 "RBI to look into companies that do not cooperate with credit rating firms")
The Reserve Bank of India (RBI) has requested credit rating firms to identify companies that are withholding important information necessary to assess a borrower's creditworthiness.
According to the Economic Times (ET), the country's central bank is now keen on understanding the extent of this issue. They want to know key information such as how many ratings fall into this category, why these borrowers have not disclosed the required information, and how long they have been uncooperative, among other related details. The majority of such ratings are related to bank loans, which is why the RBI has taken an interest in the matter.
In India, there are approximately 40,000 companies that have been rated by credit rating agencies (CRAs). According to the report, about half of these companies do not cooperate with the CRAs.
Reportedly, credit rating agencies received a communication from the RBI regarding this issue towards the end of May.
Credit rating agencies can use publicly available data to evaluate companies. However, if a borrower refuses to disclose their financials and other necessary information, the agencies have the option to either withdraw their rating or categorise it as issuer not cooperating (INC).
In such cases, the agencies use reports from debenture trustees, feedback from bankers, and auditors' input to arrive at the INC rating.
Companies might choose to stop cooperating with credit rating agencies in order to hide
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The Securities and Exchange Board of India (Sebi) had tightened disclosure and review norms for CRAs back in 2018 after companies failed to raise red flags in time, leading to a collapse of a top shadow bank in the country.
Since the tightening of these rules, the rating industry has raised this concern in the past regarding companies. However, this is the first time RBI has taken a step to address companies that have continuously failed to disclose financial information.
Financial situations that show disputes, irregularities, and stresses can potentially lead to a downgrade in rating, which may be the reason why some companies choose to not disclose this information.
A report by Icra Rating at the end of 2022, predicted the improvement of credit quality of corporates in India in the coming year, especially in the real estate, textiles, financials, engineering, construction and roads sectors.
The report’s findings were further consolidated in following reports in 2023 by credit rating agencies, such as, S&P Global, which stated that, the credit quality of finance companies was expected to improve. Similarly, many credit rating firms over the last few months have reported improvement of credit quality of companies across the industry due to strong macroeconomic demands. This may be a reason why the RBI is now looking deeper into the issue of INCs