SEBI headquarters in Mumbai (Photographer: Santosh Verma/Bloomberg)

Less Than 1% Of Indian Companies Rated ‘AAA’, Says Crisil

Even as a series of corporate defaults brought the role of rating agencies under scrutiny, a Crisil study showed that the proportion of companies rated ‘AAA’ in India is the lowest among major Asian economies.

As of January, 276 of the 32,534 instruments rated by all credit rating agencies had the ‘AAA’ tag, according to Crisil. That’s 0.85 percent of all rated debt instruments, which is lower than China and at least three other Asian countries.

The study comes amid increased scrutiny of rating agencies after defaults by ‘AAA’-rated Infrastructure Leasing & Financial Services Ltd. That led the market regulator to issue fresh disclosure guidelines and a parliamentary panel even sought a probe into the role of rating agencies.

Also read: Large Corporate Defaults: Did Indian Credit Rating Agencies Give Investors Fair Warning?

The Crisil study, however, found that Indian rating agencies accord a rating of ‘A’ and higher to only 13 percent of the companies compared with the global average of 25 percent.

About 11,438 or 35 percent of the issuers have a rating of ‘BB’, and 7,853 issuers or 24.13 percent of ‘B’, it said. A credit rating of ‘BBB’ and above is considered as investment grade, suggesting that the issuer has a low chance of defaulting on debt.

Comparison With U.S.

Still, the percentage of companies getting the top rating is higher in India compared with the U.S.

Companies rated ‘AAA’ accounted for less than 5 percent of bond issuances in the U.S. in 2017 and ‘A’ and ‘BBB’-rated companies comprised 60 percent, according to the study. By comparison, in India 85-90 percent of the issuances are rated ‘AAA’ and ‘AA’.

The reason for a higher proportion of ‘AAA’-rated credit instruments in India compared to the U.S. and Europe is because rating agencies abroad work on a global rating scale as opposed to a domestic benchmark in India, Crisil said. The national rating scale used by all agencies provides a more granular benchmarking of Indian credit instruments on a 20-point scale, it said.

“Over the past decade or more, companies in the developed economies have relied more on debt in their quest to increase shareholder value. When reliance on debt increases, financial risk also rises leading to a lowering of credit ratings,” Gurpreet Chhatwal, president at Crisil, said. “The width and depth of the corporate bond markets in these geographies, and ultra-low borrowing costs over the past decade, have also encouraged the shift to debt-driven growth.”

But if 32,500 rated Indian companies were to be assessed on the global scale, Crisil said their ratings will be boxed on a far narrow range between ‘BBB’ and ‘D’ on the global scale. That’s because India’s sovereign rating (BBB category) will usually serve as a ceiling, it said.

Crisil has 139 outstanding ‘AAA’ ratings on Indian companies, of which 80 have government backing or strong ‘parentage’ and 20 are a part of global companies with a credit rating of ‘A’ and above.

If the strong parentage or government backing were excluded from their rating methodology, Crisil said the number of companies with ‘AAA’ tag would fall to 59.