Monday , October 18 2021

IL & FS crisis puts credit rating companies on SFIO radar



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It was only after IL & FS took a default on payments that CARE and IRA downgraded IL & FS's credit ratings and some of its subsidiaries to

It was only after IL & FS paid default on the payments that CARE and IRA downgraded IL & FS's credit ratings and some of its subsidiaries to "default" or "junk." Photo: Aniruddha Chowdhury / Mint

New Delhi: The Office for Serious Fraud Investigation (SFIO) is investigating the methods used by credit rating agencies as part of the investigation into a number of breaches of Infrastructure Leasing and Financial Services Ltd (IL & FS). "SFIO is investigating the issue from a specific point of view of how comprehensive they are (rating methods)," said Injeti Srinivas, secretary of the Ministry of Corporate Affairs, at an event on Monday. The idea is to find out if their methods gave investors a false sense of security.

The measure to examine the robustness of the methods used by credit rating agencies and the reasons why they failed to detect the increased stress in IL & FS would help the government identify vulnerabilities in the financial system that could compromise its stability, they said. ministry officials.

READ TOO | How credit rating agencies have lost the IL & FS crisis

The Corporate Affairs Ministry, in its petition to the National Business Law Court in October, said it was after IL & FS had canceled payments that CARE and IRA downgraded IL & FS's credit ratings and some of its subsidiaries to "Default" or "junk".

In June, the IL & FS Transportation Division, ITNL, delayed the payment of ₹450 crore of interbank deposits from the Indian Small Business Development Bank (Sidbi), leading to a downgrade of Icra and CARE's debt rating of ITNL. roles The IL & FS group and the units subsequently assumed several other payment obligations.

In response to an e-mail inquiry, IRA said it would not be in a position to share details of its discussion with any regulatory authorities, as the content of the dialogue is confidential. "Being a responsible organization, we are providing full support to all government agencies on this issue," the IRA statement said. An email sent to CARE Ratings remained unanswered at the time of publication.

An executive with a rating agency, who spoke on condition of anonymity, said that the mandate of risk rating companies was limited and that they could not go beyond the role of auditors or detectives.

Srinivas said a section of non-bank financial firms (NBFCs) involved in real estate financing are facing liquidity problems after IL & FS delinquency. NBFCs are loan institutions that, unlike banks, do not accept deposits in most cases and are a vital source of funds for many companies. Mr Srinivas said the situation warranted short- and medium-term responses.

READ TOO | What can be done about the problem of credit rating?

"This requires a general (liquidity) flexibilization at the macro level, for which appropriate measures are being taken by the government and by the Reserve Bank of India (RBI)," he said. "I do not see any crisis. It should be duly addressed in the short term. In the medium and long term, we need to analyze how entities (NBFCs) expand and finance (projects). All entities have to follow a sustainable business development model. It should not expand at a pace that is not sustainable. "

The secretary said that the revival plan for IL & FS would take into account the best interests of all stakeholders. On the planned sale of its assets to raise funds for a revitalization scheme, Srinivas said: "At best, it could be a sale of the company's IL & FS group as a continuation. But there are serious questions and the likelihood of such a result is limited. There are alternative approaches to separate vertical layouts. The last approach is an asset-level sale. What seems most likely is a combination of some of those options. "

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