Lenders, investors, and regulators have reasons to cast doubts on the credibility of credit rating agencies. Top rating agencies such as Icra, CARE and India Ratings now face serious credibility issues after having failed to spot the liquidity crisis brewing in the IL&FS group.
All the agencies were rating bonds and loans of IL&FS and group entities at higher
investment grade such as ‘AAA’ until July, but suddenly this month the company’s loans and bonds have been placed in the ‘default’ or D grade.
The group’s consolidated net profit almost halved from Rs 244 crore during 2013-14 to Rs 141 crore during 2016-17 and reported a massive loss of Rs 1,887 crore in the last fiscal too. The company reported only a 10 percent increase in consolidated revenue during 2017-18 at Rs 18,798 crore.
The company’s top line had continuously grown, gone up 63% from Rs 11,560.7 cr during 2013-14, according to the RoC data. But the growth rate has been decreasing each year since 2015-16.
Despite having the problem inside the company and its entities, IL&FS aggressively pumped in money into its subsidiaries from 2013-14 to 2015 and invested more than Rs 9,000 cr in the subsidiary companies as well. These investments are all backed by debt and as a result, the company’s consolidated debt also rocketed from Rs 48,671 cr as on March 31, 2014, to Rs 91,091 cr as on March 31, 2018.
As debt is rising, the borrowing cost for the company also doubled from Rs 3,971 cr to Rs 7,992 cr during the same period. During 2013-14, the borrowing cost was 34 percent of the company’s total revenues, which increased to 43% during 2017-18, putting huge pressure on the company’s bottom line.
The amount of money infused into its subsidiaries didn’t pay off at all. IL&FS, which recorded a standalone net profit of Rs 584 cr, posted a huge loss of Rs 1,887 cr at a consolidated level. Most of its subsidiaries are into deep losses.
In March 2018, Icra had assigned an A1+ rating to the Rs 2,500 cr commercial paper programme of IL&FS, also giving a stable outlook on the long-term rating for IL&FS.
Over the past week, the company witnessed sharp downgrades in ratings. The long-term ratings of IL&FS were downgraded multiple notches from AA+ to BB on September 8, 2018, and then to D on September 17, 2018. And on other hands, its short-term rating was downgraded from A1+ to A4 on September 8, 2018, and then to D on September 17, 2018.
The rating of Its other subsidiaries — IL&FS Financial Services, IL&FS Tamil Nadu Power Company, IL&FS Energy Development Company, IL&FS Transportation Networks, and IL&FS Education & Technology Service were also downgraded.
WHY CREDIT RATING AGENCIES FAILED TO SPOT IL&FS MESS?
In India, credit rating agencies (CRA) are approved by two regulatory authority, The Securities and Exchange Board of India (SEBI) for capital market operations and The Reserve Bank of India (RBI) for the rating of borrowers of banks. And this is the main problem the as it is said dual control is no control. The current regulations in India are not competent enough to take care of the present crisis caused unprofessional work ethics. That’s why people dragging the rating agencies to courts on grounds of bias, manipulation, and lack of transparency or sheer incompetence. And they do not come under the Right to Information (RTI) Act in our country as they are all in the private sector, though their activities have an important bearing on the economy of the country. The court cases rising against rating agencies, not only in India but also in many other parts of the world, are indicative of the growing dissatisfaction to the irrationality of the rating agencies, which calls for serious thought on the part of the regulators all over the world.
“Rating agencies need better market intelligence inputs and monitoring rather than dependingon historical data and some prediction based on past estimates”.