Crisil is the country’s largest credit rating agency that also offers research, advisory and risk solutions. Business Line caught up with Raman Uberoi, Chief Operating Officer, Crisil, to get his insights on the future of ratings business and the Indian debt market.

Debt market continues to be sluggish. Given this backdrop, how is your ratings business performing? When can one see a revival in the debt markets?

The inception of base rate triggered some interest in money market instruments such as Commercial Papers (CP). We actually saw new issuers coming into the market and existing ones trying to enhance their CP limits. This continued for a year or so before the whole thing was put on the back burner about 15 months ago when the interest rates cycle turned. Once the interest rate hikes came into effect, the appetite for CP came down. We had also anticipated this would sooner or later lead to some action in the bond market.

We actually felt about 18 months ago that bond markets could probably take off soon, driven by a lot of things. For instance, allowing higher limits for FIIs to invest in corporate bonds was one such measure. Despite these measures (introduction of CDS and other initiatives), the high interest rates have played spoilsport, coupled with a weak investment climate.

Most of the issuers would typically invest or float papers when they are looking at investments. Since interest rates are on the higher side, a large number of corporates have deferred capex. That is one reason for the debt market not expanding as expected. The other issue dogging the debt market is about long-term investors such as insurance funds and pension funds not really being there to invest in private sector corporates. Their investments are either in the government sector or in very high credit quality paper. This is creating a demand-supply mismatch between the investor and the issuers. For instance, there are hardly any new ‘AA’ or ‘AAA’ papers in the infrastructure space. So to that extent, we really haven’t seen the bond market taking off the way we thought it could some time back.

Currently bank loan ratings contribute significantly to your revenues. Once banks begin to adopt internal ratings, what will Crisil do?

While the RBI has allowed banks to move to Internal Ratings Based approach from 2014, there’s still some lack of clarity over how many banks will move to this process and the time-frame. I believe, for the entire banking system to move from a standardised approach will be a time-consuming affair and it’s unlikely to be completed by 2014.

Although Bank Loan Rating is a reasonable component of our ratings business, it is one of the many pieces that complete the jigsaw, the primary one being the bond market along with SME Ratings and Structured Finance.

For starters, we believe, the bond market will stage a comeback. And when that happens, we will see a sizeable chunk of our BLR client base to migrate to the debt markets. The client base (10,000 companies on BLR and 32,000 clients in SMEs) we have built is a huge advantage for us. Approximately, 100 companies rated by Crisil for bank loans, have successfully accessed bond markets, enabling them to diversify their funding sources and access cost-competitive funding.

The SME Ratings business is doing very well. As of today, we have rated approximately 32,000 SMEs and on last count, the number of SMEs in India stood at 37 million. So it’s a huge potential that exists in the business.

We hope the structured finance market which, has not really seen any movement of late, will also see some signs of revival once the market gets used to the new guidelines that came some months ago. We are already seeing some initial traction on this front.

What is your view on competition in bank loan ratings?

We have always enjoyed a 50 per cent market share. Overall, Crisil’s margins have been pretty stable despite doing more of SME and bank loan ratings, which are small-ticket assignments. This is largely due to our improved workflows, processes, and technology intervention. All these ensure that despite doing these businesses, we are comfortable on the margins front.

Do you see more rating downgrades?

The trend of downgrades is intensifying. The number has exceeded that of upgrades for a few quarters now. This means that the credit quality is weakening. This is due to a lot of factors such as demand slowdown, issues with access to capital, liquidity, and higher cost structure. Some of these issues are impacting corporate India. To that extent, we are seeing pressure on ratings and we believe it will continue for some more time.

Your research business today earns more profits than ratings. Will this be the focus area for future?

We believe that today we have an ideal revenue mix for the company where 50 per cent comes from outside the country. And the mix between various segments is, research is about 50 per cent, ratings is close to 40-45 per cent and balance is advisory and risk solutions. There will be quarters in which one business could generate higher revenue and profitability, depending on the environment for the business. Profitability-wise, ratings will be the most profitable business.

You have acquired two research companies in the last couple of years. Are they in the same area of business?

Both our acquisitions have been strategic in nature. Till the acquisition of Pipal, we were predominantly servicing the financial sector entities such as global investment banks and insurance companies. We didn’t have a real presence in the corporate finance vertical in the global research business, which is where Pipal fit in. So, the acquisition of Pipal was driven by our need to diversify to a very different customer segment. Coalition has taken us to the realm of proprietary research and analytics where we were not present earlier.

Are you losing clients because of the current turmoil in the Europe?

On the contrary, we are seeing new opportunities cropping up. Although traditional business sources are a bit subdued, newer segments are opening up. Apart from the top 15 investment banks, out of which 12 we already work with, investment banks that do not belong to the top echelons are suddenly looking at off-shoring to India in a big way. They are looking at India not only from an arbitrage perspective but also from our proven expertise in analytics. Globally, there’s a lot of uncertainty over the regulatory norms and implications of new regulations such as Basel III and Frank Dodd rule.

Global banks are under pressure from regulators on areas such as monitoring risk limits, back-testing strategies, and conducting stress-testing exercises and need support in these areas. These are the newer opportunities that are opening up now.

SME rating is different from Bank Loan Rating of SMEs. Will getting these two operations separately involve huge costs for SMEs?

A product will work only if it adds value. Let me give you the example of SME rating. An SME does not have a statutory compulsion to be rated. Despite this, SMEs go for ratings driven by the value they see in it. Statistics say nearly 40 per cent of SMEs rated by us return for renewal. And typically, the fee for an SME rating is higher in the second year. Yes, some of the SMEs have both SME rating and BLR. They serve different purposes.

Apart from helping an SME raise credit, SME Ratings serve other purposes such as approaching a client and showcasing that it has been evaluated by an independent agency. I think as long as they see value and we are able to deliver value, we believe there will be instances of them paying for both BLR and SME ratings.

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