Mumbai: Credit rating agencies are ready to offer their servicesNSE -0.47 % for as low as Rs 1,100. Also, they are willing to receive the fee well after the process is complete –– and not in advance which is the customary practice.
State-run National Highways Authority of India (NHAI) recently invited bids from credit rating agencies to rate its upcoming Rs 75,000-crore bond issuance. The unusually low fee bids came in the wake of the Reserve Bank of India expressing displeasure about credit rating agencies’ business practices, including the so-called rating shopping.
Four rating agencies — Crisil, Care Ratings, India Ratings and IcraNSE -2.30 % –– had placed bids for rating the upcoming NHAI bond issue. When the bids were opened last week, three rating agencies –– Crisil, Care Ratings and India Ratings –– had placed their bids at Rs 1,100, while Icra had put in a bid of Rs 1,500. “It’s quite surprising that all the three rating firms have quoted the same amount,” said a banker who wished not to be quoted. Rating agencies traditionally charge 4-10 basis points. But, if this percentage translates into high fees in absolute terms like in the case of NHAI, it would bring in another methodology. This is the first time that credit rating agencies have quoted such low fees.
It doesn’t even cover the cost of stationary expenses,” said a person familiar with the development. “This practice is promoting a clear standard of rating shopping. Even NHAI officials were amused how they quoted such low fee,” the person said. Icra and NHAI didn’t respond to the queries. Crisil and India Ratings declined to comment.
“We won’t be able to comment on this as it would be improper to talk about any business dealing with a client as it is based on confidentiality,” said a Care Ratings spokesperson. Like state-owned companies, NHAI chooses its rating agency through tender. Some of these issuers also put in conditions like a minimum net worth that keep smaller rating agencies out. Usually, the lowest bidder gets the business.
For agencies, it is important to secure business of large bond issuers especially with topnotch ratings to improve their performance rankings. NHAI bonds typically have the highest AAA rating.
“Rules now require rating agencies to maintain better transition and default statistics,” said another person familiar with the development. “Rating agencies have become desperate to acquire higher rated issuers who issue large amount of debt at whatever rate possible.” Globally, credit rating agencies disclose their rating fee structure. In India, there is no such requirement for bond ratings.
The RBI, however, requires all rating agencies to publish on their website the bare minimum rating fee they will charge for bank loan rating. Credit rating firms, in recent times, have come under criticism from financial regulators and the parliamentary panel for failing to identify the financial troubles in companies, especially in the case of IL&FS. Earlier this month, RBI governor Shaktikanta Das expressed concerns over rating agencies’ inability to assess credit risk and take timely rating actions. He disapproved of the practice of rating shopping — where companies migrate from one rating agency to another for better ratings. A former senior regulatory official said, “The compensation structure and the general conflict of interest should be published by rating agencies as is the practice in the international market.”
Source: economictimes.indiatimes.com