Indian credit rating agencies: The road
to regulatory reforms
Prateek Sharma, Samit
Paul
Indian Institute of Management,
Lucknow
*Corresponding
Author E-mail: fpm13003@iiml.ac.in;
fpm13005@iiml.ac.in.
ABSTRACT:
Credit rating agencies (CRAs) are
considered as the gatekeepers of the financial markets. However, after the
global financial crises, the role played by these CRAs came under regulatory
scrutiny. CRAs have been accused of faulty ratings for complex asset backed
securities and other risky derivative instruments. There are concerns over the
inadequacy of existing rating methodologies to rate complex structured products
and the inherent conflict of interest in the issuer-pay model. Consequently,
there is a renewed impetus on regulating and reforming CRAs worldwide. In this
paper, we discuss the Indian Credit rating Industry. We highlight the
regulatory concerns and propose the regulatory reforms required for the Indian
CRAs. We believe that these proactive measures will be instrumental in
protecting Indian capital markets from future shocks.
KEY WORDS: Credit rating agencies, CRISIL,
ICRA, IOSCO, Credit Rating, credit rating agencies, India, global financial
crisis, regulatory reforms.
JEL Classification: G20; G24
The global financial crisis of
2008 sent shock waves across financial markets throughout the world. The U.S. S
and P 500 index declined 56.7% from its high in October 2007 to its low in
March 2009. The Dow Jones Industrial Average (DJIA) and NASDAQ Composite
declined by 53.7% and 54.7% respectively, and the broader Russell 2000 index
fell 59.4% over the same period. One of the most important reasons attributed
to the sheer magnitude of the crises was the collective failure of Credit
Rating Agencies. The financial crisis enquiry commission (FCIC) termed Credit
rating agencies as “key enablers of the financial crisis”. FCIC noted that the
reckless ratings in the pre crisis period was the prime reason behind the
housing bubble, and the sudden downgrades which followed ultimately led to a
worldwide financial disaster (United States
Financial Crisis Inquiry Commission,2011).
Credit
rating agencies (CRAs) have been around since 1860s. CRAs not only play an
important role in risk assessment but also determine concentration and
distribution of risk within the financial system. Credit ratings facilitate
investment decisions and help investors in achieving a desired risk return
profile. At the same time, they assist firms in accessing capital at fair costs
in accordance to their creditworthiness. The CRAs used to collect fees from the
public until 1975. Therefore, they served as information brokers to the capital
markets while generating revenue from investors (user-pay). Post 1975, SEC
introduced the concept of "Nationally Recognized Statistical Rating
Organizations" (NRSRO) and made the access of an issuer to the capital
markets impossible without the “approval” of these rating agencies. This
changed the business model, customer orientation and revenue generating
strategies. CRAs started selling their ratings to the companies whose debt was
the subject to be rated (issuer-pay) rather than the earlier user-pay model (Wolfson and Crawford, C. 2010). Presently, the issuer-pay
model is the prevalent model for worldwide Credit Rating Industries. While the
model has been particularly successful, it naturally leads a conflict of
interest that was highlighted by the global financial crisis.
The Securities and Exchange Board of India
(SEBI) regulates the Indian CRAs. CRAs operating in India need to obtain a
“certificate of registration” from Securities and Exchange Board of India
(Securities and Exchange Board of India, 1999, regulation 3). The supervision
by SEBI is limited to securities issued by public or rights issue. These
include Public/ Rights/ Listed issue of bonds, IPO Grading, Capital protection
oriented funds and Collective Investment Schemes of plantation companies
(Securities and Exchange Board of India, 1999, regulation 2(1) h). Presently,
there are six registered credit rating agencies registered with SEBI. There are
four primary players in Indian credit rating industry, viz. CRISIL, ICRA, CARE
and FITCH. CRISIL has the highest market share (about 55%) followed by ICRA
(about 20%), CARE (about 15%), FITCH and Brickworks (about 10%).The major
Credit Rating Agencies of the world, viz., Moody’s, Standard and Poor's and
Fitch operate through their Indian subsidiaries. ICRA is a subsidiary of
Moody’s, CRISIL is a subsidiary of and Standard and Poor's and Fitch Ratings
India Private Ltd is a subsidiary of Fitch Ratings.
