Flak for Credit rating firms from RBI 

The Reserve Bank of India (RBI) criticized the credit rating firms for their failure to identify financial troubles in various companies, especially in the case of IL&FS.

The Reserve Bank of India (RBI) has sharply criticized credit rating firms for their failure to identify financial troubles in various companies, especially in the case of IL&FS, media reports.

According to a report in ET online, central bank governor Shaktikanta Das and the deputy governors had a meeting with top credit ratings officials on Thursday, and expressed concerns over rating agencies’ inability to assess credit risk and take timely rating actions. 

RBI said that though ratings are supposed to be forward-looking, they are always a laggard, ET quoted a source. 

The apex bank also raised concerns that abrupt ratings downgrades in recent months have hurt investors and banks. RBI declined to comment on an email query by ET on the matter, said the report. 

Notably, credit rating agencies have received much flak from experts for their tardiness in identifying the stress in the IL&FS Group, which defaulted on its loans from banks, mutual funds and provident funds. The defaults led to an erosion in net asset values, or NAVs  of various debt mutual fund schemes. The crisis worsened as it soon spread to other non-banking finance companies, mainly housing finance, which are now struggling to sort out their asset-liability mismatches. 

“RBI said one third of the total NPAs (non-performing assets) in the system stemmed from investment grade ratings,” ET report quoted a source in the know of things. 

The total stressed assets are about Rs 12 lakh crore in the banking system, according to the report. 

The RBI governor is concerned over the “conflict of interest” in the country’s credit rating agencies, the report quoted its source. 

The global practice for rating agencies is to limit themselves to ratings and research related to credit ratings. For their other business interests like market research, training, risk solutions they have separate entities with no common directors, employees and shareholding from the rating entity. 

However, this is not the practice in India where the same rating agency rates and provides valuation opinions to the same set of securities to investors like mutual funds and provides advisory services, the report said. 

Das disapproved of the practice of “rating shopping”— where companies migrate from one rating agency to another for better ratings, the report said. The central bank was also concerned about issues such as rating agency CEOs being part of rating committees and rating advisors who promise better ratings to an issuer due to their special relationship with rating agencies, the report said. 

It is believed that the central bank is looking into the matter along with Sebi, and will bring out regulations to address this, the report said. 

It is to be noted here that though credit rating agencies are registered with the capital market regulator Sebi, they are jointly regulated by both Sebi and RBI as these firms rate bank loans which constitute 70% of their business. 

Further, on short-term instruments like commercial paper, RBI feels that the ratings do not reflect the pricing these papers command, the report said.

Source: https://economictimes.indiatimes.com

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