Crisil Rating: When Does AAA Mean B?

In this paper an attempt has been made to assess the quality of credit rating function being performed by CRISIL, hitherto the sole credit rating agency in India. With this objective, the paper attempts to answer two important questions, namely: a) Are CRISIL’s standards of rating comparable to international standards? And b) Are CRISIL’s rating internally consistent? The questions are answered by assessing the companies rated AAA by CRISIL on the Standard and Poor’s (S&P) standards. It turns out that the CRISIL’s AAA companies rate variously from B to A on the S&P standards! This indicates that CRISIL’s credit rating standards are not only much below international standards, they are also internally inconsistent. CRISIL’s rating reports on its AAA companies are carefully analyzed to see if the ratios employed by it are significantly different from those of S&P’s so that their AAA ratings may be consistent vis-a-vis their own ratios rather than by S&P’s ratios. Even this does not turn out to be so. CRISIL’s rating reports are also analyzed for any qualitative reasons for the award of AAA ratings. No strong reasons are found. Thus it is concluded that the discriminating ability of CRISIL’s ratings vis-à-vis risk and hence their meaningfulness and usability are in general questionable. This conclusion assumes all the more significance in the light of interest rates being allowed to be determined by market forces, and the interest rates in turn being linked to credit-worthiness of the borrowers more than ever before. Thus, the paper strengthens the case for more credit rating agencies both in the private as well public sector for making the rating business competitive. It also provides a more objective framework for assessing the performance of credit rating agencies in general.