"From here on things are looking good"

As the managing director and chief executive officer of CARE Ratings, India’s second biggest ratings agency, D R Dogra is constantly watching the big picture of the India story. Here he is in conversation with B V Rao on where the story is going.


BV Rao | August 16, 2013

D R Dogra, managing director and chief executive officer of CARE Ratings, India’s second biggest ratings agency
D R Dogra, managing director and chief executive officer of CARE Ratings, India’s second biggest ratings agency

Let’s begin with the India story. The last few years have been depressing for the economy. As a rating agency that looks at individual companies – I know you don’t do country ratings – you have a sense of where it is all headed. How is it telling on the investment climate and mood? From a rating agency’s perspective, is it really that depressing or are we over-representing this?
Yes, the last two years have been really bad for the ratings industry and for corporates. We are doing a lot of downgrades but that does not mean that companies are going bust or they are insolvent entities immediately after downgrade to CARE D. We are making a call only on the company’s capacity for timely debt-servicing. Just like our triple A rating does not mean that a company will never default or go bankrupt, a CARE D rating only means that the possibility of company defaulting on scheduled repayments is very high. Not that they will never pay, they will pay.
Ratings agencies are in bad shape because of the increasing downgrades. We have what we call a credit ratio which is a ratio of upgrades to downgrades. Normally this ratio is about 1 or 1.1. Last year that ratio fell to 0.28, that means for every downgrade there is only 0.28 upgrade or, looking at it from the other end, for every upgrade there are more than three downgrades. This means that credit propriety is down. But that is a liquidity issue; it’s not a solvency issue.
So, whenever the economy goes down we (rating agencies) are the first ones to be affected. Firstly, as interest rates move up and liquidity dries up, no new investments are happening. No new ratings come up as no new investments are taking place. Secondly, it affects our present client population as we go on downgrading them. It’s a double whammy. It’s like a bank with large NPAs that stops fresh disbursals only to discover that its NPAs are actually growing.
Let me give you this example. We work in the Maldives. The State Bank of India branch there is one of the most profitable branches of SBI anywhere in the world. It pays 7-8% to depositors and charges 18-25% from lenders in the tourism industry. Europeans and Japanese are the world’s best spenders. So, all the world’s luxury hotel brands set up shop there in the Maldives with rates like 300 dollars/euros for a room per night. When the going was good, everybody expanded and SBI started funding because tourism was flourishing. All of a sudden, when the Eurozone economy tanked, all these hotel projects crashed. They started inventing loopholes in the projects and abandoned the projects. Suddenly good projects became NPAs for SBI and it took a decision to stop funding. The present country head of SBI in the Maldives told me that he was in a jam. He said if he had Rs 10 crore outstanding and Rs 1 crore NPA (10 percent) and recovered Rs 2 crore from the good assets, his NPAs now jumped to 25 percent (Rs 2 crore out of Rs 8 crore)! That’s what a bad economy does to ratings agencies. We are squeezed from both ends.
As far as the India story is concerned, GDP for year 2013 grew just by 5 percent and for the last two quarters it was actually below 5 percent (4.7 percent third quarter and 4.8 for fourth). This is a cause for concern but I think every quarter is looking better than the earlier. We believe that this year (2013-14) we will do much better than 5 percent, it could be even 6.5 percent. Inflation has also gone down below 6.5 percent. It is reasonable to foresee that the CPI [consumer price index] will stay in single digits. Agricultural production, which was just 1.8 percent, is expected to be around 3 percent with a good monsoon and industrial production which was just 1-2 percent could be around 4 percent. This means that the trajectory of the economy is on the up, it will not be in double digits but in the high single digits. If you ask me, from here on things are looking good.

So 2014 should be a good year?
Yes, 2014 should be a better year as compared to 2013. You see, in spite of everything, this government has brought in some real reforms in FDI, oil pricing, gas pricing, insurance, civil aviation etc. And all this in an election year when the Congress is fighting with its back to the wall…

