Are credit ratings stifling NBFCs?

The lack of clarity in the rules has seen rating agencies become gatekeepers, determining who gets or doesn’t get credit.

Arti Singh

Delhi

25 August 2020

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Your debt is—at the heart of it—someone else’s risk. And as a lender, the assessment of that risk is the key to survival. A lot goes into it, but a big part of weighing the likelihood of a borrower paying depends on what are known as credit rating agencies, purveyors of arcane labels such as “AA-” and “Baa3”. In more prosaic terms, rating agencies assess large-scale borrowers, from nations to corporations, on the basis of their ability to pay back loans in a timely fashion.

For years now, the effectiveness of credit ratings have been questioned across the world, with critics pointing to flawed business models, misaligned incentives, conflicts of interest and false ratings. On a grand scale, even the value of a credit rating is a matter of some doubt.

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