Rating agencies face heat for poor monitoring
Rating agencies have come under criticism from lenders, investor, and regulators for allegedly failing to spot the liquidity crisis brewing in the Infrastructure Leasing and Financial Services (IL&FS) group.
Senior public and private sector bankers said rating agencies — Icra, CARE and India Ratings — have been monitoring the activities of IL&FS, a holding entity of group, and its subsidiaries for long.
The expectation is that agencies will pick up signals about problems in time and issue a rating watch, followed by rating action. They have failed to act in time in this case.
They were rating bonds and loans of IL&FS and group entities at higher investment grade such as “AAA” until July. Now, IL&FS loans and bonds carry a “Default” grade. Rating downgrade has a material impact on the bottom line of lenders.
This is going to hit the treasury book by provisions for erosion in value of bonds and financial paper because of a rating downgrade for IL&FS group entities. The pressure will be felt as early as in the results for second quarter of this financial year, said a treasury official of a public sector bank (PSB).
Expressing displeasure on the work of agencies, Ajay Tyagi, chairman, Securities and Exchange Board of India (Sebi), said on Tuesday, “This is a thing that has to be continuously watched. We do inspection but these issues keep emerging.”
“Investors also need to safeguard themselves. We have asked mutual funds (MFs) to have their own comfort when it comes to rating,” said Tyagi.
The framework for rating agencies will be further rationalised.
“This is a thing that has to be continuously watched... Investors also need to safeguard themselves. We have asked mutual funds to have their own satisfaction when it comes to rating”
There could be some changes to the review committee structure at rating agencies, the Sebi chief added.
A senior executive with a Mumbai-based PSB said it is a disappointing experience that these agencies effected multinotch downgrades in a matter of few weeks. They have more powers to seek access to accounts, which helps in getting an idea about the health of a company. Rating agencies have to get their act together and be prompt to detect worrying signs.
A head of risk management with a Mumbai-based private sector bank said, “Whether or not they performed their fiduciary responsibility to satisfaction is a big question.”
Hitendra Dave, head of global markets, HSBC India, said, “I would say every time you have a situation like this there is a tightening of the lending standard.”
“You see what is happening to banks today on the infrastructure side. It is only fair to assume that will happen for some time now. Borrowers should expect more scrutiny of their business,” he added.