Here’s why less than 1% of India’s companies would get a top credit rating by global standards
CRISILsaid that less than 1% of 32,500 rating Indian companies would actually be able to achieve a top credit rating of AAA.
- This is significantly less than China (12.8%), Taiwan (8.6%) and even Thailand (4.8%).
- Since India’s sovereign debt is rating BBB, the debt of any Indian firm is usually assessed against a ceiling of BBB.
In a statement that could set alarm bells ringing, CRISIL said that less than 1% of 32,500 rating Indian companies would actually be able to achieve a top credit rating of AAA. This is significantly less than China (12.8%), Taiwan (8.6%) and even Thailand (4.8%).
However, that isn’t a cause for concern as much as it is an explanation for how credit ratings work.
The rating agency explained that global ratings could not be compared with national ratings because the latter is an assessment of credit risk that is relative to a country’s credit rating. For example, since India’s sovereign debt is rating BBB, the debt of any Indian firm is usually assessed against a ceiling of BBB.
Sovereign debt is generally considered a low-risk and safe investment when compared to corporate paper.
On a national level, CRISIL found that 85-90% of bond issuances were carried out by Indian companies that were either rated AAA or AA on a national scale, pointing to saturation at the top of the market.
Around 13% of Indian farms have been given a rating of A or higher on a national scale, compared to a global average of 25%. Rating agencies in developed markets usually employ a global ratings scale as opposed to a national one.
Credit rating agencies have come under fire for failing to alert investors to the IL&FS crisis. Up until its first default in August 2018, IL&FS was still rated a AAA entity. ICRA, a ratings agency, eventually downgraded IL&FS to a junk rating around a month later.
CRISIL further explained that the number of AAA-rated companies in the world has come down significantly between 2008 and 2018 - from 89 to 9, according to its parent S&P Global Ratings, and from 170 to 53, according to Moody’s.
It attributed this to not only to the higher costs of maintaining an
AdvertisementAccording to Gurpreet Chhatwal, President, CRISIL Ratings, “Over the past decade or more, companies in the developed economies have relied more on debt in their quest to increase shareholder value. When reliance on debt increases, financial risk also rises leading to a lowering of credit ratings”.
India’s securities regulator is forcing rating agencies to comply with stricter assessment norms to prevent a repeat of the IL&FS crisis
As India’s shadow banks brace for a tough 2019, the central bank and government will try and prevent a repeat of the IL&FS crisis by solving the data problem
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