Rating Firms Seek to Withdraw Nearly Half of India 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 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 worlds biggest pile of soured loans, and with the pandemic bad debt will worsen to the highest since 1999, according to S&P Global Ratings.

Non-Cooperation

Nearly half of the credit ratings fall into issuer-not-cooperating category

Source: A document submitted by rating companies to the RBI on July 1 and seen by Bloomberg

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 firms fees, according to the document sent to the Reserve Bank of India. That ratio has more than doubled to 47% of the total in the two years to March 2020, and bank loans make 95% of such ratings.

The rating companies recommend that they withdraw a credit score 12 to 15 months after the issuer being placed in the non-cooperating category.

The RBI didnt immediately respond to an email seeking comment.

India Ratings & Research Pvt. declined to comment, and another six ratings companies, including Crisil Ltd. and ICRA Ltd., didnt immediately reply to emails.

Not Reliable

According to a 2016 circular from the Securities and Exchange Board of India, the markets regulator, the rating firms have to continue to assess these companies even when there‘s non-cooperation. 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 issuer-not-cooperating rating beyond a reasonable period, neither the entity‘s nor the investors’ interests are served.”