Fiasco Shows Credit Rating Agencies In Poor Light

The CRB Capital Markets episode has brought into focus the inadequacies in the monitoring system of credit rating agencies.

The fixed deposit (FD) programme of CRB had been initially assigned a rating of A+ by Credit Analysis and Research Ltd (CARE). The FD programme for Rs 200 crore was however downgraded from A+ to A by the agency in September 1996.

This was the last time that Credit Analysis and Research Ltd reviewed the rating.

A rating of A signifies an upper medium grade instrument with many favourable investment attributes, including safety pertaining to repayment of principal and interest.

A cross-section of depositors, who had queued up outside the CRB office, while speaking to Business Standard, expressed surprise that despite the fact that the Credit Analysis and Research Ltd had issued a note of caution while assigning the rating, there was no review in between.

 

How can it be that CARE was blissfully unaware of what was happening? A rating of A cannot become C overnight, one of the depositors said yesterday.

CARE maintains that it carried out its work diligently. Managing director P M Thomas told Business Standard: We reviewed the rating from time to time and have taken the appropriate decisions.

While assigning a rating of A in September 1996, CARE had observed: CRB faced severe liquidity constraints. As a result, it could not meet its repayment commitments on certain inter-corporate deposits taken by it.

There was a deterioration in asset quality and fall in recovery performance. The company did not make the necessary provision of Rs 3.10 crore against its non-performing assets. The exposure to group companies rose sharply in the financial year 1996.

CRB was restrained during June-August 1995 by the Securities & Exchange Board of India from submitting any offer documents as a merchant banker.

The companys heavy dependence on fixed deposits and the relatively low level of bank or institutional finance are matters of concern.

The Credit Analysis and Research Ltd reacted only after the Reserve Bank of India suspended CRB from raising fresh deposits.

The agency had then downgraded the fixed deposit program to C, indicating a high investment risk and likelihood of default in payment of interest and principal.