ICRA- Investment Information and Credit Rating Agency of India Limited
About ICRA:
- ICRA Limited (ICRA) is an Indian independent and professional investment information and credit rating agency.
- It was established in 1991, and was originally named Investment Information and Credit Rating Agency of India Limited (IICRA India).
- It was a joint-venture between Moody’s and various Indian commercial banks and financial services companies.
- It is one of the nation’s most successful credit rating agencies currently.
- It rates rupee-denominated debt instruments provided by commercial banks, financial institutions, manufacturing firms, undertakings of the government sector and much more.
- The company changed its name to ICRA Limited, and went public on 13 April 2007, with a listing on the Bombay Stock Exchange and the National Stock Exchange.
- As of end December 2020, Moody’s Corporation owns a 51.86% majority stake
Services from ICRA
- To offer institutional & individual creditors or investors with tips and guidance
- Improving the capacity of lenders/borrowers to access the financial markets to take advantage of a significant amount of capital
- The assistance of regulatory authorities in the promotion of financial market clarity
- To include tools built for mediators to increase the efficacy of fund-raising systems
What is a Credit Rating?
A credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. It can be assigned to any entity that seeks to borrow money — an individual, corporation, state or provincial authority, or sovereign government.
Evaluating the creditworthiness of an instrument comprises of both qualitative and quantitative assessments, making credit rating far from a straightforward mathematical calculation.
What are Credit Rating Agencies?
A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to pay back their interests and loan amount on time and the probability of them defaulting. CRAs were set up to provide independent evidence and research-based opinion on the ability and willingness of the issuer to meet debt service obligations, quintessentially attaching a probability of default to a specific instrument.
Credit rating agencies in India came into existence in the second half of the 1980s. In India, CRAs are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
SEBI’s Detection for CRAs
- The Securities and Exchange Board of India tightened disclosure standards for credit rating agencies while assigning ratings to companies and their debt instruments.
- The regulator directed that rating agencies must now disclose the liquidity position of a company being rated.
- If the rating is assigned on the assumption of cash inflow, the agencies would need to disclose the source of the funding.
- Rating agencies must disclose their rating history and how the ratings have transitioned across categories.
- Credit rating firms will also have to analyze the deterioration of liquidity and also check for asset liability mismatch.
There are six credit rating agencies registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.
Importance of CRAs
- For The Money Lenders
- Better Investment Decision: With credit rating, lenders get an idea about the credit worthiness of an individual or company (who is borrowing the money) and the risk factor attached with them. By evaluating this, they can make a better investment decision.
- Safety Assured: High credit rating means an assurance about the safety of the money and that it will be paid back with interest on time.
- For Borrowers
- Easy Loan Approval: With high credit rating, banks will approve loan application of borrowers easily.
- Credit ratings will enable independent benchmarks for pricing debt, ushered in a culture of financial discipline, helped allocate capital efficiently by pricing risk appropriately, and supported financial innovation.
Issues
- No uniformity among rating companies in India: An average investor in India is not able to understand the different credit ratings prevailing in India as there is no uniformity among the credit rating agencies.
- No standardization in rating and no standardized fee structure for rating agencies in India is one of the other issues.
- Distinction between equity instruments and mutual funds is not provided which is one of the major drawback of credit ratings in India.
- Lack of reliability of Credit rating in India: Even credit-rated companies have failed in India and there is no remedy for this. Example CRB Capital Markets, which had a turnover of Rs.1,000 crores per year and with a credit rating of ‘A’, failed, and neither SEBI nor RBI could come to the rescue of investors.
- The credit rating agency in India lacks transparency.
- After the creation of credit rating agencies, the country has witnessed stock scam and the failure of CRB Capital Markets. This only reflects poorly on functioning credit rating agencies.
- It is the duty of credit rating agencies to forewarn the regulating authorities about the weaknesses and drawbacks, if any, of the companies they are rating and they should ensure to do so at all costs.
- There is conflict of interest with “issuer-pays” model, wherein the fees to the CRA is paid by issuer himself. This has to be switched to investor-pays model. Issue of rate-shopping, pick and choose.
- Because of high entry barriers for entering credit rating, there are not sufficient CRAs in India, hence there is no competition.
- There is no method to seek the accountability of CRAs – “who will rate the rating agency”.
Way Forward
- CRAs should refrain from providing advisory services to the rated companies, even via subsidiaries, as this entails conflict of interest. SEBI may look into this as part of its regulatory practices for protecting investors.
- Rating Agencies should avoid arriving at ratings with limited information, even if it means foregoing that mandate.
- CRAs should operate on fixed fee structure, restricting competition to quality and not pricing, increase objectivity of rating models, thereby reducing subjectivity and cognitive bias.
- Government should build a surveillance policy, imposing stringent monitoring of an outstanding rating.
- Increase accountability of CRAs to provide better protection to consumers; this one will need intervention by Sebi by affixing some monetary or business implications. For example, restricting a particular CRA from re-rating an entity that defaulted above a threshold for a certain period of time.
Source: ICRA
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