DMPQ: In recent years role of credit agencies are under scanner. Comment.

A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt, but not of individual consumers.

 

Recently the role of credit agency was under scanner:

  • Their failure to sense the US Financial crisis in 2009.
  • Providing AAA rating to the mortgaged based securities which ultimately led to the US financial crisis.
  • History shows a bias towards Borrowers.
  • India is doing good in the post- recession phase, but its rating is BBB- which does not reflect the true picture.
  • The method of arriving at the rating is a complex one which itself is under question. For example, for India’s poor rating they site low capita/ gdp which is a slow moving variable. India as a debt taker as shown high willingness to pay.
  • Very few credit rating agency is also one of the biggest problem.
  • China in 2010 expanded is credit to GDP by 63% , much larger than India. In Dec, 2010 CRA increased its rating from A+ to AA-. Even though China’s growth declined from 10% to 6.5%. This anomaly is beyond explaination.

 

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