Economy

IAS Parliament 6 years

KEY POINTS

IL&FS crisis

· IL&FS group of companies has a total consolidated debt of Rs 900 billion and it started to miss deadlines on its debt obligations.

· The company also has Rs.35 billion worth repayments scheduled for this year while it has less than Rs.2 billion worth of resources for the payment.

Role of CRAs in the crisis

· IL&FS debt papers enjoyed highest safety status for a long time despite their crisis condition.

· However, credit rating agencies (CRA), that rated its debt quickly downgraded them from high investment grade ratings (AA+ in some cases) to default/junk ratings when it started to miss deadlines on its debt obligations.

· This is not the first instance where CRAs downgrade ratings suddenly.

· Swift action by CRAs would have certainly averted a full-blown crisis.

· CRAs cannot afford to commit too many mistakes as it is the investor who pays the price for their mistakes.

Suggestions

· CRAs can best serve markets when they operate independently, adopt and enforce internal guidelines to avoid conflicts of interest, and protect confidential information received from issuers.

· CRAs should be made accountable for any faulty rating by penalizing them or even de-recognizing them, if needed.

· Competition in the rating industry should be enhanced by easing the entry of new players to enter the credit rating space and compete against incumbents.

· This will make credit rating agencies actually serve creditors rather than borrowers.

· The conflict of interest inherent with the “Issuer pays” model, where an issuer of debt securities also pays for the credit rating, has to be reconsidered by the regulating agencies and a proper alternative should have to be implemented.