The Need for Reform in Credit Rating Agencies: A Closer Look at India's Case

The Need for Reform in Credit Rating Agencies: A Closer Look at India's Case

Introduction:

India, the fastest growing major economy, has long been advocating for a reevaluation of the credit rating system. The dominance of qualitative indices and the lack of inclusion of quantitative indices in the ratings have raised concerns about the credibility and impartiality of global credit rating agencies. This article explores the flaws in the current credit rating system, the challenges faced by credit rating agencies in India, and the need for reform in order to establish a fair and independent credit rating process.

Flaws in the Global Credit Rating System:

Credit rating agencies, often seen as a tick mark exercise, heavily rely on qualitative indices to determine a country's credit rating. This approach overlooks crucial quantitative factors and fails to provide a comprehensive assessment of a country's economic performance. In the case of India, despite being the fifth largest economy in the world, it has only received a BBB- rating, which raises questions about the neutrality and fairness of the system.

The Role of Credit Rating Agencies in India:

Credit rating agencies play a crucial role in assessing the creditworthiness of companies and sovereign bonds. However, concerns have been raised about the independence and impartiality of credit rating agencies in India. Instances of top management interference in the rating of securities have come to light, questioning the internal workings of these agencies. The Securities and Exchange Board of India (SEBI) has introduced regulations to ensure compliance with due diligence, but cases of laxity and intentional oversight have still been observed.

The Need for Reform:

India has recognized the need for reform in the credit rating system to establish credibility. The country can authorize home-grown credit rating agencies to regulate the credit ratings, similar to JCR Japan Credit Rating and China Chengxin. While concerns about the impartiality of such agencies exist, it is important to acknowledge that global credit rating agencies also skew their ratings towards their home country. India should have the autonomy to determine its credit rating without relying solely on agencies in London and New York.

Challenges and the Path Forward:

Establishing the credibility of home-grown credit rating agencies will take time, as concerns about independence and impartiality persist. However, India's strong regulator, the Reserve Bank of India (RBI), has showcased its mettle during the Covid-19 crisis, proving its capability in managing the country's financial stability. Reforms and improvements in India's fundamentals and resilience have created opportunities in the equity and fixed-income markets, making a credit rating upgrade long overdue.

Actionable Advice:

• 1. Push for Transparency: Stakeholders should advocate for greater transparency in the credit rating process, urging credit rating agencies to include more quantitative indices in their assessments. This will provide a more comprehensive and unbiased evaluation of a country's creditworthiness.

• 2. Strengthen Regulatory Oversight: Regulators, such as SEBI in India, should continue to introduce and enforce regulations that ensure credit rating agencies comply with due diligence, prudence, and reasonableness. Regular monitoring and strict penalties for non-compliance will help build trust in the system.

• 3. Promote Local Ratings Agencies: India should encourage the growth and recognition of local ratings agencies, such as Brickworks and CareEdge Ratings, which are not affiliated with global agencies. These agencies can provide independent evaluations of sovereign bonds, reducing reliance on foreign agencies and promoting a more balanced and fair credit rating system.

Conclusion:

The flaws in the global credit rating system have become apparent, particularly in the case of India. The need for reform is evident to establish a fair and independent credit rating process. By addressing the challenges faced by credit rating agencies in India, promoting transparency, strengthening regulatory oversight, and supporting local agencies, India can move towards a more credible and reliable credit rating system that accurately reflects its economic growth and potential.