Rating the “Rating Agencies”

Rating the Rating Agencies

The credit rating agencies (CRAs) have been under the scanner over the past couple of years because of their ‘perceived inability’ to accurately gauge the risks in various financial assets they have rated. Securities and Exchange Board of India (SEBI) regulates the conduct of the rating agencies and in recent times has taken several measures to make the rating process more transparent, objective and fair. These reforms have included:

  1. Enhanced Governance Norms including:
    • MD/CEO of a CRA not to be a member of rating committees of the CRA.
    • Rating committees of the CRA to report to a Chief Ratings Officer (CRO).
    • One third of the board of a CRA to comprise of independent directors if the board is chaired by a non-executive director.  In case the board of the CRA is chaired by an executive director, half of the board is to comprise of independent directors.
    • The Chief Ratings Officer (CRO) to directly report to the Ratings Sub-Committee of the board of the CRA. 
  2. Enhanced Disclosures including:
    • All non-accepted ratings to be disclosed on the CRA’s website for a period of 12 months from the date of such rating being disclosed as a non-accepted rating.
    • Standardizing the press release regarding Rating Actions including the condition to specifically add sections on liquidity, critical factors which can change the ratings etc.
    • Performance Disclosures as explained in detail in the subsequent section.

Performance Disclosures

SEBI, in order to promote transparency and enable the market to best judge the performance of the ratings, has stipulated the CRAs to publish:

  • Average one-year rating transition rate over a 5-year period, calculated as the weighted average of transitions for each rating category, across all static pools in the 5-year period(“Transition Matrix”). Transition rate means the number of movements/transitions from each rating category to another, as at the end of the financial year, as a percentage of the total number of ratings in the static pool. Static pool being the ratings outstanding for each category at the beginning of any financial year.
  • Cumulative Default Rates representing the likelihood of an entity that was rated at the beginning of any multi-year period defaulting at any time during the multi-year period. For example, three-year cumulative default rate, computed as Three-year CDR for rating category X = No. of issuers which defaulted over the three-year period / No. of issuers outstanding at the beginning of the three-year period.


Basis the performance disclosure metrics discussed above, we are presenting below the performance benchmarking of major CRAs (Brickworks, CARE, CRISIL, ICRA, IndRa). Further, since all the five agencies have published FY18-19 data only so far, the same has been presented below in our analysis.

Transition Matrix:

  • Stability of ratings is very important for investors – any downward revision from the initial rating can result in mark to market losses for capital market investors and increased capital requirements for banks. A consistent high rate of downward revision gradually increases uncertainty amongst the investors and this risk gets priced in by the market thereby increasing costs for the issuers.
  • Below matrix shows the percentage of ratings, in a particular category, that have seen at least one downgrade over the course of one year. This is basis each CRA’s one-year transition matrix (tabulated in Annexure-A) for long-term ratings for the last five financial year with period ending in 2018-19.
Transition Matrix to showcase the % of long-term rating downgrade category wise.

How to read the above table : row two and column two value of 1.4% denotes that on an average 1.4% of the ICRA AAA ratings outstanding at the beginning of any year have seen a downgrade by at least one notch.

Also, the cells highlighted in green represent the lowest downgrade rate and in red represent the highest downgrade rate for the rating category across all the CRAs i.e. CRISIL at 1.31% saw the lowest number of downgrades for AAA category while BWRs at 7.01% had the highest downgrades for the same.

Annexure A has CRA wise transition matrices showing rating upgrade/downgrade or a stable rating. For illustration purpose ICRA matrix is provided below. Observing the matrix, we can see that ICRA has maintained 98.6% AAA rating for the issuers while 1.4% has been downgraded by at least one notch(1.1% to AA & 0.3% to D).

ICRA’s average one-year transition rates for long-term ratings for the last 5 financial year period ended 2018-19

Salient Points:

  • CRISIL and ICRA have seen much lower rating downgrades during this period.
  • CARE has had median ranking in most of the categories.
  • IndRa and BWR have had relatively much higher downgrades compared to other CRAs.
  • On expected lines, stability for higher ratings is better.
  • Also to highlight – much discussed proposal amongst regulators has been to introduce more competition amongst rating agencies by introducing more players, however this too is fraught with risks since newcomers (hungry for business) may have much relaxed rating frameworks.

Default Rates

As explained above, CDR is a metric representing the likelihood of an entity that was rated at the beginning of any multi-year period defaulting at any time during the multi-year period.

Below is the snapshot on Cumulative Default Rates (CDR) for non-structured(Bank Loans, NCDs, CPs etc) and structured instruments ( PTCs, Structured NCDs etc. ) to understand how various rating agencies have performed.

Illustration A: 3 Year Cumulative Default Rates for Non-Structured Instruments for the last 5-Financial Year Period (FY2015-2019)

ICRA – non securities1.2%0.2%0.4%2.7%4.9%
ICRA Securities1.1%0.4%2.2%8.2%18.8%
3 Year Cumulative Default Rates for Non-Structured Instruments for the last 5-Financial Year Period (FY2015-2019)

*ICRA has bifurcated default rates into securities(NCDs,CP etc) and non-securities. The same has been used for analysis.

Salient Points :

  • CRISIL’s defaults rates have been low compared to other agencies across most categories.
  • Default rates in “AA” and “A” category have been highest for BWR while ICRA has the highest default rate in “AAA” category.

Illustration B: 3 Year Cumulative Default Rates for Structured Instruments for the last 5-Financial Year Period (FY2015-2019)

3 Year Cumulative Default Rates for Structured Instruments for the last 5-Financial Year Period (FY2015-2019)

@ Includes default on multiple instruments of two issuers. If all instruments of the same issuer are considered as one, since they have the same structure and guarantor, the default rate will be 1.54%

Salient Points

  • BWR and IndRa have not been considered due to lower presence in SI segment in FY 19 – however they have gained good market share in FY 20 basis our earlier post..
  • The performance of SI segment has been relatively better than non-SI space for AAA/AA rating categories.
  • For A category defaults – CRISIL has clarified that majority of the debt defaulted was contributed by eleven guaranteed instruments of two issuers. All the defaulted instruments were guaranteed by the government of Andhra Pradesh. This was an extraordinary event arising due to non-servicing of repayment obligations on account of the ongoing dispute regarding the bifurcation of assets and liabilities between the state of Telengana and erstwhile state of Andhra Pradesh.


It is extremely critical for the financial system that CRA “Opinions” are as close as possible to the intrinsic value of the underlying credit.  Larger the difference between the two – higher would be the probability that ratings would be considered only to meet the regulations & not yield any value to the investors. Also, in “issuers pay” model it is very important for investors to do a regular benchmarking of the performance of CRAs and incorporate the same in their commercial discussions on the transactions.

Lastly, in the above article we have benchmarked the CRAs basis the available FY 18-19 data, considering the number of downgrades and defaults which have occured over the past year it will be interesting to analyse how the agencies performed once the FY 19-20 data is out.

Annexure A : Transition Matrix of rating agencies:

India Ratings
CRISIL Ratings
CARE Ratings
Brickworks ‘ Rating

Disclaimer:  No content on this blog should be construed to be investment advice. All information is a point of view, and is for educational and informational use only. You should consult a qualified financial advisor prior to making any actual investment decisions. We accept no liability for any information or view provided in any of our articles.

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