Meet the Chief. Ratings will help build smart cities

Schemes such as Smart City Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Heritage City Development and Augmentation Yojana (HRIDAY) have brought back the focus on urban local bodies. Credit rating will help these cities mobilise resources to provide the much needed infrastructure and services to the burgeoning urban population, says Vivek Kulkarni, IAS (Retd), Founder Managing Director, Brickwork Ratings

There is an increased demand for ratings as more investors and lending institutions want to base their decisions on independent credit rating agencies. But a weak investment cycle is playing spoilsport. What is the credit rating scenario in India?

India is a large country and I don’t see many growth challenges as opportunities are plenty even in the current environment. For instance, while it is true that bank credit has grown at an anaemic pace and PSU banks, in particular, are reluctant to lend, there are opportunities when these banks sell the bad loans to asset reconstruction companies (ARCs).

As per RBI norms, ARCs are required to pay a minimum of 15 per cent of the value as upfront payment and the remaining (security receipts or SRs) is shown in the banks’ books as investments. This is rated every year by rating agencies. We have a large market share in SRs, almost 70 per cent. Hence, opportunities are always there in some form or the other. Similarly, even if bank lending has been weak, corporates have been tapping the bond market actively to meet their fund requirements. Gradually the market for low-rated bonds should also pick up.

In India, rating revenues broadly comprise bank loan ratings, corporate bond ratings and SME ratings. Which segments do you operate in?

We are present in all the segments. The main product in term of numbers is, of course, bank loan rating, which is mainly driven by the RBI’s implementation of the Basel guidelines. Bank loan ratings are used by banks to determine risk weights for their loans, which determine their capital requirement. Sometimes, banks also ask companies to get themselves rated before granting them loans, to get an independent assessor’s view. Bond ratings have been in existence for the last 20 years — in fact it is the oldest product for rating agencies. The number of corporates getting rated has gone up substantially over the last two decades. The SME market — post simplification of the ratings bucket last year — also holds good potential for all ratings agencies.

Is SME rating driven mostly by companies themselves or is it mandated by lenders and other regulatory institutions?

One, of course, is SMEs wanting to get themselves rated for easier access to funds. Also ratings agencies, including Brickwork, sign up with banks to offer these ratings.

For a high rated company, banks offer concessional loan rates. The other driver is the National Small Industries Corporation (NSIC). This is a Government of India Enterprise under the Ministry of Micro, Small and Medium Enterprises (MSME), which seeks to foster the growth of MSMEs in the country. It invites tenders from SMEs for supplying products and services from time to time and stresses credit rating as one of the eligibility criteria.

Aside from the usual ratings do you see any other new opportunities emerging?

Urban Local Bodies (ULBs) ratings are emerging opportunities for rating agencies. Brickwork is currently rating 92 cities in the country — Amritsar, Chennai, Cuttack, Dhanbad, Kochi, Lucknow, Pathankot, Raebareli, Thiruvananthapuram and Varanasi, to name a few. Indian cities were run quite professionally in the fifties and sixties, and undertook all civic functions — water supply, roads, sewage, street lights, electricity, transport, education, healthcare, etc.

Since then, however, both the Centre and the States have been usurping many traditional functions themselves and have not devolved enough financial and administrative powers to the cities. Schemes such as Smart City Mission, AMRUT and HRIDAY have brought back the focus on urban local bodies.

Credit rating will help these cities to mobilise resources through pooled funds/bank debt/floating municipal bonds to provide the much needed infrastructure and services to the burgeoning urban population and also aid in the Centre’s Smart City Mission.

What are the challenges that rating agencies face currently?

There is a huge competitive pressure in terms of pricing which even the RBI has recently acknowledged. To quote an instance, there was a large rating agency that had bid for a tender, wherein it quoted a price of Rs ₹29,000 to rate 29 cities!

Considering the field work required to rate each of these cities, this was a pure case of steep undercutting of prices. No wonder the It is no wonder that RBI has mandated rating agencies to specify the minimum rating fee on their websites.

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