Credit rating agencies: adapting with challenges

The principal concern of every lender is the repayment capability of a potential borrower. Creditors and investors need to form an objective opinion on the creditworthiness of the issuer of a debt instrument and the credit rating agencies (CRAs) assist them in doing this.

The opinion provided by the CRAs is an “informed indication” of the possibility of default on a debt instrument, relative to the possibility of default by other issuers. Nowadays procuring a credit rating has become a precondition for any debt offering in virtually every country with a debt market. However, CRAs have their shortcomings.

Answerable to none

Although the opinions of CRAs are relied upon greatly, their accountability for inaccurate ratings is minimal. Attempts to regulate CRAs have been resisted on grounds that the CRAs merely voice opinions and do not make recommendations. It has also been argued that CRAs, which depend on their reputations for their existence, are adequately regulated by market forces.

Soumya Mohapatra is an associate at Khaitan & Co in Mumbai. Khaitan & Co is a full-service law firm with offices in Bangalore, Kolkata, Mumbai and New Delhi.