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Regulating Credit Rating Agencies

The RBI recently put out two documents, (i) the Report of the Committee on Comprehensive Regulation of Credit Rating Agencies prepared “in response to the direction given by the High Level Coordination Committee on Financial Markets to reflect on the inter regulatory issues emanating from the activities of Credit Rating Agencies”, and (ii) the Assessment of Long Term Performance of Credit Rating prepared by the National Institute of Securities Market. The NISM study complements the committee report.

The committee report reviews the role of credit rating agencies (CRAs) in India, the regulations governing the industry and makes certain recommendations. Its key findings are summarized as follows:

The committee feels that prima facie there is no immediate concern about the operations and activities of CRAs in India even in the context of the recent financial crisis. However there is a need to strengthen the existing regulations by learning the appropriate lessons from the current crisis. The committee has taken note of international action in this regard and inter alia recommend that there may be greater disclosures regarding materially significant revenues received from a particular issuer/ non rating business like advisory services. A lead regulator model for CRAs may also be explored. The committee has also strongly recommended voluntary compliance with existing and emerging regulations like IOSCO Code.

Both the committee report as well as the NISM study are quite extensive. In his blog, Professor J.R. Varma notes, however, that the terms of reference of the committee could have include at least two more important questions that currently continue to be unanswered. These are the reduction in the use of CRAs by regulatory authorities and the introduction of competition in the CRA sector in India.