Indian Credit rating industry has
witnessed a sharp growth, which is expected to continue in the near future.
Steady economic growth, large capital investment projects in infrastructure,
power generation and energy sectors and steady decline in interest rates all
augurs towards sharp growth in the business of credit rating agencies. Another
key driver for the growth of credit rating sector is the SME ratings segment.
According to an RBI report on trends and progress in banking 2010, only 13% of
the registered SMEs have access to finance from formal sources (Krishnan, Nair,
Tiwari, Nagpal, Sahajwala and Jayasimhan, 2008).
Soliciting a creditworthiness assessment from a CRA is highly beneficial for a
SME as it can bargain for better financing terms, faster turnaround of loan
pressing time and better business opportunities afforded by enhanced
credibility of unbiased of credit ratings.
Financial Products
The
rating agencies define the task of their credit rating by their own way, but
the variation of this definition is not so high. Specifically, a credit rating
indicates the probability of default of a financial instrument, and therefore
provides a benchmark for measuring the relative credit risk of the instrument.
It helps the investors to find the most suitable option to invest depending
upon their risk-return portfolio and the investor’s ability to bear the risk. A
credit rating provides huge amount of diverse information by symbolizing it by
meaningful symbols. It could be a simple alphabetic or alphanumeric symbol,
such as “AAA” or “DA1”, which normally conveys a meaningful credit rating (Vassiliki, 2010). CRAs in India rate the following types of
financial products:
1) Bonds/ debentures; 2) Bank loans; 3) Fixed
deposits; 4) Mutual fund debt schemes; 5) Initial Public Offers (IPO); 6)
Commercial paper; 7) Structured finance products (CDO).
The credit rating is an opinion or an
assessment on the relative credit risk (or default risk) associated with the
rated instrument. Default risk is the event in which companies or individuals
will be unable to make the required payments on their debt obligations. A
failure to pay even one rupee of the committed debt service payments on the due
dates would constitute a default. For most of the instruments, the process
involves an estimation of the cash generation capacity of the issuer through
operations, investments and financing activities in order to fulfill its requirements
for repaying debt obligations over the tenure of the instrument. The analysis,
although carried out within the proprietary framework of the rating agency, is
purely based on the information obtained from the issuer and on the
understanding of the business environment in which the issuer operates
(Krishnan et al., 2008).The analytical framework used by credit rating agencies
includes the analysis of business risk, market risk, liquidity risk, credit
risk, interest rate risk, technology risk, industry risk, financial risk,
operational risk and management risk. Business risk analysis, by and large,
covers industry analysis; operating efficiency, market position of the company
whereas financial risk covers accounting quality, existing financial position, cash
flows, financial flexibility and various risks (sensitivity) affecting the
performance of the company. Under management risk, analysis an assessment is
made of the competence and risk taking capacity of the management (Krishnan et
al., 2008).
Credit rating agencies usually take two
approaches in order to assign credit rating to an instrument. The first method
is known as Through The Cycle (TTC)
methodology, which only focuses on the permanent component of default risk and
rating change policy. It ignores the short-term fluctuations and considers only
those developments that are structural and permanent in nature. If there is a
substantial change in permanent component of default risk, it definitely leads
to rating migrations. The second approach which rating agencies adopt is the Point In Time (PIT) approach. In the PIT approach, the credit rating is
changed as and when any new information, affecting the short-term the long-term
repayment ability of the entity, becomes available. Therefore, the basic difference
between these two methods is that they put different weightage
on the permanent and temporary components of credit quality. The relative
weights are influenced by different time horizons for which the rating is
valid. Specifically, for a one year horizon the temporary component would get
more weightage, whereas, for longer time horizon
permanent component will get more weightage (Krishnan
et al., 2008).
