The global economic slowdown coupled amid the financial turmoil means many challenges for the credit rating agencies as well. Equally worrisome could be the slowdown in the domestic capex cycle. CRISIL Ltd, a leading player in the domestic rating and financial research markets with exposure in the international markets, is consolidating its position in some of the areas and focusing on emerging trends. Dhiren Shah and Jitendra Kumar Gupta speak with Roopa Kudva, MD & CEO, CRISIL Ltd, and discuss the company’s growth strategies, outlook for different business segments, recent developments in the Indian debt market and latent opportunities for the rating business. Excerpts:
What has been the trend in the corporate bond rating market?
There has hardly been any growth in the corporate bond market, if you were to exclude the structured finance business. Structured finance comprises of asset-backed securities, mortgage-backed securities and single loan sell-downs. To give you a perspective, in FY06, the size of the bond market was Rs 90,000 crore, out of which structured finance was Rs 10,000 crore and the balance was the plain vanilla bond rating. In FY08, the total was Rs 1,73,000 crore, out of which, the structured component was Rs 70,000 crore. So a lot of growth has come thanks to structured finance, which has now come down to a trickle with the volatility in the financial markets.
When do you see things improving for the bond market?
In the last month and a half, we are seeing some new trends. The manufacturing companies, which were earlier able to fund through the strong internal accrual, cheaper foreign money and equity markets, are now showing interest in accessing the bond market.
What kind of impact would the Basel II norms have on your bank loan ratings business?
As per the Basel II, the RBI has said that all borrowers with banking facilities above Rs 10 crore need to get rating by March 2010, in phases. So this provides us a good opportunity. Many companies that haven’t been rated before, are now entering the ratings arena. The number of companies being rated by us (excluding SMEs) has increased from around 400 end-2007 to about 1,200 end-2008. According to our estimates, there are about 7,000-9,000 rateable entities.
The share of ratings in the overall revenue mix could go up as we see the main drivers of growth in 2009 being bank loan ratings, SME ratings and the global analytical centre.
Would this also mean higher margins given the improving economies of scale?
Margins could come down a little bit. Many of the companies coming for bank loan ratings are smaller companies. The ticket sizes are smaller, but the work done is the same. Also, companies are getting their loans rated, at the behest of their bankers. Price is therefore an important consideration and they are looking to get the rating at the lowest possible fees.
But we do have a strong focus on margins by way of managing the technology, knowledge and scale. Also, if you rate two steel companies, you might have to do it in a particular way. But if you rating 50 steel companies, the work becomes easier as you have large databases to leverage on. That is where, now, the benefit of our knowledge and all the investments will start kicking in, because there are more companies.
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So, what is your strategy with regards to credit rating?
We were rating only around 400 companies and were India’s biggest rating agency, which wasn’t satisfying. We therefore decided that, we would offer our ratings wherever a credit decision is made. So today, we are rating the SMEs too. We have assigned ratings to about 4,000 SMEs and there are lakhs of them present out there. The idea is to catch them young and grow with them. As the rated SSI unit grows bigger, we would be able to offer bank loan ratings and subsequently, bond ratings.
Your research segment has been one of the big growth drivers for your company, growing at CAGR of over 100 per cent in the last 3 years and contributing about 40 per cent to the revenues. Do you expect its growth momentum to continue?
The big growth in this segment has come because of the international research, handled by Irevna, a company we acquired in 2005. It has about 500 people and we are at the top end of the pricing. But I expect the growth momentum to slowdown in 2009, as our customers are mainly the leading global banks in US and Europe, which have been affected by the turbulence of recent months.
I believe though, that the slowdown is temporary. Once there is clarity, mainly on the ownership front, I think the need for off-shoring will only increase. The domestic research business, on the other hand, may not be very large but is quite profitable. People stop spending on research in difficult times. But what we have done is - introduce several new reports on risk sectors. For example, we have published a report on global meltdown and its impact. Ninety per cent of the banks in India buy CRISIL research reports. Now increasingly, private equity firms and corporate houses are subscribing to such products.
Could you throw some light on your advisory segment, which account for about 20 per cent of your revenues?
We have a large proportion of government clients in our infrastructure advisory business. Areas of expertise include policy advisory, public-private partnerships, bid-process management, where credibility is important. We also do work related to legislation in the areas of power tariff, infrastructure, etc and such work is very niche. On the international front, we are doing some fantastic projects in Philippines, Vietnam, many countries in Africa, Middle East. We are actually doing the entire city-redevelopment of Mauritius. While the international consulting currently contributes a small portion, we would ideally like the mix to be 50:50 in the coming years.
What is the status of your plans to enter the retail credit market?
Now that has gone into bit of a problem. Currently, India has one credit bureau in the form of CIBIL. The RBI had invited applications with the intention of giving out more licences. We had put in an application jointly with Equifax and the Tatas. But recently, the RBI has said that no Indian shareholder can hold more than 10 per cent stake in a credit bureau. Earlier we were hoping to have a more strategic stake, which may not be the case now.
What are the major challenges that you face at the moment?
Today with the financial market turmoil and global as well as Indian economic slowdown, our focus in the rating business is clearly on maintaining intensified surveillance of the rated entities. We need to make sure that the ratings are both, accurate and timely. Since we have highly talented employees, retaining talent is an ongoing challenge. But given the current job-market conditions, attrition levels have declined significantly.