Crisil, the pioneer in credit rating in the country, is completing 25 years in business. Under the leadership of Roopa Kudva, Managing Director and Chief Executive Officer since 2007, Crisil has evolved into a diversified analytical company with a global client base and delivery footprint, while remaining the undisputed thought leader in all its segments. Excerpts from an interview with The Hindu:
The global financial crisis of 2008 negatively impacted investor confidence in rating agencies. Are there any lessons learnt?
Yes, definitely. Unlike in the West, Indian rating agencies have been regulated from 1999. India was one of the first countries in the world to have regulations for rating agencies, whereas in the U.S. it came a few years ago, in Europe regulation is being put in place. Even though we were not really affected, as an Indian rating agency, we decided to see what we need to change proactively.
We increased our dialogue with the market. We started releasing ‘credit alerts’. The idea is if we see a problem in any sector, we should inform the market not after we do the downgrade, but proactively. Let us tell the market in advance we have seen problems in this sector and are issuing an alert saying these are the risks, we are reviewing the portfolio in this sector and we will come out with final views on the ratings shortly. So the market realises where we are in our thought process.
Another thing we changed was our rating rationales. For every rating, we publish a rationale explaining why we have assigned that particular rating. We have improved transparency regarding our assumptions. One of the criticisms globally of the structured finance transactions was that the rating agencies did not make their assumptions very clear. Another big thing we changed was the intensity of surveillance of our rated portfolio of companies. The world has become a much more volatile place after the 2008 crisis. It is important for the rating agencies to be alert and maintain strong surveillance on the companies which they rate.
International rating agencies have warned India on its sovereign rating. What are your views?
We don’t have a sovereign rating. While I may not be able to comment on India’s rating, I can comment on Crisil’s views on what is the economic outlook for India. We believe that we have reached the bottom or we are somewhere very near the bottom of the credit quality cycle. We think that things will get better from now onwards. Look at corporate profitability. After 8 or 9 quarters of declining margins, in the results which came out in the last quarter, we saw an improvement in profitability. This was because commodity prices came off their peaks and some export-oriented companies have benefited from a weaker currency. But clearly we saw profitability increasing. Further, if you look at our rating actions — out of 11,000 companies Crisil rates, downgrades are still higher than upgrades but we believe the intensity and pace of downgrades will begin to decline. Inflation numbers have started coming down. So interest rates, we believe, will not go up from now. We are also forecasting gross domestic product (GDP) growth in 2012-13 at 5.5 per cent. For next year, we are forecasting 6.5- 6.7 per cent. We are projecting that if there is a normal monsoon, agriculture will account for 3.5 per cent of GDP. We are projecting a good growth for the industry. Overall, we believe that the worst is almost over.
What are your suggestions to improve the sluggish corporate bond market?
One of the classic long-term issues for India is developing a robust corporate bond market. You need it for a variety of purposes. Most important reason is for infrastructure funding. In the last few years, several measures have been devised. First, the government has doubled the limit for foreign investment in the Indian debt market to $40 billion. Today, it is much easier for a company to list its debt. Procedural complications, which were there a few years ago, have been simplified. We have also introduced measures such as credit default swaps. All these measures have been designed to give a fillip to the bond market and yet we don’t see that much of a pick-up. Partly it has to do with general economic conditions. But there are some more measures, I think, which are important for improving the corporate bond market. They are the restrictions on the investor. Today, an insurance company can invest only up to AA paper. It can invest in A+ paper only after a specific approval from the investment committee. If you look at EPFO, they have the largest corpus of investible funds. They have long-term money. Insurance companies also have long-term money. The EPFO today invests only in seven private sector bonds and those companies which are rated AAA by two rating agencies. This is a very narrow investment option.
Investors only invest in highest rated papers, partly because of regulatory reasons and partly because they believe that the paper rated below AAA is risky. We have done an analysis. We have 507 companies rated in the A category. Our analysis shows that even on a risk-adjusted basis, these papers offer better returns. So, there is a strong case for investors to re-look at their investment norms and invest beyond AAA paper to AA and A category more. When investors look at papers which are below AAA, it would be an important milestone in the development of corporate bond markets.