Limitations of credit ratings
Following are the major limitations of
credit ratings agencies.
1. It does not
recommend the investor to buy,
hold or sell any stocks, debentures, bonds, or any other financial instruments
issued by an individual entity, or derivatives thereof. It is just an
indication to the investors about the potential of a particular instrument so
that based on which investor can take the decision.
2. Apart from the
credit default risk, an investor needs to consider several other factors before
investing on a debt instrument
such as volatility, liquidity risk, pre-payment risk, interest rate risk,
sensitivity, yield offered, taxation aspects, exchange loss risk and risk of
secondary market loss.
3. Generally, it does not evaluate the
performance of the entity that has issued the instrument in the market unless
specified to do so. The rating is usually specific to the instrument and is not
the rating of the issuer.
4. It does not opine on the status or
condition of the associates, subsidiaries or group companies of the rated
entity. Moreover, it is difficult to quantify naturally qualitative aspects
like management quality.
5. It does not audit the statutory or
non-statutory obligation of the entity to be rated.
6. It does not comment upon the compliance or
any legal or statutory requirements.
7. It does not
provide any guarantee against the default risk inherent to a particular
instrument. Each instrument carries a certain level of risk with itself and
credit ratings do not provide a measure of absolute risk of an instrument.
However, it can be assured that higher rated instruments are less risky in
comparison to the lower rated ones (Krishnan et al., 2008).
Credit ratings are ordinal rather than
cardinal in nature. They suggest that a rating of AA has a higher likelihood of
default than AAA, but to what extent is not readily obvious. An accurate
assessment of credit quality would require a probability to be assigned to each
rating indicating its likelihood of default. Further, in the event of default,
how much of the debt is recoverable. These two metrics, popularly known as the
probability of default (PD) and the loss given default (LGD) are hidden in the
aggregate credit rating measure.
Rationale for Credit Ratings
Although,
the credit ratings are quite useful for the investment decision, it is
debatable whether the ratings augment or change the information base as a
whole. If the market can estimate the credibility of an instrument on its own,
then the role of credit rating agencies are not justified. Empirical evidence
indicates that market do the information processing better than the CRAs.
Hence, the market price itself acts as an indicator towards its credibility.
The
rationale for credit rating may be expressed on the following counts. If there
is any information gap in the market, regarding a particular instrument, then
the market sentiment could be misleading. It affects the cost and reputation of
the security traded in the market. In such cases a fair credit rating helps to
reduce the information gap and enhance liquidity in the market (Indian
Perspective on Banking Regulation, 2010). For instance, in a market with
incomplete or inaccurate information dissemination, if firm A is rated above
firm B then markets should demand a lower interest from A than B. In the
absence of credit ratings, the investors would be wary of the unknown risks and
demand higher risk premiums from all firms, making it systemically more
expensive to raise capital. Similarly, if the default risk of a newly issued
bond/equity is not clearly known to the market, it may cause an under pricing
of that particular security. It may again be quite risky to the issuer as long
as the information gap prevails. Hence, it is optimal for the issuer to obtain
a credit rating so as to place the bonds/equity at a better price. Moreover,
international obligations like Basel III require provisioning of capital based
on risk weights attached to each of the assets. Capital requirements for a
rated asset base is usually less than an unrated assets base, since unrated
assets may be classified as highest risk by default.
SEBI Code of conduct
The Code of Conduct has been designed by SEBI in order
to ensure proper transparency and independent functioning of credit rating
agencies. This code of conduct for CRAs addresses some of the basic issues
relating to conflicts of interest. Some of the salient provisions of the Code
of Conduct are:
§A credit rating agency should put all
efforts to protect the interests of investors.
