"The impact of credit rating in Nepal will be visible in Nepal only after the rating of debt instruments and businesses begin"; Interview with Vivek Mathur, ICRA Nepal

Mr. Vivek Mathur, the Executive Vice President & Head  of Rating Operations of ICRA Limited and the chairman of ICRA Nepal, has been on the forefront of developing Rating tendency in Nepali market. ICRA Nepal Limited (ICRA Nepal), the first Credit Rating Agency in Nepal, is a Subsidiary of ICRA Limited (ICRA) of India. It was incorporated on November 11, 2011 and granted license by the Securities Board of Nepal (SEBON) on October 3, 2012.

Although the rating has started in Nepal, investors most often overlook the ratings and follow the noise, the reason to which might be because they don’t know how it works. So on this back drop, Sandeep Rana, Aakriti Thakali and Krishna Khatiwada from Sharesansar visited Mr. Mathur. The excerpts of the interview are:

What are the objectives of rating agencies in general?

Rating companies are basically investment information companies whose primary objective is to provide credit related information to the market. So as a rating agency we are neither borrower nor lender or investor, rather we are positioned as a third-party who is responsible for unbiased analysis and deriving results based on that. The results that we produce are used by investors to decide whether to invest or not. Similarly it is also used by banks to decide the creditworthiness of a borrower and the level of interest rate to be charged. To sum up, rating is an input or a means to end but not the end itself.

The concept of rating in Nepal has started just few years back. What are the impacts that we’ve seen so far?

The impact of rating is yet to be felt in Nepal. So far we’ve done around 200+ ratings and majority of them have been for public issues like IPO and FPO, which are one-time exercise. Once the rating for bank loans and corporate houses starts, only then the true impact of the rating agency can be felt in the market.

Could you shed some light on ICRA India and its works so far?

ICRA India is more than 25 year old company and is a subsidiary of Moody’s Investors Service. So far we’ve done above 7000 ratings and rate debt issuances of large number of corporates across diverse sectors. Besides rating all prominent banks, financial institutions and non-banking finance companies in India it also rates debt issuances of prominent business houses such as  Reliance, Tata, Birla and the like. It also rates debt issuance of almost all prominent public sectors undertakings in India. The coverage of ICRA India spans various sectors and the same experience is our inheritance to ICRA Nepal. In addition to that we have a staff strength of about 250+ analyst continuously working on rigorous research and analysis.

What are the criteria and methodologies of rating?

To precisely categorize the procedure, we look into three criteria before rating any issue. They are:

Management quality: For any business to succeed the quality of the owner or the manager plays a really important role. So under this criteria we look into the managers’ and management teams’ experience in that industry and their history.

Business risk: The type of business refers to the sector they are in, whether its cement or banking or construction and likewise. Then we access the competitive advantage of that particular company in that industry, the level of maturity of that product and the overall landscape of competition.

Financial risk: This criteria looks into the financial structure of the company and its formation. We look into the debt and equity composition of the company, the profit it has been generating over the period and the returns being distributed.

So basically, rating is a forward looking process where we take historical data and the trends to analyze its capacity to service its debts and generate returns for its investors in future. Rating measures probability of default, lower the probability of default better will be the rating and vice versa.

Are there any limitations of rating?

The greatest limitation for us as a rating agency is the fact that “rating is a forward looking process”. We don’t only analyze the past data, but are endowed with the responsibility to make judgments based on that data to comment on the company’s future. Foreseeing how someone on something might behave is a lot of forecasting and future is always uncertain. So the degree to which we can correctly foresee the future performance of a company shows the quality of our analysis. Therefore we maintain a very strong and large database to facilitate extensive research and analysis.

How long does it take for the rating to complete once the application is submitted by the client?

It is actually not from the date application, but rather the date from when all the information and documents are made available by the client.so once all the information is received, it takes usually 2 to 3 weeks at max. Since you’ve asked it let me take you through the entire process:

First, after having all the data we need, we’ll analyze them based on the three parameters we discussed above – Management quality, business risk and financial risk.

Second, we’ll compare the derived results with other companies of similar nature in the industry through our database and research.

Third, we’ll prepare a rating report based on our comparison.

Fourth, the report will be presented to a rating committee which comprises of 7 analyst who will go through each component and discuss the rationale of rating.

Finally based on the rating committee’s unanimous judgment, the rating is given.

In the recent Monetary Policy, it has been made mandatory for the companies to also do Company’s rating. What kind of impact will that create in the market?

