How India's rating agencies survive without a bond market

Crisil's chief executive discusses the agency's latest acquisition and how it copes with an under-developed corporate bond market.

India is having a rough time of it lately. Economic growth is slowing, inflation is uncomfortably high, investment is lacking and the overall policy climate suggests conditions may get worse before they get better. Even the prime minister, Manmohan Singh, who was once lauded as a committed reformer, has drawn criticism.

Conditions could hardly be worse for India’s rating agencies, yet business is bouncing back at some of the biggest firms. Shares in Crisil, the market leader and part of the Standard & Poor's group, are up 21% so far this year and profits were up 28.5% during the first quarter, after a tough year in 2011. The agency is also on the acquisition path.

In June, it made its second overseas acquisition since Standard & Poor’s took over in 2005, buying the UK’s Coalition Development, an analytics firm that provides market insights to investment banks.

Roopa Kudva

The deal is part of a strategy to protect the independence of its ratings by launching new products and services, globalising its operations and diversifying into different business segments.

“In an environment where companies don't invest, and demand for funding and research falls, it is difficult,” said Roopa Kudva, Crisil’s chief executive and head of South Asia for S&P. “We are not divorced from the wider Indian economy, so it does have an impact.”

Kudva’s job is made even tougher by the fact that India’s tiny corporate bond market, with roughly $250 billion outstanding in a $3 trillion economy, is served by no fewer than six licensed rating agencies, including Icra, which is 29%-owned by its global rival, Moody’s.

The level of competition puts pressure on the traditional rating agency model, in which issuers pay to be rated. With so many agencies to choose from, companies that are unhappy with their rating can easily shop around for a better deal, which is what happened after India’s economy started opening to global competition during the late 1990s.

“We downgraded a lot of clients,” said Kudva, “And many went to other rating agencies.”

Crisil responded by buying businesses that reduced its dependence on revenues from the ratings business and allowed it to continue making tough calls without having to worry about putting itself out of business. It moved into risk management, global research and analytics, and even business school ratings.

“It is important to be analytically accurate, which meant being less dependent on ratings so that we could be financially strong,” said Kudva, who became Crisil chief executive in 2007.

The company has also helped to expand the universe of rated products by moving into non-traditional areas such as ratings for small and medium-size enterprises. The implementation of Basel II has also grown the market for ratings in the loan market. During the past four years, the number of companies Crisil rates has ballooned to 10,000, up from around 500. Indeed, India will soon have more rated entities than any market other than the US.

Even so, the small domestic bond market has propelled Crisil to expand overseas, which “provides a non-conflicted way of diversifying the business model”.

It is also a way to attract and retain talented individuals. Ambitious graduates in India value international experience highly, and Crisil’s diversification strategy has helped to deliver this. Before buying Coalition it already had analytic teams in Argentina, China and Poland. And its earlier acquisition of Pipal gave it a research, analytics and risk management platform that works with investment banks in Europe and the US, mostly, but also in Australia and Japan.

Coalition is the next step up the value chain. It provides industry analysis to senior management at investment banks, to help them benchmark individual business lines in terms of headcount and revenues.

But the development of a more active Indian bond market would nevertheless be a welcome step. The biggest impediment, according to Kudva, is the strict regulatory restriction on India’s big investor groups, which keep the market small, shallow and thinly traded. The system is also overly complicated and limits foreign ownership.

For its part, Crisil remains an advocate for better functioning markets. “Our role is really to speak about the benefits of transparency and pricing credibility,” said Kudva. “Ratings are public, so companies feel the need to maintain them, which increases the confidence of investors. Our goal is to expand the whole population of rated entities, while maintaining credibility and strengthening the credit culture.”

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