Credit rating: Competition and regulation

Ms. Surabhi Chopra.

Student, S.Y.BBI, 6617, Thakur college of science and commerce, Kandivali(E), Mumbai,
Mobile No: 9029636344
E-mail: surabhichopra21@gmail.com


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, IICRA,
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.
This study provides a comprehensive analysis of credit rating economics and
draws conclusions on the nature of regulation. It starts with an overview of the credit rating
industry and introduces a framework that structures multiple rating agency functions. At the
heart of the credit rating business model lies the reputation mechanism, which is analyzed in
detail. Despite several frictions in the process that give rise to entry barriers and market power,
the quality assuring function of the reputation mechanism is very robust - contrary to the fear of
many. After analyzing the reputation mechanism, the study takes a wider look at the industry and
identifies the forces behind credit rating supply and demand. A comprehensive review of
potential reasons for regulating the credit rating industry reveals that there are only few
compelling arguments despite the large number of different aspects discussed by practitioners
and researchers. In general, the reputation mechanism and competition should be strengthened.
Specifically, the study discusses five regulatory areas: the use of rating-based regulation,
competition, official recognition, civil liability, and implementation methods. The regulatory
approaches of the EU under the Capital Requirements Directive of 2005 and the USA under the
Credit Rating Agency Reform Act of 2006 are contrasted against an optimal regulatory regime.



Keywords: Credit Rating Agencies, Credit Rating practices, Credit Rating activities.