Letter to BS: Credit rating must be handled by professionals with expertise

Absence of protection for investors in the event of faulty risk projection in an issuer-based ratings is an escape route for these agencies

This refers to your article “IL&FS fallout: Lessons for rating agencies” (June 5). Credit rating agencies, in the midst of competition, project contradictory ratings of institutions. Investors thus get misled and incur financial losses. Rating parameters among various rating agencies should not be too extreme in nature. The agencies ultimately evade accountability and pass on the responsibility to the corporate. The absence of protection for investors in the event of faulty risk projection in an issuer-based ratings is again an escape route for these agencies. They thus require higher levels of functional supervision, both internally and externally, to ensure efficient and diligent functioning. Although the Securities and Exchange Board of India possesses punitive authority to cancel licences, impose fines for fraud and malpractices in credit rating, the same is not strictly exercised on rating agencies. 

An investor-based model for credit rating, can be more cautious about these. The issuer model will provide more transparent and reliable reports in the absence of payment from the rated corporate to the credit rating agency. Hedging of ratings is akin to gambling where commitments and end results are not firmly indicated. The rotation of credit rating agencies similar to that of auditors under the Companies Act will ensure greater transparency and accuracy and prevent collusion. The lowering of rating standards of rating agencies does not serve the purpose. Instead, credit rating should be handled by professionals with expertise attained through functional exposure to domestic and international markets.

C Gopinath Nair, Kochi
 

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