Panel seeks safeguards on credit rating
KP Krishnan committee on Comprehensive Regulation of Credit Rating Agencies(CRA) has observed undercutting of fees between CRAs is taking place and issuers may take advantage of such situations.
Issuers attempt to seek informal ratings from various CRAs and pass the rating mandate to the agency that could potentially offer the highest rating. To prevent instances like the damage caused by unscrupulous salesmen of Insurance, Mutual funds and Personal loan products, it is necessary to place safeguards or prescribe standards on outsourcing of credit rating or credit information to any third party. This is in the interests of quality and confidentiality.
“To curb this unhealthy practice, it is necessary to come to a stage where all ratings, including unaccepted ratings, are published,’’ said the committee.
Krishnan Committee was constituted by the ministry of finance at the instance of the High Level Coordination Committee on Financial Markets (HLCCFM) to revisit the legal and policy framework for regulating the activities of CRAs in order to take a larger view of the entire policy with respect to banking, insurance and securities market
The committee said that every person engaged in credit rating or credit information must be an employee of a registered CRA or CIC. The registered CRA or CIC needs to bear the onus of responsibility on quality of work as well as confidentiality. Dissent notes over the ratings should be available for future reference.
Also, there is no standard definition of default by the issuers. Practices vary from CRA to CRA. Some consider even a single day’s delay as a default. Others consider the grace period in case the debt covenants provide for it. Furthermore, the severity of the delay or default is inversely related to the tenor of the instrument. Delays in coupon payments in case of long-term debt instruments could be condoned or considered more sympathetically.
There is a need for a framework to be agreed upon by all CRAs and regulators to have a standardised and operational denition of default.
For a market in India, where financial literacy is at a nascent stage, multiple rating symbols could confuse the investing community.
Rating scales, brought under comparable bands, need to be hosted on the websites of Sebi, RBI, Irda and PFRDA and also on the sites of investors’ associations.
Some CRAs provide services other than ratings. It is to be ensured that the registered CRA, as a corporate entity, must not engage in any services other than ratings.
In the interest of unbiased judgement, it is necessary to constitute an Appeals Committee that is different from the one that was involved in the initial rating exercises. There is excessive dependence on the auditors and bankers, to corroborate the information provided in the financial statements....
Issuers attempt to seek informal ratings from various CRAs and pass the rating mandate to the agency that could potentially offer the highest rating. To prevent instances like the damage caused by unscrupulous salesmen of Insurance, Mutual funds and Personal loan products, it is necessary to place safeguards or prescribe standards on outsourcing of credit rating or credit information to any third party. This is in the interests of quality and confidentiality.
“To curb this unhealthy practice, it is necessary to come to a stage where all ratings, including unaccepted ratings, are published,’’ said the committee.
Krishnan Committee was constituted by the ministry of finance at the instance of the High Level Coordination Committee on Financial Markets (HLCCFM) to revisit the legal and policy framework for regulating the activities of CRAs in order to take a larger view of the entire policy with respect to banking, insurance and securities market
The committee said that every person engaged in credit rating or credit information must be an employee of a registered CRA or CIC. The registered CRA or CIC needs to bear the onus of responsibility on quality of work as well as confidentiality. Dissent notes over the ratings should be available for future reference.
Also, there is no standard definition of default by the issuers. Practices vary from CRA to CRA. Some consider even a single day’s delay as a default. Others consider the grace period in case the debt covenants provide for it. Furthermore, the severity of the delay or default is inversely related to the tenor of the instrument. Delays in coupon payments in case of long-term debt instruments could be condoned or considered more sympathetically.
There is a need for a framework to be agreed upon by all CRAs and regulators to have a standardised and operational denition of default.
For a market in India, where financial literacy is at a nascent stage, multiple rating symbols could confuse the investing community.
Rating scales, brought under comparable bands, need to be hosted on the websites of Sebi, RBI, Irda and PFRDA and also on the sites of investors’ associations.
Some CRAs provide services other than ratings. It is to be ensured that the registered CRA, as a corporate entity, must not engage in any services other than ratings.
In the interest of unbiased judgement, it is necessary to constitute an Appeals Committee that is different from the one that was involved in the initial rating exercises. There is excessive dependence on the auditors and bankers, to corroborate the information provided in the financial statements....
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