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.
This move by the country’s central bank aims to understand the extent of the issue and gather specific details.
RBI’s Concern and Information Requirements
The RBI is keen to know the number of ratings falling into this category, the reasons behind borrowers not disclosing required information, and the duration of non-cooperation.
The majority of such ratings pertain to bank loans, which explains the RBI’s interest in the matter.
Lack of Cooperation by Companies:
Approximately 40,000 companies in India have been rated by credit rating agencies (CRAs).
According to reports, nearly half of these companies do not cooperate with CRAs, raising concerns about transparency in the credit assessment process.
RBI’s Communication with Credit Rating Agencies:
The RBI communicated its concerns to credit rating agencies at the end of May, urging them to address the issue of non-cooperation by companies.
Evaluation Challenges Faced by CRAs:
Credit rating agencies can use publicly available data to evaluate companies.
However, when a borrower refuses to disclose their financials and other necessary information, agencies have two options: withdraw the rating or categorize it as issuer not cooperating (INC).
In such cases, agencies rely on reports from debenture trustees, feedback from bankers, and auditors’ input to arrive at the INC rating.
Potential Motives for Non-Cooperation:
Companies may choose to stop cooperating with credit rating agencies to conceal their financial situations, which may include disputes, irregularities, and financial stress.
The fear of a potential downgrade in credit rating could be a driving factor behind their decision.
Past Concerns and RBI’s Action:
The Securities and Exchange Board of India (SEBI) tightened disclosure and review norms for CRAs in 2018 after failures to raise red flags in time resulted in the collapse of a major shadow bank.
While the rating industry has previously raised concerns about non-disclosure by companies, this is the first time the RBI has taken a step to address continuous failures in disclosing financial information.
Positive Outlook on Credit Quality:
Reports by credit rating agencies, such as Icra Rating and S&P Global, have predicted an improvement in the credit quality of Indian corporates in various sectors, including real estate, textiles, financials, engineering, construction, and roads.
Strong macroeconomic demands have contributed to the overall improvement in credit quality, which may have prompted the RBI to investigate the issue of INCs more closely.
