Credit Rating Agencies-Is there a need?

India has allowed western credit rating agencies to operate in the country. It has also allowed the establishment of local credit rating agencies. Government of India and regulatory authorities including Reserve Bank of India and Securities and Exchange Board of India recognize the ratings of these agencies. People also give consideration to these ratings in taking decsions on investments. How do the agencies come to conclusions about the financial strength or weakness of a company  and how can one rely on their findings?

First of all, it is not possible for any agency to rate any manufacturing or financil services company correctly. Secondly, how can one be sure that its ratings are not subjective? Can the rating agency prepare any report on a company without the company’s full cooperation? Will the company provide any information which will show it in a bad light?

Reserve Bank of India and a few research organisations estimate the national GDP to the accuracy of 0.1% i.e say 5.7% or 5.8% and keep revising the same. When it requires the entire government machinery to estimate GDP to the accuracy of 0.1%, how can any smaller organisation or institution do it? At the most one can say that because of good rains, the agricultural production may go up by 10 or 15%; the production of fertilizers, pesticides, agricultural implements etc. may also go up by 5% or 10% etc. If there is increse in wages of the entire working class, one can predict that the demand and hence production of consumer durables may also go up. But no agency can estimate that the economy of a large country like India can grow, say  by 7.1% or 7.2%.

The ratings of the agencies is creating havoc in stock markets. Many companies abandon proposed projects which affects the growth of the economy. There appears to be a need to seriously consider whether there is need for the credit rating agencies.

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