The Ides of March haven’t been bad at all for credit rating agencies in India.
Their business is swelling as Indian companies are rushing to get their bank loan exposures rated before the fiscal year ends on 31 March.
Much of the rush is being driven by banks with overseas operations who are pushing their corporate clients for ratings as they need to comply with the new accounting standards of Basel II by the end of this month.
Under the earlier accounting standards of Basel I, a uniform risk weight of 100% was applied to all corporate advances, irrespective of the rating of the firms. The risk weight, therefore, did not distinguish between a borrower with the highest credit rating of AAA and the non-investment grade credit rating of BB.
Until now, all corporate loans carried a risk weight of 100%. Since banks’ capital adequacy ratio is 9%, for every Rs100 worth of loans, a bank needs a capital of Rs9.
Basel II does away with this practice and aligns the risk weight in accordance with the actual risk that the banks carry on their books, depending on the rating of a firm. For instance, a loan exposure to an AAA-rated firm carries 20% risk, but it goes up to as much as 150% for a firm that does not enjoy an investment grade. This means that, from 1 April, banks will need to provide lower capital for loans that enjoy higher ratings.
RUSH FOR RATING (Graphic)
So, for every Rs100 worth of loans, banks will require to have a capital of Rs1.8, down from Rs9, for an AAA-rated loan. Similarly, for a Rs100 unrated or non-investment grade loan exposure, a bank will need Rs13 worth of capital.
Large public sector banks including State Bank of India, Punjab National Bank, Bank of Baroda and Indian Bank, have signed pacts with the rating agencies to enable their corporate clients to pick an agency of their choice and get a rating on their loan exposures.
“Banks are playing the role of a facilitator. They are not paying for the service,” notes Rakesh Valecha, senior director, Fitch Ratings India Pvt. Ltd.
Rating agencies such as Crisil Ltd, the Indian arm of the global rating agency Standard and Poor’s (S&P); Icra Ltd, an associate of Moody’s Investors Service; Fitch Ratings India and Credit Analysis and Research Ltd (CARE) have all been working overtime since February to rate Indian corporations’ loans.
Crisil and Icra are listed entities in India with S&P holding a majority stake in Crisil and Moody’s being the largest stakeholder in Icra.
Rating experts said by the end of March, each of the four agencies will end up rating at least 300 companies’ loan exposures and many more are in the pipeline as banks are pushing their corporate clients to get rated in a hurry.
This comes as a new business opportunity for the rating agencies just as the number of firms entering Indian capital markets with initial public offerings (IPOs) has dried up.
In May 2007, capital market regulator, the Securities and Exchange Board of India, made the ratings of IPOs compulsory resulting in a surge in that business for the rating agencies.
Tarun Bhatia, head of corporate and government ratings at Crisil, said there has been a “significant increase” in the number of bank loan facilities that Crisil has rated. “Compliance with the Basel II accounting standards will immediately benefit the big public sector banks who have large corporate exposure on their books,” he said.
According to Bhatia, large public sector banks will be able to save a lot of capital, as they have so far lent to a good number of corporations which enjoy high ratings.
In the first phase, loan exposures more than Rs50 crore are to be rated. In the second phase, that will come into effect in next April, loans more than Rs10 crore will have to be rated.
This, according to Bhatia, will benefit the private sector banks since they are lending aggressively to small and medium enterprises. There is no rating for retail loans.
Says Chanda Kochhar, joint managing director of ICICI Bank Ltd: “Banks, in general, have been using internal ratings in the past, in conjunction with external ratings, to assess the credit profile of its customers. This is not expected to change as a result of Basel II norms. However, there is expected to be a greater emphasis on customers in respect of obtaining an external credit rating.”
The compliance with Basel II norms will augur well for those banks that have a “good credit mix”, rating experts said. This means that if a bank has already been lending to strong corporations with high ratings, it will require lesser capital to support the credit growth as risk weights for highly rated loans are less.
Vibha Batra, vice-president of Icra, said though banks have had their internal risk assessment models, external credit rating will deepen the loan market.
“As banks will need less capital for highly rated loans, they will be able to lend more and leverage their capital efficiently,” Batra said.
Valecha of Fitch Ratings says that although companies will be able to get a better pricing on their loans if they get a higher rating, banks cannot “restrict themselves” to lending only to large corporations with high ratings.