Feb 26, 2009

Rating Agencies - The new Devil?

"Sold our soul to the devil for revenue", moaned some employees of Moody’s recently. They were crying foul about how the company issued fake ratings to junk securities just to make money on them. Moody’s 28% associate in India, ICRA, seems to be doing the same things. Not showing penance for giving 4 out of 5 IPO rating to Reliance Power which had no business to show for its creditworthiness, the company is at it again.

It has assigned its highest rating to Reliance Communications (RCL), as the latter prepares to borrow money for expansion purposes. This rating is for a company that has a debt to equity of 0.9 times, which will increase to 1.2 times after the latest round of fund raising! RCL is already being questioned by the Enforcement Directorate for violating the foreign exchange rules. The company had reportedly parked the unutilised money (of around Rs 51 bn) from its foreign currency bond issue interest free with a wholly owned subsidiary! Further, the company has a large portion of forex loans (around 66% of total loans) in its book, which has the potential to severely hurt its profits.

The story of credit rating agencies worldwide and in India is a story of massive failure. And the result is that our entire financial system is now at risk. If the raters are not brought to task, we will always remain in a debt bubble trap.

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