Scrutiny of global credit rating agencies came to an
all-time high after the 2008 financial crisis. But the issue is
only beginning to unfold in India.
The troubling phenomena of biased rating assessments and
rating agency shopping are only a few of the worrying flaws
facing India's credit rating agency sector. These issues came
under the spotlight after Infrastructure Leasing &
Financial Services was given overly high ratings for its bonds
in August 2018. The company then defaulted on its interest
payments and, subsequently, credit rating agencies dropped
their assessments of the bonds accordingly.
It is of little help to investors when downgrades like this
come much too late to be of any effect, as so frequently is the
case. Investors then find it difficult to depend on rating
agencies if their credibility and ability to provide impartial
ratings based on credit risk is under question. The risk is
especially problematic when, for instance, overseas investors
consider high yield bonds that appear to have solid
One of the underlying problems resulting in potential bias
is the dual role that credit rating agencies play in both
rating a company and acting as its adviser. It is not difficult
to imagine the potential for biased ratings given the conflict
of interest. The question is whether these agencies could
remain profitable if they are dependent on ratings as the main
source of revenue generation.
Interestingly, global credit rating agencies Moody's,
Standard & Poor's and Fitch all have businesses in India
that are separate from their parent companies.
The rating frameworks used in India are also different from
those in other jurisdictions. Rating agencies fall under the
remit of the Securities and Exchange Board of India (SEBI) and
the Reserve Bank of India (RBI). Although SEBI has been more
scrutinous of the disclosure and review requirements of rating
agencies in the past few months, these measures need to be
complemented by a revamp of the sector.
India's regulators are discussing plans for a stronger
governance structure for rating agencies. But what the
structure might look like and when it might be changed is still
unclear. Without a revamp of the sector, India's financial
system will continue to be undermined, and it will be
increasingly challenging to build investor confidence both
within and outside the country.