Evaluation of working and performance of credit rating agencies in India

Abstract

Credit rating is the symbolic indicator of the current opinion of rating agencies regarding the relative capability of issuer of debt instrument, to service the debt obligations as per contract. The credit rating agencies today have ample opportunities to play a unique role in strengthening the capital market and building the investors? confidence in the financial system. So, considering the importance of credit rating, the present research work has been undertaken to study the regulatory environment affecting the credit rating activities in India, to examine the operational performance of four SEBI recognized credit rating agencies, viz. CRISIL, ICRA, CARE and FITCH, to assess the consistency in rating methodology and to examine rating variability in grades assigned by these agencies, to study the post-rating performance of various companies rated by these agencies and to study the investors? opinion regarding the credit rating practices in India. The credit rating agencies in India are regulated by the Securities and Exchange Board of India under the SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. As far as the consistency in rating methodology of each rating agency by taking companies belonging to the same rating class is concerned, it has been found that there has been consistency to a large extent in the methodology of all the rating agencies while assigning a particular rating grade whereas there has been inconsistency in the methodology adopted by all the four rating agencies while assigning different rating grades. The analysis provides that as far as the rating change ratio is concerned, the largest number of rating change cases is related to FITCH followed by CARE, ICRA and CRISIL.However, the analysis regarding the post-rating performance of companies, rated by all the agencies, reveals that the companies rated by CARE have shown more stability in their performance as compared to the companies rated by other rating agencies.