Infrastructure debt funds are one more step in this regard. Because you are structuring IDFs as a AAA rated entity, you are able to get money from investors who have no risk appetite and put the money into more risky projects in infrastructure. It’s a wonderful mechanism. We estimate that IDFs should be able to raise about Rs.20,000 crore in capital immediately. It is not the only solution but it is one more step to develop the bond market.
Rating of SMEs has become a lucrative business for rating agencies. What do you see as the growth drivers in this sector as well as risk factors?
When Crisil pioneered rating of SMEs a few years ago, the SME sector was not used to the concept of credit ratings. Financially they were not sophisticated. They were smaller enterprises owned by promoters. Most of them are involved in the day-to-day running business. So clearly, the concept of getting evaluated by a third party was unknown to them.
We had two things in mind. Let us keep the assessment simple. Traditional rating products would be too complicated for SMEs.
The second is can we keep the rating affordable. So what we offered to SMEs, a simple credit assessment service whereby we evaluate SMEs on business parameters as well as financial parameters. We have worked with the Government of India to come up with a subsidy scheme for the smaller units. Today a small unit in India could get a rating by paying as little as Rs 9,000. Today we have 35,000 enterprises rated by Crisil alone. The confidence of bankers in lending to them has significantly gone up. We believe that SMEs themselves have seen value in the ratings, because in the second year of rating the subsidy is no longer available. Yet 40 per cent of these entities are coming for the renewal of the rating by paying a higher fee. They would not come if they didn’t get any benefit from ratings. Today our assessment is that these SMEs have saved around Rs 2000 crore as interest cost because 17 banks have announced interest rates concessions linked to the rating. This is a tremendous financial benefit for them. Besides that, since we are evaluating them, they have become more professionalised. We have observed that the second time they come for a rating, the quality of their reporting has improved. Since the ratings are public, it makes the financial discipline better because if you don’t pay your loans the rating will come down.
You acquired Coalition, a U.K.-based analytical firm, recently. Any more acquisitions in the pipeline? Will you continue looking at inorganic growth?
Coalition does some pretty unique work. They provide a comparative analysis of revenues as well as productivity of global investment banks. They provide very intelligent analysis on the banks, which I think nobody else in the market is providing. This acquisition represents a logical progression for Crisil. We started 25 years ago as an India focused credit rating agency. From there we have come to a situation today where more than half of our revenues come from outside India and rating is only one third of our business. We have consciously diversified our portfolio. Outside, India our work was related to Investment Banks - equity research, in-depth analysis on trading and risk management activities and fixed income research. We were supporting the global banks out of research centres in India, Argentina, China and Poland. Coalition is a logical extension because it is also working with the same investment banks. We work with research functions and trading and risk management functions and Coalition works with the same banks’ top management and strategy teams. The acquisition of Coalition marks our entry into proprietary research outside India.
We continue to look at inorganic growth. If you look at Crisil’s history over the last ten years, we are a high growth company. Our profits have grown at a compounded annual growth rate of 33 per cent, over the last ten years. It’s a nice mix of organic and inorganic growth. All our acquisitions have been funded by cash on Crisil’s books. So, inorganic growth is a key element of our strategy.
Are you concerned about the downturn impacting CRISIL Global Research & Analytics’ revenues?
There is no doubt that our important customer segment outside India is the investment banks and these investment banks are going through a period of stress. So this stress creates challenges for our business. But we also see new opportunities emerging. Global banks are subject to lot more regulations, which require them to do lot more analysis and that’s where we can step in. The new areas like stress testing, validation of price models, risk analytics, these are becoming more important for global banks. We are seeing second rung global banks, regional banks coming to work with us. Recently we started working with banks in Australia and Spanish regional banks. So every crisis creates an opportunity.