I think this will create a positive impact in the Nepali market, the kind of impact I was talking in the initial questions. The overall impact that it will generate can be broken down into:

1. The companies will get to know where they stand from a third-party’s view and this will help them internalize the problems that they may have. This is very important because our own view of our company might be myopic. Rating will help them see their own Strengths, Weaknesses, Opportunities and Threats (SWOT).
2. Rating will also bring corporate governance in management. Prior to rating the companies’ financials aren’t disclosed which might some time lead to mismanagement of cash flows. So in such scenario they’ll get lower rating and thus to not let that happen companies will ensure corporate governance.
3. Rating will also help banks in analyzing the borrowers credit quality. Thus they’ll be able to charge different interest rates to different borrowers based on their credit rating.
4. Once the companies are rated they can also look into bonds market to diversify their source of funding.
5. Similarly when companies are rated, the foreign companies will feel safer to transact with them. So rating will indirectly boost the foreign trade and FDI flow of the company.

We have also heard of Individual’s credit rating, but that isn’t practiced in Nepal yet. Is it done in India? What are its prospects in Nepal?

No, it isn’t done in India either and credit rating agencies like us don’t do individual rating. It is done by credit scoring companies.

Has your rating been challenged so far?

Ratings besides being objective also have an element of subjectivity which sometimes leads to difference of opinion with the client. Ratings assigned are always accompanied by a rating rationale. So to challenge our rating, the company must also have enough background to challenge the finding that we’ve made on their SWOT.

Although the ratings have been mandatory, often it is ignored by investors. We have a lot of instances where a poorly rated IPO also gets oversubscribed. What do you think is the reason?

This is precisely the reason why I’m saying that the landscape of rating will change in Nepal only when the rating of bank loans and corporate bodies start. Currently whatever rating we’re doing is mostly of public issues and public issues are investors driven not lender driven and that makes all the difference. The investors’ priority while subscribing an issue is related to the listing gains not the repayment as equity has no maturity. So even though we point the companies’ weakness and threats, the investors won’t care as the benefits that they want to yield are short term whereas rating paints a long term picture.

Whereas on the other hand when you’re lending, the priority is given to the borrower’s ability to service the interests and repay the principle amount. So in such scenario the lender depends on the rating to access the probability of repayment and return too.

Similarly if you look closely, these oversubscription had happened when the market was flush with liquidity and people were looking for ways to manage it. However if you see today the liquidity has tightened and many IPOs and right issues have gone under or un-subscribed. So in this manner we can see a lot of changes.

How the ICRA India is helping its subsidiaries in Nepal to upgrade the qualities of services?

ICRA India is helping ICRA Nepal in many ways, to point a few they are:

• Training of the staffs
• Domain experts to work with the team of ICRA Nepal concerning specific industries like Hydro, construction etc.
• The rating committee also consists of experienced analysts from ICRA India who provides valuable input in the committee discussions

Why do you think credit rating of Nepal is still not done? Do you think it is necessary to attract foreign investors and FDI in the country?

Why it is not done, I am not the right person to respond on this.. Why is it necessary – it’s because when a country is also rated like a company it provides them credibility. When a country is rated, other countries will see that an external party has analyzed this country and it gives them confidence to invest there. Similarly the country itself will also have a chance to look at its own stature, the areas it’s good at and the areas where improvements are necessary. So the rating of the country can be a way to reflect inwards and also to raise itself to international standard.

Is ICRA capable for rating Nepal?

No ICRA isn’t eligible to do country’s rating. It is done by internationally recognized rating agencies like Moody’s based on criteria like the fiscal policies and its effectiveness, Balance of Payments, Foreign exchange rates, GDP growth rate, deficits, debts, source of revenues etc. So they’ll look at the structural strengths and weaknesses and how it’ll be able to change the future of the country, and based on these facts the rating will be given relative to other economies.

What you have to say about the Nepalese financials Market?

I think the Nepalese financial market is poised to grow. The financial market is small but there are a lot of institutions, so based on financial inclusion Nepali people have got too many choices. In that perspective this market is very well catered. However, I think now it’s time to build a culture of credit. When there is plenty of competition, then there may be many competing to lend and in that competition sometimes the quality of asset might get compromised. So in that scenario rating will help in analyzing if the lending is safe or not.

Therefore if we develop the culture of rating, this will develop the culture of corporate governance and in long run it will benefit the entire financial system.

Is there any plan of ICRA Nepal to issue share to general public?

Not as of now, because it is prohibited by our clauses.

Are there any international trends that hasn’t started in Nepal?

There are many actually. Like in India too, the bonds market hasn’t fully developed yet. In Nepal people invest in stock market or park funds in banks. Nepal is in very initial phases of financial market development. Structure finance, for example, is a very big market in India.

Final note:

I’ve been tracking the Nepali market for quite some time now and are positive towards the upcoming days. The government is taking very positive steps to develop this market, they’re mindful of the risks and are focused too. So I think we’re all headed toward the right direction and I can only see good things in the future.