Road construction takes place near the IL&FS building in Mumbai. Photographer: Abhijit Bhatlekar/Bloomberg News

Role Of Credit Rating Agencies Needs To Be Introspected, Says Finance Ministry

In the wake of Infrastructure Leasing & Financial Services crisis, there is a need to review the role of rating agencies as they continued to rate the non-bank lender at top-notch investment grade even a day before it defaulted on its payment obligation, a top finance ministry official said.

IL&FS, a large systemically important non-deposit accepting core investment company, sent markets into a tizzy with series of defaults beginning August last year. Rating agencies failed to see the financial troubles brewing and judge the ballooning debt of IL&FS. Following a series of defaults, the credit rating industry came under scrutiny.

While the banks were busy with the clean up exercise, non-banking financial companies went on an aggressive lending spree, Financial Service Secretary Rajiv Kumar told PTI.

"The growth of NBFCs was exponential when banks were cleaning themselves and a kind of a similar situation what happened to the banks in aggressive lending happened to NBFCs,” he said.

"Some of the NBFCs which have grown more than the normal need a correction in terms of the asset quality management and at the same time need to be regulated more intensely. Also, the role of credit rating agencies needs to be introspected and looked at as to how entities can remain “AAA” and suddenly come eight notches down in a day. So, these roles have to be seen," he said.

IL&FS, which has been downgraded to junk status by rating agencies, is sitting on a debt pile of around Rs 91,000 crore. Of this, Rs 57,000 crore are bank loans alone, most of which are from state-owned lenders.

Also read: NCLAT Suggests Appointing Former Supreme Court Judge For IL&FS Asset Sales

State-owned Life Insurance Corporation is the largest shareholder with a fourth of the firm's equity, while Orix Corporation of Japan owns 23.5 percent.

Other shareholders include Abu Dhabi Investment Authority with 12.5 percent stake, IL&FS Employees Welfare Trust with 12 percent, HDFC with 9.02 percent, Central Bank of India with 7.67 percent and State Bank of India with 6.42 percent at the March-end 2018.

In a bid to align with the “best corporate practices”, the finance ministry has asked the public sector banks to gradually bring down the government's equity to 52 percent.

"The government is essentially a major shareholder. So, this need to be aligned to the best corporate practices. The shareholding needs to come down to at least 52 percent in the first phase. As and when market condition allows, banks will take step in that direction. They have all the permissions in hand, Kumar said.

The country's largest lender SBI has already initiated steps for Rs 20,000 crore share sale through qualified institutional placement. Post the QIP, the government stake will be diluted from the existing 58.53 percent.

Also read: RBI Rejects Request For Special Classification Of IL&FS Loans