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 Agencies 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?

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 post 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!

Posted at 6:05 pm IST on Tue, 9 Mar 2010         permanent link

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