§A credit rating agency should exercise due
diligence in order to achieve and maintain transparency and independence in the
process of rating. Moreover, it needs to ensure proper care and independent
professional judgment in order to gain the investor’s confidence.
§A credit rating agency should follow a
rating process that is as par as international rating standards and consistent
throughout.
§A credit rating agency should be aware of
all current developments and should keep track of all important changes
relating to the client companies. Moreover, it should develop efficient and
responsive systems to publish timely and accurate ratings. Further it should
play a role of a monitor who can keep monitoring closely all relevant factors
that might affect the creditworthiness of the issuers.
§A credit rating agency should disclose its
rating methodology to clients, users and the public so that there will be no
conflict regarding authenticity.
§A credit rating agency should be specific
while making a statement. It should not exaggerate about the qualification and
capability of its client in rendering services. Whether it is in form of an
oral or written communication, it should disclose the actual findings about the
client.
There are various provisions prescribed by SEBI Code
of Conduct in order to ensure credibility of credit rating. Some of the key
provisions are:
§If the credit rating agency predicts about
any possibility or reasons which may create conflict of interest and in turn
affect its ability to predict fair and unbiased ratings, it needs to disclose
the same to the clients. It is also the responsibility of the credit rating
agency to resolve if there is any conflict of interest exists within the
members of rating committee and with client.
§No member of the rating committee and no
employee of credit rating agency is allowed to advice about the investment
strategy to the outsiders.
§Apart from credit rating and researches,
the credit rating agency is not allowed to provide any other services to the
clients against any fee.
§For a credit rating agency the credit
rating activity should be totally independent of any other activities.
§A credit rating agency should have its own
internal code of conduct in place. This will help it to look after its own
internal operations and to keep a track of violation of norm, if any. The
employees and officers should be aware of the internal code of conduct and
encouraged to adhere to it. Such things definitely enhance more of integrity,
confidentiality, objectivity, avoidance of conflict of interests, which in turn
leads to professional excellence and better services. It gives a clear path way
in order to formation of rating committees and the underlying duties of its
employees and officers.
§Rating services and investment advisory
services are usually provided by separate entities. Nevertheless, concerns are
raised regarding the common ownership and overlap in management. Therefore, few
credit rating agencies such as CARE decided to discontinue its advisory service
business and now it is only providing the credit rating and research
activities. However, this poses a challenge in terms of revenue generation by the
CRAs.
Multiplicity of regulators
The
credit rating agencies generally work under the purview of multiple regulators.
Products from financial market such as bonds, debentures etc are regulated by
SEBI, whereas products like bank loans, fixed deposits, commercial papers etc
are regulated by RBI. Earlier, RBI carried out a detailed and rigorous
evaluation of Indian CRAs before granting them External Credit Assessment
Institution status for rating of bank loans under Basel II. Further, some
regulators (such as IRDA and PFRDA) have incorporated ratings into the
investment guidelines for the entities they regulate (Darbellay
and Partnoy, 2012). It is observed that all SEBI
regulated CRAs in India have framed their internal code of conduct, which have
provisions, inter alia, of conflict of interest management, avoidance and
disclosures of conflict of interest situations etc. and such provisions
prescribed are by and large in accordance with the IOSCO Code of Conduct
Fundamentals for CRAs. The internal code of conduct formulated by the CRAs is
in addition to the Code of Conduct prescribed under the SEBI (CRA) Regulations
– 1999.
Regulatory Concerns for Indian Credit Rating Agencies
Credit rating agencies (CRAs) play a
crucial role in assessing risk and protecting the interest of investors. Credit
rating agencies facilitate investment decisions and help investors achieve a
desired risk return profile. As the financial sector continues to develop there
is a growing reliance on credit ratings due regulatory requirements, maturing
capital markets, linkage of capital adequacy norms and creditworthiness
appraisal in banking sector. Credit ratings have a potential to govern the
capital allocation decisions, direction of investment flows and valuation of
assets within the economy. The failure of various CRAs to carry out due
diligence is cited as the major cause for late detection and severity of the
global financial crisis of 2007-2008. Given the significance of CRAs in the
economy, regulatory and supervisory oversight for CRAs is of utmost importance.
