Crisil rating deficiencies

CRISIL CD RATING OF YES BANK DID NOT REFLECT RISK

The general complaint against credit rating agencies in India is that they revise their ratings much after the damage is done to the investors and the other stake holders. CRISIL has recently (19th March 2020) given a rating of  A2(assigned) to the CD Programme of Rs.20,000 cr. of Yes Bank. A2 (one notch below the best rating) indicates that the instruments have a strong degree of safety and carry low credit risk. 

FACTS:  As per the rating rationale made available in public domain, the rating awarded is centrally pinned to the extraordinary support received/likely to be received from the Ministry of Finance, RBI and SBI(now holding 48% equity in yes bank).

The report quotes

i) Restructuring scheme (scheme)of the bank jointly implemented by the govt and RBI,

ii) Overwhelming support received from SBI in raising the equity proposed in the scheme, 

iii) Liquidity support promised by RBI and 

iv) SBI to be a likely investor in the CD programme of Yes Bank

as the positive factors to arrive at the rating assigned, though the following constraints affecting liquidity are yet to be resolved

a) Deposit has shrunk by more than Rs.63,000 cr. during the FY and since Dec 2019 alone, the decline was Rs.28000 cr.

b) Huge jump on NPAs from 7.4% in Sep 2019 to 18.9% in Dec 2019, resulting in reversal of interest income, huge provisions thereon and also the impact on the future interest income on  the said  stressed assets

c) SMA 1 and SMA 2 accounts aggregate Rs.13,900 cr. (7.5% of total advances).  Any material slippages can impact the bank's earnings further and thereby its capital position

d) Liquidity Coverage ratio (LCR) was 74.6% as on December 31, 2019 against regulatory stipulation of 100%.  However, CRISIL understands that the ratio has since improved.

When the above rating was given by CRISIL, the rating given by ICRA for the CD Programme - (ICRA)D-  was still in force.  ICRA upgraded the rating to (ICRA) A4+ from D on 24th March 2020, after factoring the removal of moratorium and the reconstruction scheme announced by RBI and the government. (D means Default expected on maturity and A4 means minimal degree of safety and carry very high credit risk and susceptible to default). Interestingly, ICRA withdrew its rating on CD Programme on 31st March 2020 and the rating of CRISIL is in force now.

REASONS FOR QUESTIONING THE RATIONALE:

The questions that come to the mind are

1. How can there be such a variation in rating between two rating agencies, one indicating strong degree of safety and low credit risk, the other suggesting minimal safety and very high credit risk - that too the dates of ratings are within short intervals (one 19th March and the other on 24th March) and the same factors of revival were considered

2. Breach of Liquidity Coverage Ratio by a huge margin, huge outflow of deposits and absence of internal accruals in the light of huge stressed assets affected the liquidity considerably and are the prime factors in rating a short term instrument like CD. Though the extraordinary support from the government and the regulator are huge comforts, does it justify improvING the rating from a default position a fortnight ago to high degree of safety?

3. Since pricing is directly proportional to the risk involved, the rating A2 has given advantage to the company to raise funds at lesser rate, at the cost of investors.

4. The audited financials for March 2020 indicate that

    (i) LCR further reduced to 40%(from 74% in Dec 19) as on 31.03.2020 (worsened still further to 34% as on 2nd May), (very much below the regulatory level of 80% now)

     (ii) CET-1, Tier I and CAR are once again below regulatory minimum inspite of capital infusion of Rs.10,000 cr. and extraordinary income of Rs.6000 cr. plus from AT1 write off

     (iii) Under AFS portfolio of Rs.14655 cr. in Investments, Rs.9107 cr.(74%) are NPIs and

     (iv) deposit depletion continues, though on a lower scale.

Will CRISIL review its rating in the light of the above 'rating sensitivity downward factors'?

SUGGESTIONS: OVERALL AND STANDALONE VIABILITY RATINGS TOGETHER WILL BRING OUT MORE TRANSPARENCY

While different ratings are given for different fund raising instruments, the credit rating agencies in India follow single rating methodology when they evaluate the risks of a particular instrument (short term/long term) of a company. Due to this reason, even when there is uncertainty in liquidity/solvency of a company on a standalone basis, external support from the group/sovereign and now the regulator is relied upon to extend a better rating.  The operation inefficiencies of the company in question are not conveyed at all, if one goes through the rating only without reading the rationale summary.

International rating agencies follow the system of evaluating the risks based on standalone viability as well as with the support system available. 

For example in respect of Yes Bank, Moody's Investor Service revised its ratings based on the reconstruction scheme of the bank on 17th March 2020.  The ratings given are two

1. With the support available, the long term issuer rating was upgraded from Caa3 to Caa1 (upgraded within poor quality and high credit risk ratings)

2. Baseline Credit Assessment Rating (BCR) retained at 'ca' as the bank's standalone viability is in question (highly speculative and risk of default)

In a similar way, Fitch has given two ratings for IDBI Bank instruments

1. Long Term Issuer Default Rating - BB+(less vulnerable in the short term)

2. Bank's Viability Rating - 'ccc"(currently vulnerable and depends upon favourable conditions to meet commitments)

SUGGESTIONS
I. It is high time that the rating agencies in India also adopt the rating system followed by their counterparts abroad and introduce two ratings for a single issue - one taking into account all external support available and the other on a standalone viability

II. When a rating of a particular instrument is in force, any new agency engaged for rating the same instrument, the new 'rater' shall substantiate by way of reasoning as to why he differs from the existing 'rater', if he chooses to rate the instrument up/down by more than one notch.

V.Viswanathan

Retired Banker

13th May 2020