Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Report on Rating Agency Regulation in India

Last week, the Reserve Bank of India published the Report
of the Committee on Comprehensive Regulation of Credit Rating
appointed by the Government of India (more precisely, the
High Level Coordination Committee on Financial Markets). This was also
accompanied by a study by the National Institute for Securities
Markets entitled An
assessment of the long term performance of the Credit Rating Agencies
in India

The report provides a comprehensive analysis of the issues
mentioned in the terms of reference for the committee. Unfortunately,
those terms of reference did not include what I believe are the only
two questions worth looking at about credit rating in the aftermath of
the global financial crisis:

  • How should India eliminate or at least reduce the use of credit
    ratings in financial sector regulations?
  • How should India try to introduce greater competition in credit

Rating agencies are fond of saying that “AAA” is just
the shortest editorial in the world. Regulators should take the rating
agencies at their word and act accordingly. They should give as little
regulatory sanction for these ratings as they do to the editorial in a
newspaper. Also, regulators should make it as easy to start a rating
agency as it is to start a newspaper. These are the two issues that I
think need urgent consideration.

As I pointed out in this blog
last year, the US is an outlier in terms of the use of credit ratings
in its regulations, and since India has largely adopted US style
regulations, it too is an outlier. By unilateral action, India can
eliminate all use of credit ratings except what is required by
Basel-II. Even Basel-II is not something for which Indian regulators
can disown responsibility – India is now a member of the Basel
Committee. Indian regulators should be providing thought leadership on
eliminating credit rating from Basel-III or Basel-IV.

I am disappointed that India’s apex regulatory forum (High
Level Coordination Committee on Financial Markets) having recognized
the important role of credit rating agencies in the global crisis, did
not bother to ask the truly important questions. All the more so,
because the report did a good job of addressing the questions that
were referred to it in the terms of reference. If only the same bunch
of competent people had been asked the right questions!


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