Disadvantages of credit ratings in India

Disadvantages, demerits and limitations of credit rating in India. Though there are a lot of benefits due to Credit rating, there are still some areas of concerns due to economic and political conditions, regulation of rating agencies which needs to to be address. The following are the demerits of credit rating in India.

Demerits of credit ratings in India

1. No uniformity among rating companies in India:

An average investor in India is not able to understand the different credit ratings prevailing in India as there is no uniformity among the credit rating agencies, especially among CRISIL, CARE and ICRA.

2. No standardization in rating:

There is no standardization of credit rating by different rating agencies for the same instruments. For fixed deposits, there are 6 different grades and for promissory notes, there are 5 grades.

3. No standardized fee structure for rating agencies in India:

The credit rating agencies do not have uniform fee structure or charging rates and as a result, they create anomaly among the borrowing concerns.

4. No proper Distinction:

Distinction between equity instruments and mutual funds is not provided. Which is one of the major drawback of credit ratings in India.

5. Making rating mandatory for equity instruments and Mutual funds:

Rating exercises should be made compulsory to equity instruments and mutual funds. In India, there are large number of private sector mutual funds and the investors must know the details of mutual funds, having either positive or negative features.

6. Difference between two credit rating agencies:

In India, there is no remedy for difference in the credit rating by two different credit rating agencies which is a major disadvantage. One may give the rating of ‘safety’ and another may give ‘risky’. In such a case, what is the remedy open to the public? In foreign countries, in similar situations, credit rating from a third credit rating agency becomes mandatory.

7. Lack of reliability of Credit rating in India:

Even credit-rated companies have failed in India and there is no remedy for this. Example CRB Capital Markets, which had a turnover of Rs.1,000 crores per year and with a credit rating of ‘A’, failed, and neither SEBI nor RBI could come to the rescue of investors. The credit rating agency in India lacks transparency.

After the creation of credit rating agencies, the country has witnessed stock scam and the failure of CRB Capital Markets. This only reflects poorly on functioning credit rating agencies.

It is the duty of credit rating agencies to forewarn the regulating authorities about the weaknesses and drawbacks, if any, of the companies they are rating and they should ensure to do so at all costs.