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Role of rating agencies questioned

CHENNAI: The collapse of big U.S. institutions with history, reputation and brand equity has brought the focus sharply back on the rating agencies.

The system of credit rating is a recent phenomenon in India. A pure rating outfit depends on its clients (companies which rates) for its cash flow, nay survival. Years ago, at least a couple of well-known Chennai-based outfits refused to accept the ratings assigned to them by the agencies and instead had chosen to go to other agencies to get better ratings. An investor who has put his money in a non-banking finance company based on ratings given by these agencies has little option to withdraw the investment, which is tenor-linked. We have seen how depositors were left ruing in the mid-90s because of the crisis in the NBFC (non-banking finance companies) field.

From pure rating outfits, these agencies have gone a long way and diversified to offer a host of allied services to their clients whose debt instruments they rate. The trouble lies here. When the rating agencies also offer services such as consultancy and financial advisory to the company they rate, could they carry out the job of rating the client objectively? Not really.

The rating agencies mostly don’t directly provide their clients these assorted additional services. They do these through their subsidiaries. From a legal perspective, these are independent outfits. In reality, however, they are informally connected.

The much-claimed practice of keeping an arm’s length distance with subsidiaries sounds hollow in the wake of what had happened in the U.S. Most of the big rating agencies — Standard & Poor’s, Moody’s, the Fitch Group — have a strong presence in India through equity participation in Indian rating companies.

The rating agencies should be made responsible and accountable for the ratings they assign. Hopefully, the collapse of the American financial system will force the Indian policy ‘think-tank’ to bring a new framework to make the credit rating industry independent and objective.

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