Ratings firms to see major opportunities post Basel-II

Mumbai, April 19 | Updated: Apr 20 2005, 05:36am hrs
Post Basel-II, the domestic ratings market is expected to see significant opportunities in terms of quality of services and categories of products. Roopa Kudva, executive director and chief rating officer, Crisil, said with the implementation of Basel-II banks will be required to undertake a rating exercise for several more activities.

However, it depends on which approach is adopted by banks and the regulator. For instance, the rating agencies stand to benefit if the regulator adopts a standardised approach of Basel-II for banks. Under this approach, all loans taken by banks or extended by banks to companies have to be rated.

Since the issuer as well as the investor will be involved in any rating exercise, both vanilla products as well as structured ratings will surge in due course, Ms Kudva observed. However, even as the rating service industry is likely to witness a gradual boom, there is no potential for more rating agencies to set up shop in India. There are four rating agencies in India already.

Crisil is present in nine locations in India. With the need for increasing rating services, our network will be growing commensurate with it, she said. According to R Jayakumar, senior director, Fitch Ratings India, Banks can undertake a rating exercise either internally or externally. In case of a standardised approach, banks will have to involve external credit rating agencies, which will be beneficial for the credit rating industry.

This is a very nascent stage. More credit enhancement products and services will be introduced only in phase-II of Basel-II, he said. Implementation of Basel-II will enable efficient use of capital by banks. If banks credit is strengthened, then they will require less capital. At that stage, more products and services will be introduced. But this is a grey area, which will be clarified once phase-I of Basel-II is implemented.

Creating a rating brand is a long haul exercise, which acts as an entry barrier for credit rating agencies. Further, the per ticket size is very small. Hence it takes a reasonable amount of time to break even and earn sizeable gains, he said. Moreover, there are four credit rating agencies in India, which itself is a crowd, he pointed out.

Giving a clients perspective, Nachiket Mor, ICICI Banks executive director, said what will be the implications of Basel-II on credit rating agencies is an issue still under debate.