cfoaxis_5a8ytd 10 October, 2019 1

Credit Ratings and the Curious Case of Altico Capital

The Economic Times today (16 Sep 2019) reports an interesting news about the SEBI Chief blaming the banks for covering their exposure to Altico by netting off the fixed deposits of the company, held with them. Altico Capital India, a realty-focused non-banking lender, defaulted on nearly Rs 20 crore interest payment to Mashreq Bank on 12th September.

Altico owes over Rs 4,500 crore to the financial system (mostly banks). Two rating agencies, India Ratings and CARE Ratings, downgraded Altico to junk status, after the default. This doesn’t serve any purpose since the default has already occurred and the prospective lenders would in any case have factored this in. Rating agencies have been widely criticized for closing the stable door diligently after the horse has bolted. The three leading global rating agencies (Moody’s, Standard & Poor’s and Fitch) are known to have rated Lehman Brothers investment worthy weeks before the bankruptcy.

Altico has a very strong pedigree. It is promoted by Clearwater Capital Partners, whose “dedicated investment management strategy combines direct lending, credit and special situation investment knowledge and experience to help Asian companies, often lacking access to sophisticated capital market solutions, rebound, grow and achieve their full potential.” (Source: This was specifically highlighted by the Rating agencies in their reports, as one of the factors that heavily weighed in favor of Altico.

Altico Capital is registered with RBI as a systematically important non-deposit taking NBFC. “Non-deposit taking” indicates that it did not approach general public for deposits. However, it borrowed to the tune of Rs 4,500 crores, mainly from the banks. The banks, as professional lenders, have been well aware that Altico “focuses on senior secured lending to mid-income residential projects and Commercial Real Estate sector across Tier-1 cities in India which include Mumbai, NCR, Chennai, Bangalore, Pune and Hyderabad.” (Source:

Likewise, rating agencies that rated Altico’s debt are also aware of Altico’s concentration on real estate sector. Each of their rating reports highlights this. Let’s look at the ratings awarded by the rating agencies to Altico and “key rating drivers” highlighted by the agencies. Note that every rating agency report highlights strong risk management process, liquidity position and capital adequacy!

Image: Extracts from Altico Capital’s Credit Rating Reports

Some of the issues with the credit ratings are well known. Since the rating agencies are selected by the company being rated, there is an inherent conflict of interest. How do you rate a client who pays you without losing sight of how bad rating will impact you future business from the client? The rating business is as competitive as any other.

Additionally, the company being rated can call off the mandate or not publish adverse ratings. The rating agencies rate the instrument or the borrower at a specific time and there is no active follow-up. The agencies seem to be using a standard template for ratings. The review of reports of the above agencies on Altico Capital appear to be a copy – paste work. In fact, most of the reports looks like Altico’s sales pitch to prospective investors, from whom Altico is seeking funding! Of course there is mandatory mention of sectoral risk.

The woes of Indian real estate sector are known to public. Since last 10 years the sector is in the red. Companies have gone bankrupt, projects have stalled, and banks have lost huge money due to diversion of funds by non-scrupulous borrowers to real estate. Is it therefore not surprising that a NBFC which was focused on lending to real estate sector was not watched closely by the rating agencies? On the other hand, the rating reports praise Altico for well diversified investments (within real estate sector)!

Such events totally destroy public’s confidence in ratings. SEBI must take steps to ensure that things don’t go southward from here. It should be an easy task because I doubt whether there is any scope for further southward shift in rating agencies’ track record.

The SEBI should consider radical moves such as rotating rating agencies like the auditors. An agency that rates a company or instrument once should not rate that company for three more years. When default happens, the rating agency must disclose to the public the reasons it did not identify the possibility. SEBI should more actively track the performance of the rating agencies and withdraw registration if necessary.

Rating agencies must urgently reform, so that it continues to have some value add from public’s perspective.

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