Mumbai, June 5, 2017
Credit rating agencies in India are caught in a gale triggered by downgrades, defaults and a grim spectre of bad loans.
On one hand, Sebi has asked rating agencies to explain their actions on RCom bonds to know whether processes were followed, and what lead to downgrade of the company’s debt securities and loans by several swift notches; on other hand, Reserve Bank of India, a week ago, asked agencies whether they could rate ‘restructured loans’ — an activity that has regulatory and market implications which most agencies are not entirely comfortable with.
"Sebi wants to know whether investors could have been alerted and rating actions could have been initiated earlier... what lead to cascading downgrades was delay in information," a person aware of the development told ET.
"Rating agencies have no access to loan default data — something they feel banks and RBI should share," the person said.
At the meeting held with rating agencies, RBI broached the subject on rating of bank loans to corporate that is undergoing a complex debt rejig programme that could involve entry of a new investor or a deal to monetise assets.
While agencies are ready to rate such loans or securities, they are unwilling to publish these ratings. However, Sebi rules disallow such ‘private ratings’ that are not put in public domain for the benefit of investments and market participants.
"Agencies believe that rating of debts of a company which is undergoing, say a strategic debt restructuring, is based on assumptions and hinges on other factors. For instance, a company like RCom is likely to overcome the current difficulties once its proposed sale of the tower business goes through. But what if it is delayed? There could be similar situations that other debt-heavy companies would confront... There’s a moral hazard in publishing ratings that are dependent on such outcomes..," said an industry official.
BANKS CAN BENEFIT
However, a rating upgrade of debts of companies that are going through restructuring would benefit banks that are saddled with bad loans. "A higher and above-investment grade rating would lower risk weightage on these loans. This would improve their capital adequacy and thus require the government to infuse less capital. One can understand where RBI is coming from," said another person. Sebi rules require agencies to publish all their rating actions. Even if the regulator allows private ratings — which are not disclosed to the market — it would not lower risk weights on banks’ loan books.
"A lower risk weight can be assigned only if such upgrades are published and known to the market and auditors. A private rating or view with the agency carrying out scenario analysis may present an evaluation of the adequacy ratio," said a banker. The downgrade of various RCom debts — local debentures, offshore, debts and loans from domestic banks — could pave the way for agencies receiving information on loans where interest payment is overdue for 30 or 60 days.
"A loan is treated as non-performing asset if it is not serviced for 90 days. "Banks do not share such data, particularly if the client is high-profile. Even if they do, no bank will give it in writing. There’s an information asymmetry that rating agencies face," said a source.
RBI and banks are reluctant to share such data due to its volatile nature and the impact it could have on the company’s security and stock prices.
"There are companies which regularise their accounts soon after a default or even within 30 or 40 days. Maybe, RBI will agree on sharing data where the interest is unpaid for 60 days or more. In case of RCom, rating agencies were late in getting a whiff of the situation as mutual funds were not holding RCom securities. Since agencies evaluate debt securities, they are typically more alert when MFs are investors," said a banker.
[The Economic Times]