Indian ratings agencies: time for a revamp

Author: IFLR Correspondent | Published: 8 Aug 2019
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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 ratings.

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.