The Hindu Business Line : Credibility’s our valuable asset: ICRA

Chennai, Sept.14 Global credit agencies are being roasted for their role in the sub-prime mess. Regulators in the US and Europe are discussing means to bring more clarity and prevent conflicts of interests. Mr P.K.Choudhury, Vice-Chairman & Group CEO, ICRA Ltd, replied to a set of questions from Business Line through e-mail on rating and market. ICRA, a New Delhi-based rating agency is an associate of Moody’s Investment Service Inc. Mr Choudhury said the retail financing needed more scrutiny to avoid credit delinquency. “Some small elements of sub prime lending can not be ruled out in the Indian loan market. However, the magnitude is expected to be very small. In certain asset classes, trend of delinquency is being seen these days. Retail financing needs closer and intensive monitoring. The rapid growth in retail lending in the recent past made it difficult and the monitoring system did not keep pace with this growth in some cases. However, things are improving significantly now.”

Excerpts from the interview:

There is a fear that the credit crisis could spill over into structured corporate and commercial real-estate bonds, also rated by the agencies. There is also talk of the need for reinventing rating agencies and rating the rating agencies. What is your take?

As you are aware, these are global issues and are being discussed by the regulatory authorities in the major economies of the world. The domestic credit rating agencies like ICRA has no role in this. Therefore, it would be extremely difficult for me to come up with an opinion at this stage. I would rather prefer to leave it to their judgment.

ICRA is committed to protect the integrity of its ratings. The most valuable asset of ICRA is the credibility it enjoys with all the market participants.

The criteria-based rating approach, published benchmarks, systemic transparency, objectivity of the rating process, rigorous due diligence, consistency of the parameters, separation of business developments efforts from analytical resources, hiring of competent analysts and providing them with training are a few of such endeavours that protect the integrity of ICRA ratings. We regularly publishes its methodologies, rationale of ratings assigned and the default statistics.

What is the importance of rating in India? How do you compare the practice of rating in India with developed economies?

India is one of the countries where the major credit rating agencies have demonstrated a consistently satisfactory track record and gained the confidence of the capital market. The yields in the market are linked to credit spreads as determined by the rating agencies.

Both organised and retail investors take opinions of agencies into serious consideration as an input for their investment decisions. The situation in India is significantly closer to the conditions prevailing in most of the advanced debt markets of the world.

India is probably the first in the world to introduce rating of IPOs. What are the problems and challenges in stock rating? Does it help the retail investors?

It is a new concept and would need some time before it is well accepted in the market. However, the initial feedback that we are getting is quite encouraging. The major challenges in IPO grading would be to create enough awareness as to its utilities and more importantly, its limitations.

The retail investors are likely to benefit as grading would be expressed in simple terms through symbolic expressions.

India Inc these days are on a leveraged buyout binge. Is it a good practice? Does it make economic sense in the long run?

As the name implies, these acquisitions are substantially debt funded. There is always a risk of potential mismatches between the expected cash inflows from the project, etc. and timing of meeting the obligations. The asset values in the market to day are somewhat inflated. This adds one more dimension to the causes of concern. Therefore, enough caution has to be exercised before concluding such deals.

What are the roadblocks faced by companies in the corporate bond market?

The problems that are impeding the growth of Indian bond market are quite a few and are also somewhat complex. The major problems are procedural complexities, overdose of disclosure requirements, absence of retail investors, limited secondary market, demands restricted to bonds with higher level of ratings, etc.

There is talk about real estate mutual funds? What are it benefits for investors? Can you cite some international examples?

This would be one more attractive investment options for a section of the investors who are interested in real estate. However, a precondition to its success would be to put in place an appropriate mechanism for valuation. This would enable retail investors to participate in the prosperities of the sector while enabling spreading of risks and availing of the services of professional management. Real estate investment trusts are doing quite well in many countries of the world.

What are the future plans of the ICRA group?

We are not looking at any new major area of business now. The efforts are to consolidate the present activities. We are also open to the idea of a few acquisitions in the area of KPO and software development provided there is right synergy and pricing.

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