Rating agencies blame lack of timely default data for lag in IL&FS downgrade

Rating agencies blame lack of timely default data for lag in IL&FS downgrade
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New Delhi, Oct 23: Credit rating agencies, which are being probed by the Securities and Exchange Board of India for failing to downgrade IL&FS debt issuances on time, have blamed the lack of timely availability of data on defaults.
Infrastructure lender IL&FS, which defaulted on its payments in September, a development that triggered worries of a financial contagion, was rated highly by most agencies right up to its default.
However, rating agencies told the market regulator that they depend on data from a host of sources, including from companies and regulators such as the Reserve Bank of India (RBI).
They say that, in particular, the lag in disclosure of data from the Central Repository of Information on Large Credits (CRILC) hurt their efforts to obtain a true picture of the company’s affairs.
Set up in 2014, CRILC collects data on all borrowers with fund exposure of over Rs 5 crore and disseminates it to other stakeholders.
Rating agencies, however, say that this data is disclosed on a quarterly basis.
“Banks are not authorised to provide default data directly to rating agencies. Rating agencies get data on loan defaults almost two-three months after the event,” a source close to a rating agency told Moneycontrol. “A company that has defaulted will not voluntarily disclose this.”
A source close to SEBI also talked about the Reserve Bank’s reluctance to share data in some matters. “RBI had declined SEBI’s request to share data on money raised through corporate bonds over the last few years.”
The RBI and the government had earlier shot down SEBI’s proposal that made it mandatory for banks to disclose default data within a day.
However, the Ministry of Corporate Affairs, which superceded the IL&FS board with its own nominees after the crisis broke out, is not buying rating agencies’ explanation.
“Credit rating agencies did not do their homework properly in the IL&FS case,” a source close to the MCA said. “During SFIO’s probe into IL&FS, even at preliminary stage, there were many instances where rating agencies could easily have discovered irregularities in the company’s affairs. This should have reflected in the ratings given to IL&FS debt.”
The source in SEBI also said that prima facie, there was negligence on part of credit rating agencies.
This is not the first time when credit rating agencies are in the dock for downgrading junk debt too late.
In the case of Amtek Auto, SEBI had initiated a probe against CRISIL and CARE after the company’s debt was downgraded well after it had defaulted – a move that led to severe redemption pressures for a few mutual funds that had invested in the company’s paper.