In November, Moody’s downgraded the Indian banking sector from stable to negative. On the very next day, S&P upgraded the sector by moving it from group 6 to group 5 which means improvement in the future prospects of the sector. Moreover, there is an interesting observation in S&P ratings that countries like Italy and Spain who are in huge debt crisis (specifically due to their banks’ debts) have been rated higher ratings than India. Now, isn’t this a cause of worry? What does this contradictory picture of ratings from world’s top two rating agencies tells us? Should we even bother about these ratings?
Currently, there’s a huge debate going on the credibility of ratings of these credit rating agencies. These ratings are coming out to be false picture of the actual scenario and also, there’s no consensus over the ratings within these agencies as well (As we can see in the case of difference between Moody’s and S&P ratings).
According to a survey conducted by CFA association on the credibility issue, it was found as the popular response that CRAs were responsible for the Global economic crisis 2008 as they rated the risky financial securities as secure. Just to give a light picture, the day when Lehman brothers collapsed, they had healthy and secure credit ratings.
There are many more such cases where the credibility of these external regulatory bodies has been questioned. The famous fraud cases like Enron scandal have instances where the role of CRAs has been doubted upon.
Thus, the CRAs are being criticized all over the world due to their ambiguous procedures and criteria for ratings. These agencies are considered important as their ratings are a crucial driver of the mass’s business and investments decisions. If the CRAs really want to gain back their credibility, they would have to work on modifying their processes and being more transparent in it. Revival is need of the hour here!
By Nidhi Yadav