To this end, we intend to contrast the contrast the features of Indian credit
rating environment with the developed markets of US and UK. Specifically we
attempt to highlight regulatory concerns and lacunae in the existing regime and
try to incorporate lessons from failure of CRAs during the global financial
crisis within the Indian context. There are certain features unique to the
Indian credit rating environment. Firstly, SEBI requires mandatory ratings for
initial public offerings, while in developed markets like US, UK, Australia,
France etc. issuers obtain ratings on voluntary basis. This enhances the
significance of credit ratings as their scope is extended from debt markets to
equity markets. Secondly, we believe that the credit rating environment in
Indian capital markets is in a transitory phase. As discussed earlier vigorous
growth of credit ratings due to adoption BASEL III norms by the Indian banks
(Reserve Bank of India, 2007) and a booming credit appraisal business of
hitherto unrated SME sector is marking a inflection point in growth of credit
rating industry in India. This sharp growth in number of published ratings and
higher transaction values involved enhances the potential for conflict of
interests and underlines the importance of strict regulatory regime. Finally
Indian CRAs have recently initiated rating relatively nascent structured
products in Indian markets, these products are considered potential landmines
in wake of the financial crisis and warrant an enhanced regulatory attention
(Jain and Sharma, 2008).
The fundamental regulatory concern in case
of CRAs stems from the inherent dichotomy between their role as ‘gatekeeper’
and a ‘reputational intermediary’ (Oh, 2011). As a gatekeeper, a CRA has a
responsibility of monitoring quality of information flowing into the markets,
while as a ‘reputational intermediary’ it may indulge in false certification if
the gains exceed the loss in reputational capital. In the absence of explicit
legal liability, such incentives are magnified. For instance during the global
financial crisis CRAs were highly criticized for understating the risk involved
with MBS (mortgage backed securities). It is alleged, that the lenient rating
standards were a result of rating fees being twice as high for the
mortgage-backed bonds as for the corporate bonds. Further, many of the dealers
sought active participation of CRAs in creating these issues, which effectively
put the rating agencies in a position to influence the size of the market from
which they drew lucrative revenues and implicitly bias in the ratings (a
notable example being design of CDO tranches).
There are several regulatory concerns in
the Indian credit rating industry. First, the multiplicity of regulators in the
Credit Ratings creates a possibility of CRAs involving in regulatory arbitrage.
Another concern is the lack of appropriate methodologies to rate complex
structured products with multiple tranches and susceptible to rapid,
multiple-notch downgrades. Since CRAs are not liable for accuracy of their
ratings, this legal immunity creates perverse incentive for deliberate fraud
and malpractices. Finally, CRAs often provide ancillary services like research
and advisory services, issuers may lure CRAs into providing favorable ratings
by incentivizing them through additional ancillary business. Further, with RBI
and SEBI mandating the use of credit ratings for raising any type of capital in
the financial markets coupled with the oligopolistic nature of the rating
industry, there is an increased reliance on CRAs giving those fewer incentives
to compete by developing more sophisticated accurate and precise ratings
methodologies.
