The present study by NISM is another attempt to assess the performance of CRAs, particularly in the light of the recent significant events in the global financial system and the criticism being faced by CRAs in the USA

The National Institute of Securities Markets (NISM) has called upon credit ratings agencies (CRAs) in India to tweak their operations so that the ratings can be more useful for investors.

In a report titled, 'Assessment of Long Term Performance of Credit Rating Agencies in India', the Institute said that there is a need for a framework to be agreed upon by all CRAs and regulators to have a standardised and operational definition of default.

CRAs have been operating in India since 1988. CRISIL, ICRA and Fitch India have collaborative arrangements with S&P, Moody’s and Fitch, respectively. CARE is promoted by IDBI and Canara Bank. Brickworks, the latest entrant, was established in 2008. Thus, a total of five major CRAs operate in India at present. Most of the ratings by CRAs relate to bank loans, on account of ascertaining the credit-related capital adequacy.

For a market like India, where financial literacy is at a nascent stage, multiple rating symbols could confuse the investing community and it could result in 'rating inaction' and foster unhealthy competition. Rating scales, brought under comparable bands, need to be hosted on the websites of the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA) and also on the sites of investors' associations, the NISM said.

Talking about the timeliness of ratings and its outlook, the report said since 'Rating Outlooks' (both positive and negative) and `RatingWatch' have a limited life, it must be replaced by a firm rating within a reasonable span of time, say a month.

Terming the policy of some CRAs to stay away from services other than credit ratings as a 'healthy sign', the NISM said that it needs to be ensured that the registered CRA, as a corporate entity, must not engage in any services other than ratings.

The report said that the presence of External Committee Members (ECM) brings with it a whole baggage of conflict of interest. Some CRAs have demonstrated that it is possible to develop the expertise either with full-time employees from domestic CRAs or in collaboration with overseas CRAs. Alternately, ECMs could be deployed for providing inputs, leaving the final ratings to an Internal Committee at the CRA, it added.

To curb the unhealthy practice of 'shopping for ratings', the NISM said that it is necessary to come to a stage where all ratings, including unaccepted ratings are published. In the 'shopping for ratings', issuers attempt to seek informal ratings from various CRAs and pass the final rating mandate to the agency that could offer the highest ratings, it clarified.

It said that young potential employees tend to gravitate towards merchant banking and investment management, leaving a paucity of talent in accounting, audit and credit appraisal, which are actually the backbone of financial systems. Calling for specialised training for due diligence review (DDR) and accounting & auditing systems, the report said that these skills, especially the DDR skill, are needed to assess the overall credit-worthiness of an entity. India is only two years away from the implementation of International Financial Reporting Standards (IFRS) and the preparedness is woefully lacking, amongst professionals as well as academics, the report noted.

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