India’s market regulator on Thursday fined two leading credit rating agencies 2.5-million-rupees ($35,058.20) each for their failure to carry out proper due diligence when assigning credit ratings to an indebted shadow bank.
ICRA, the Indian arm of global ratings company Moody’s Investors Service, and CARE Ratings “failed to exercise proper skill, care and due diligence” while assigning credit ratings for non-convertible debentures of Infrastructure & Leasing Finance Services (IL&FS), the Securities and Exchange Board of India (SEBI) said in two separate orders late on Thursday.
CARE and ICRA did not immediately respond to requests for comment.
India’s credit rating agencies have come under pressure from authorities and investors over their failure to proactively flag financial problems at IL&FS, one of the country’s biggest Non-Banking Financial Companies (NBFCs) until a subsidiary started defaulting on some of its debt last year.
In 2018, the Indian government took control of the IL&FS board, in a move it said was necessary to protect the country’s financial system and markets from potential collapse, as shockwaves from a series of IL&FS defaults triggered big declines in debt and equity prices at other shadow lenders.
Funded substantially by short-term debt, NBFCs such as IL&FS, also known as shadow banks, have played a major role in lending growth in India in the last two years as Indian banks, saddled with roughly $150 billion of bad debt, slowed lending.
Credit rating agencies for years assigned high ratings to IL&FS and its group companies despite its deteriorating financial health, according to a special audit conducted by Grant Thornton India.
CARE Ratings in July placed its chief executive on leave until further notice.
ICRA in August fired its chief executive after sending him on leave in July this year.
IL&FS in October said it aimed to resolve 50% of its debt by March 2020 and had identified resolution plans for all of its 302 entities.
IL&FS has a total debt of close to a trillion rupees.