NASRIN SULTANA : Amid debates on the relatively large number of AAA ratings that Indian credit rating agencies(CRAs) have assigned compared with their counterparts in developed countries such as the US, Crisil Ratings said such a comparison is incorrect because it is an artificial construct.

“It would be tantamount to equating the scale of a FIFA World Cup with Santosh Trophy. Or Fahrenheit with Celsius. ...By construct, credit ratings can have – and do have – different scales as they are relative assessments of credit risk. And the relative benchmarking can be national, global or regional," it said in a note on 26 February.

It said that investors in developed economies such as the US and Europe consider investment options across the world. Credit risk assessments that benchmark issuers across the world on a global scale (AAA to D) offer comparable information to them and enables their investment decisions. According to Crisil, if 32,500 rated Indian companies were to be assessed on the global scale, their ratings will be boxed on a far narrow bound between BBB category and D on the global scale, because India’s sovereign rating (in the BBB category) will usually serve as a ceiling.

On the other hand, a national rating scale affords granular benchmarking of domestic issuers on a 20-point scale (AAA to D) and the sovereign, which has the flexibility to print local currency, is pegged at AAA on this scale. This provides valuable information to investors in local currency domestic debt such as insurers, pension funds, banks and mutual funds, Crisil said.

Further, AAAs in India make up for only 0.85% of the overall rated universe, which is far lower than corresponding metrics across other national scale ratings in countries such as China, Taiwan, Thailand and South Korea.

To be sure, there has been a steady decline in the number of ‘AAA’ rated companies globally. At S&P Global Ratings, it reduced from 89 a decade back to nine as of January 1, 2018. For Moody’s, it went from 170 to 53. The high cost of maintaining AAA ratings has contributed to this. For an entity to be rated AAA on the global scale, it has to enjoy an extraordinarily strong balance sheet that can withstand stresses on a world scale, and manoeuvre complex international business environments. That puts severe limits on debt levels and gearing headroom for growth, according to Crisil.

“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. The width and depth of the corporate bond markets in these geographies, and ultra-low borrowing costs over the past decade, have also encouraged the shift to debt-driven growth," said Gurpreet Chhatwal, President, Crisil Ratings.

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