IL&FS default: Did rating agencies' failure to connect dots lead to crisis?

Did rating agencies again trip up in their assessment of IL&FS, leaving the markets with little time to adjust to the unravelling of the infrastructure company? Or do you accept the rating wisdom that at least three non-banking financial companies (NBFCs) are AAA, and more than one public-sector banks have slipped down to AA minus or even lower on their Tier-I bonds? It means these banks are more prone to default than the highest-rated NBFCs. To get a sense of what goes when a paper is rated by a credit rating, let us examine a typical one in the case of an IL&FS subsidiary.

In February this year, India Ratings had affirmed an AA minus rating for a debt paper of IL&FS Education & Technology (IETSL) Services Limited. Despite recognising that the company had Rs 17.29 billion overdue for 180 days (double the time period for recognition of bad debt by banks and NBFCs), it noted that this risk was mitigated through “an unconditional and irrevocable line of credit facility of Rs 300 million from IL&FS, sponsor and parent of IETSL, to tide over the collection shortfall”.