Recommended Reforms
Improvement in Disclosure Norms
The IOSCO code for from rating agencies
recommends that the disclosures from rating agencies should include both
qualitative parameters like definition of default, time horizons used by the
credit rating agency (IOSCO, 2004 , para. 3.5) and
quantitative parameters like default rates, transition rates etc (IOSCO, 2004 ,
para. 3.8). The existing regulations require Indian
CRAs to disclose the definition of the ratings, the rationale of the ratings
and the rating methodology. However, the disclosure norms do not specified
exactly what information should be covered under rating methodology. We believe
that more standardized and comprehensive disclosure norms (similar to those
followed in developed markets like US), specifying exact requirements within
the rating methodology would help users compare the ratings quality across CRAs
and provide more transparent credit ratings. To this end, it will be beneficial
for Indian Credit Rating Regulations to align itself more closely to the IOSCO
disclosure requirements. Further SEBI allows CRAs to develop its own internal
code of conduct for governing its internal operations and laying down its
standards of appropriate conduct for its employees and officers (“Credit Rating Agencies Regulations”, 1999,
principle 19). This is a potential source of accountability gap and non-uniform
practices across CRAs. We believe that internal code of Indian CRAs should be
aligned with the IOSCO Principles Regarding the Activities of Credit Rating
Agencies’ and the ‘IOSCO Code of Conduct Fundamentals for Credit Rating
Agencies’. Similar to Australian and European approach , SEBI should adopt a
"comply and explain" approach whereby CRAs should be required to
demonstrate how their internal code and practices are aligned with recommended
IOSCO code and justify any significant deviations in the methods or enforcement
of the code. CRAs should also disclose any changes in the method or
implementation of their internal codes in accordance to the IOSCO guidelines
(IOSCO Code, 2004, para. 4.1).
Relaxing Regulatory Mandates for Credit Ratings
Indian regulatory agencies like RBI and
SEBI are enforcing the Credit ratings as a mandatory regulatory requirement.
This approach is likely to backfire as it develops an over dependence on rating
agencies and transforms CRAs into de-facto licensing authorities increasing the
potential of abuse of ratings. As regulators make the credit ratings mandatory,
the customers (issuers of debt / equity securities or SME availing bank loans)
of credit ratings will largely focus on complying with legal requirements than
availing the services of CRAs for its implicit utility. This is likely to erode
the analytic rigor and reliability of such credit ratings, more likely since
there are only a few licensed CRAs in the country operating in a
quasi-oligopolistic market. We believe that this will be counter-productive for
the development of credit rating industry in general and could have potentially
catastrophic effects in case of a financial crisis. In our view such a system
is also likely to adversely affect access to small issuers and new entrants in
the capital markets. It is noteworthy that the developed markets, like the UK
and the US, have a two ratings norm that has developed on its own due to market
expectations rather than regulatory compulsion (Duff and Einig,
2007). This is a much healthier approach, encouraging competition among credit
rating agencies and providing them incentives to come up with more accurate,
precise and rigorous credit rating systems.
Provision for increased
Liability of CRAs
One
of the major concerns cited in the Enron case on the role of CRA is the
practical immunity of CRAs to lawsuits (Role and Function of Credit Rating
Agencies, 2003). It is noteworthy that making CRAs liable for their ratings may
make them susceptible to frivolous lawsuits forcing them to rate only high
quality issuers (Pinto, A. R., 2008) or putting a negative bias on ratings due
to overly conservative ratings given by CRAs. SEBI defines a rating as merely
an "opinion" and allows CRAs to insert disclaimers that investors
should only take these ratings as indicative and not the sole criterion for
investment decision (“Credit Rating Agencies Regulations”, 1999, regulation
2(q) and 18). However, in cases of deliberate fraud, deceit, negligence; a CRA
should be made liable to investors. Such an explicit provision would act as a
strong deterrence against professional malpractices and potentially increase
the transparency and reliability of credit ratings. It is contradictory policy
stance to mandate the credit ratings and increasing investor reliance on credit
ratings, at the same time leaving investors unprotected against the possible
misuse of rating authority by CRAs.
