Downgrading All

CRISILs sweeping action (incidentally not mirrored in any action by the other credit rating agencies) is probably a response more than anything else to the new, less favourable climate in which all NBFCs have to function. In addition, there have been specific problems, like the CRB scam, doubts about the health of the bill discounting business (yet another area in which scams have been unearthed), concern over narrowing spreads and over business risk.

If CRISIL has indeed warned the public in time, something that the RBI has repeatedly failed to do, it has earned its bread. But its broad brush approach has raised other questions. Not all companies can be equally affected by a change in the business climate. So how can all be marked down uniformly by one notch? Some gradation in this regard would have made the exercise less sweeping and suggested more qualitative judgement. The second point is related. Rating is a pretty laborious exercise and a revision in rating equally so, with companies often being put on credit watch first. Downgrading one and all (while reflecting a re-assessment of the NBFC business as a whole) does look a little bit like mixing up apples and oranges.

The RBI may well be waiting to announce its comprehensive policy on NBFCs, but it should be a little more revealing about what it is doing with the 40,000 applications that it received for registration of NBFCs. The Khanna committee on revamping NBFCs submitted its recommendations to the central bank early this year. An action plan to implement the recommendations was initiated but nothing was heard on this till the CRB scam broke. Then, reacting to the development, the central bank asked all NBFCs to register within a stipulated date, in July. Now RBI must complete the herculean task of going through all those applications, responding to them and then monitoring them over time. It is worth asking again whether the central bank is adequately equipped to do all this regularly. The fear is that the RBI, which is famous for asking for more returns than it can ever process, will clear the NBFC applications at its own pace till another crisis breaks. Then it will overreact. Against such a background, the CRISIL action, though sweeping, may have a salutary effect in an unintended quarter.