That brings us to another point. We have often heard from this government that reforms have been blocked because of coalition compulsions but even though the coalition is more vulnerable now and an election is approaching, they have pushed through a rush of reforms. So is this a problem of the economy or of governance?
Governance is an issue. Governance is a big issue. The market perception, and I also subscribe to that, is that the years of Pranab Mukherjee as finance minister were a drag on the economy. I don’t know why but the government was under this fictitious fear that Mamata [Banerjee] will do this and Mamata will do that. But when they deregulated diesel prices that happened? Nothing happened. Either Mulayam or Maya, one of them has to support the government, so what was the fear? Why did this government have to kneel down before Mamata? You know why A B Vajpayee was able to push through so many reforms even though not all his allies were on board? The TINA (there is no alternative) factor. The same holds true now. You think the BJP really wanted early elections?
But I think, as far as our economy is concerned, the kind of domestic demand we have and if the US economy revives (of which there are some signs), then our economy should do well. Our economy is not suffering because our manufacturing is suffering due to dumping by China, our economy thrives on exporting services to the US and west. Once that market revives, we will start doing better as well. Yes, there are fundamental problems such as lack of infrastructure because of which we are suffering but we should also see it as an opportunity. If the country is to put one trillion dollars on investment only in infrastructure in the next five years, my assumption is that a similar amount is the minimum requirement just in the manufacturing space. That’s why I keep telling colleagues that ratings agencies will have it good. If India requires two trillion dollars in the next five years, it cannot come from the equity markets. It has to come from the debt market. And that is why we are in good space!

How complicit was corporate India in bad governance? I ask this with all the scams in mind; they couldn’t have happened without a money bag behind them.
If there are two companies, one promoted by D R Dogra and the other by the Tatas having the same performance parameters, the company of the Tatas will obviously get a better rating. We are not forensic auditors. We start with the audited balance sheet. If the auditor is hand in glove with the company’s management and siphons off money showing some untrue picture using some tax loopholes or protections especially in cahoots with some tax officials, we can be taken for a ride. We have to be very careful. So, in addition to looking at quantitative issues we look at the track record of the promoters and their management structure carefully before we arrive at our ratings.

Corporate governance and good corporate culture are a parameter
Yes, these are very important factors. It’s not just the ability to pay but also the willingness to pay. If you have the money and you don’t intend to pay then whatever assumptions I make while building the ratings model looking at your cash flows etc. will go haywire.

In the parameters of ratings where do corporate governance, good corporate behaviour and even social responsibility figure? Is there a number for that?
There is. Though our starting point is the audited balance sheet we don’t go blindly by the balance sheet numbers. We go behind those numbers. There are certain indicators to suggest the truth of those numbers, for example, group investments, loans and advances given to associate companies, suspicious accounting policies—for example, if the terms of trade are 30 days credit but you are giving 60 days, then we have to know why. Changing of accounting years from March to June to January, fictitious sales, merging and de-merging companies, are all tricks that companies employ. All these get due weightage while arriving at a rating. When we look for good governance, we don’t go by Clause 49 of the company law (the board should have a minimum 50 percent independent directors). We look at the quality of the independent directors because, I tell you, the quality of the independent directors is such that they are more dependent than the other directors. For social responsibility though we have a product called corporate governance ratings where we look at all stakeholders. But in our credit rating we have still not factored in CSR. When I do a credit rating, my priority is to look at investors’ interest whether he is going to get back the money he put in the company. For example a lender such as ADB [Asian Development Bank] would like a renewable energy project than a thermal project, but I am not directly concerned at this point. If a thermal project and a green project have the same service parameters, I will rate them the same. I see that companies which do good for society ultimately reap benefits with better brand creation and market for themselves. So CSR is automatically taken care of.

As a rating agency you rate a certain company and it pays you for it. It’s like internal auditors. Substantially, you rate companies on the information they give you. Is there an intrinsic conflict of interest? How does a company like CARE maintain its ethical ways?
Nice question. Our service is to give opinion to the investors on the way the company is growing so that the investor’s money is safe. The actual user of my rating is not the person who contacts me but actually someone else. The beauty of my service is not in the eyes of client but in the eyes of the lender or investor. Since the client gives me a fee there could be temptation on my part to rate the client higher. But I cannot do it. Even though I am the second largest rating agency in the system, I cannot do it. If I give a favourable rating to a client company, the company will love me, the bank will love me, as the bank will love me, the investor will love me but only temporarily. Because, if the forget me, the second placed agency, even the sixth largest agency out of six cannot do it. Investment banks and lenders look at our transactions rates. As per SEBI regulations credit default rate (CDR) will have to be displayed on our websites or on SEBI website. So lenders keep a check on the quality of our ratings all the time.

So is there a rating of rating agencies too?
We are only a 20-year-old company. S&P and Moody’s are 100-year-old companies they have done very good business for 70-80 years. Every rating analyst in the world would like to match their CDR with S&P and Moody’s. While we don’t have a debt market in India, theirs has been strong for many years and numbers are normalised. Ours are not. It is only now that they have started coming out with regulations in the US while we already have regulations. It is a tough time for rating agencies in the US and Europe. It is difficult to tell if S&P US will be able to come out of the 4 million dollar suit that the US department of justice is intending to pursue against them.

 (The interview first appeared in the Governance Now magazine, issue August 1-15)



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