The rating income of Crisil, the Indian associate of Standard and Poor’s, is slightly more than 50% of its overall income. Photo: Abhijit Bhatlekar/Mint
Live Mint :Tamal Bandyopadhyay : Sun, Mar 31 2013. 07 10 PM IST
What can we get for Rs.1? Till 15 March, funky party bags worth Rs.95 were available at Rs.1 each on a website. The Vodafone website offers latest videos, songs, photos and games for Rs.1 per download, up to five downloads a day. We can also buy a matchbox, a sachet of Chick shampoo, Pass Pass mouth freshener, and a couple of Mentos—the mints of dimaag ki batti jala de campaign fame—for Rs.1. With a down payment of Rs.1 and in exchange for our old car, we can drive home Volkswagen AG’s Vento sedan (there’s a catch; the old car must be worth at least half the price of the new Vento). There have been occasions in the past when airlines in India sold tickets for Rs.1.
Rarely though have there been instances of sick public sector undertakings being sold for Rs.1.
In the service sector, there aren’t too many instances of a Rs.1 offering. For instance, the cost of a shave cannot be so low even if one opts to have it on a pavement from a barber with a broken mirror. But investment bankers are not averse to the idea of offering their services for as low as Rs.1 to grab the mandate for the government’s divestment programme. Such mandates give them access to powerful bureaucrats and kick them up a few notches on the league table.
Now, a similar trend is being noticed in the rating business, which is as competitive as investment banking. I am told one rating agency recently bagged the mandate from a very large public sector undertaking for rating its debt instrument—for a payment of Rs.1. Typically, public sector undertakings follow the L1 (lowest one) principle and award the mandate to the pre-qualified bidder who quotes the lowest amount.
When asked, the chief executive officer of the rating agency initially said he was not aware of such a mandate and later sent me a mail saying the fee charged by the rating agency to a client for a rating is confidential and neither of them reveals this. His agency has a rate card on its website of fees charged for initial rating and surveillance but the actual fees charged could be lower for two reasons, he argued. “The first is where we operate with a client on a basket basis, wherein we charge a fixed fee for the year irrespective of the volume of debt involved. Hence, it could appear that at the margin, the client is paying a very low fee. The second is the force of competition, which is more prevalent when we are dealing with bank loan ratings or small and medium enterprises, where we are unable to charge a fee close to the card rate,” he explained.
How competitive is the rating business in India? There are six rating agencies and we don’t need to say more. The only other country that boasts of half a dozen rating agencies is Bangladesh. The six credit assessors in India are Crisil Ltd, Icra Ltd, Credit Analysis and Research Ltd, India Ratings and Research Pvt. Ltd, Brickwork Ratings India Pvt. Ltd, and SME Rating Agency of India Ltd. The first three are listed entities and they account for the bulk of the business, but it isn’t easy to define the exact market shares of the agencies as the composition of their business is different. The rating income of Crisil, the Indian associate of Standard and Poor’s, is slightly more than 50% of its overall income, but for Care, the last rater to be listed, rating is the mainstay. Rating makes up roughly one-third of the overall business of Icra, in which Moody’s Investors Service holds a hefty stake.
Rating is a high-margin business and valuation is even higher. If one has the ability to sustain cash losses for the first few years and has a team of good analysts, in a growing economy, a rating company is bound to thrive. Indeed, competition raises the quality of service, cuts cost and pares delivery time, but it has a different meaning for the rating industry for one simple reason: The buyers of the rating service pay for it but they are not the consumers. The buyers engage a rating agency to rate their financial instruments and, based on the rating, consumers get involved in their money raising plans.
So, when competition drives down the cost of rating and time of delivery of service, the quality of rating is bound to be affected. A rater cannot cut fees and continue to pay market salary to analysts. Similarly, it can pare the time of delivery of service if it chooses not to be fussy about the quality of data gathering and analysing them. In both cases, the buyers are not affected, but the ultimate users of the rated instruments—or the consumers who put in their money, based on rating of an instrument—are affected. This is why quite a few developed markets, including the US, have capped the number of rating agencies.
Since a company can refuse to buy a rating for its instrument even after paying for it if it does not suit its requirement, theoretically it can influence the rater. In other words, it can force a rating agency to compromise on quality to get business. But this cannot continue for long because of market forces. If a rater compromises its analysis and awards a rating higher than a company deserves, in the long run the market will eject the agency. So, it’s in the interest of both the rater as well as the rated companies, and, above all, the consumers who put in money in various financial instruments, based on a company’s rating, competition should not lead to dilution of rating standards.
The rating business is not something like running dhabas on a highway where competition for customers first leads the eateries to compromise on quality and serve stale meat and then offer liquor as an incentive to attract clientele even if they don’t have the licence to sell alcohol.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to bankerstrust@livemint.com
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