Unambiguous definition of
Conflict of Interest
As
discussed earlier the various conflict of interests arising due to the nature
of credit rating industry are the primary regulatory concern. However, we find
that there is a lack of specificity and objectiveness in defining what
constitutes a conflict of interest. Regulations merely refer to ‘any conflicts
of interest which may undermine fairness and objectivity of ratings’ and fail
to define what specific types of conflicts a CRA should manage or avoid. If a
regulator wants industrial entities to follow a specified standard, then it
must clearly, objectively and unambiguously define the meaning of such a
standard. For instance, in the case of conflict of interest arising due to
ancillary services provided by CRAs, the regulatory guidelines recommend that
there should be an arm's length relationship between the credit rating business
and any other activity without clarifying the exact connotation of such
requirement. In contrast to this, IOSCO standard clearly defines that there
should be ‘operational and legal’ separation of credit rating and ancillary
businesses (IOSCO, 2004, para. 2.5).RBI recommends
that CRA should disclose details of fees collected by CRA (or its subsidiaries)
from an issuer (or its subsidiaries) for both rating and other services for the
past three years. Such a disclosure would clearly highlight conflicts of
interest arising out of ancillary services provided by the CRAs. Further, the
IOSCO approach completely prohibits CRA's employees trading in the securities
of its clients including the derivatives of such securities (IOSCO, 2004, para. 2.12-2.14). In Indian context, CRAs are independent
to frame their own internal code and there is no regulatory obligation to curb
such practices. This is a glaring lacuna in the existing regulations and needs
to be addressed on priority.
Rating Structured Instruments
Indian
CRAs have just forayed in rating structured instruments. Given the important
role of such instruments in the recent financial crisis and relative
inexperience with such instruments in Indian markets, it is important to
formulate special provisions for rating Structured Products. While the general
view of the regulator is that existing rating methodologies might be inadequate
in rating complex structured products, as of now there are no additional
regulatory recommendations for rating structured products. As on date the
ratings methodologies remain based on one-dimensional metrics (default
probabilities or expected losses) that fail to capture all of the risk
dimensions peculiar to tranched products (Krishnan et
al., 2008). Further, there should be clear
guidelines prohibiting a CRA from giving recommendations, consultancy or
advisory in any form that influences the design of structured products that are
also rated by the CRA. Due to very
different nature of risks involved in structured products, there should be a
clear distinction between credit ratings of structured products and
conventional instruments. CRA should also be expected to perform due diligence
to assess the quality of information provided by the originators, arrangers and
the issuers of such structured products.
Process and Compliance Audit
The existing regulations do not require
any process and compliance audit of CRA's operations. However, given the
sensitive nature of the CRA's operations, periodic process and compliance
audits should be mandated. Such an audit should assess whether all the
requirements stipulated in the CRA Regulations and other regulations/guidelines
stipulated by other regulators (RBI/IRDA etc) are being followed by the rating
agency. CRA should be subject to regulatory penalty in case of material
deviations from stipulated regulations as well as have a legal liability in
cases of deceit, fraud or deliberate malpractices.
Concluding Remarks
Indian Credit Rating landscape is still
relatively nascent as compared to the developed nations. SEBI has kept pace
with the global trends and reforms in regulating Indian CRAs. However, there
are significant improvements required to bring more transparency and clarity to
the operations of Indian CRAs. Specifically, there is a need for more
standardized and unambiguous disclosure norms. Another major concern is that
CRAs enjoy a virtual immunity from any liabilities arising out of failure to
carry out their responsibilities properly. For instance, a CRA can’t be held
accountable of improper rating due to visibly unsound rating methodologies or
mala fide ratings. Finally, Indian market is venturing into complex structured
instruments, the products notorious for their role in global financial crises
and worldwide failures of CRAs to rate these products properly due to their
inherent complex structures. We believe that due to the additional risk factors
associated with structured products there is a need for specific regulatory
provisions and enhanced rating methodologies for rating these complex products.
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Received on 20.02.2015 Modified on 15.04.2015
Accepted on 28.04.2015 © A&V Publication all right reserved
Asian J. Management; 6(2):
April-June, 2015 page 110-116
DOI: 10.5958/2321-5763.2015.00016.5