Raters want to pull half of debt ratings
Rating firms in India are seeking to withdraw credit scores where issuers don't provide enough information to support their assessments in a move that could potentially affect nearly half the country's ratings.
The current situation means that ratings don't fully reflect the credit health of issuers, according to a document from major raters submitted to India's central bank on Wednesday and seen by Bloomberg. That underscores challenges for a country mired in a credit crisis triggered by the 2018 default of a top-rated shadow lender.
The surge in these unreliable ratings came even before the spread of the coronavirus pushed India's economy toward its first contraction in more than four decades. The downturn has made the accuracy of credit ratings more crucial than ever to understand the capital position of the nation's banks and keep another major one from requiring a bailout.
India already has the world's biggest pile of soured loans, and with the pandemic bad debt will worsen to the highest since 1999, according to S&P Global Ratings.
There's been a surge in the number of ratings where the companies don't provide adequate information for the assessment or stop paying the rating firm's fees, according to the document sent to the Reserve Bank of India. That ratio has more than doubled to 47 per cent of the total in the two years to March 2020, and bank loans make 95 per cent of such ratings.
The rating companies recommend that they withdraw a credit score 12 to 15 months after the issuer being placed in the noncooperating category.
The RBI didn't immediately respond to an email seeking comment.
India Ratings & Research declined to comment, and other rating companies didn't immediately reply to emails.
According to a 2016 circular from the Sebi, the rating firms have to continue to assess these companies even when there's noncooperation. They have to use the best available information, which can even be irrelevant old corporate data to rate them and then highlight in their credit reports that the issuers aren't cooperating.
"An issuer-not-cooperating rating by a credit rating agency does not reflect a reliable opinion on the credit quality of the entity," the document said. "By maintaining the issuernot-cooperating rating beyond a reasonable period, neither the entity's nor the investors' interests are served."