An Emperical Study on Credit Rating Agencies (with Ref. to Default Rates of Crisil)

Abstract

Credit rating is the symbolic indicator of the current opinion of rating agencies regarding the relative capability of issuer of debt instruments, to service the debt obligations as per contract. The corporations with specialized functions namely, assessment of the likelihood, of the timely payments by an issuer on a financial obligation is known as credit rating agencies. Lately, the credit rating agencies have been the subject of significant criticism for failing to warn the investors of the defaults well in advance. Investors in long-term debt instruments are usually risk averse, buy-and-hold types; and hence, for them, the variability of investment-grade default rates is particularly important since they employ simple investment-grade rating cut-offs in the design of their investment eligibility plan. According to CRISIL (Credit Rating Information Services of India) and another credit rating agencies, default mean that the company has either already failed in the payment of interest and/or principal as per terms or is expected to fail. This paper tests the reliability of ratings assigned by CRISIL on the basis of the actual default rate experience in different sectors over a period of ten years, i.e., 2000-2011.Since the credit rating agencies do not publish ratings that are not accepted by the issuers, this study is limited to only those issues that have been accepted and used by the issuers. The default statistics were examined sector-wise, period-wise, and company/institution-wise. Analyses of the background and business, operating performance, management and systems, financial performance, prospects, key issues, and the reasons cited for defaults were undertaken with respect to all the companies. Further, an attempt was made to identify whether companies in default had issued other debt instruments that were rated by other credit rating agencies.