Search for quality: on credit rating agencies (THE HINDU)
SEBI’s proposed rules may not necessarily improve the quality of credit rating services
Credit rating agencies may be in for a tough ride as the Securities and Exchange Board of India continues to tighten the screws on them. The market regulator has released a consultation paper seeking feedback on a new set of rules drafted to improve “market efficiency” and enhance “the governance, accountability and functioning of credit rating agencies”. Among them are provisions to restrict cross-shareholding between rating agencies without regulatory approval to 10%, and increase the minimum net worth requirement for existing and new agencies from ₹5 crore to ₹50 crore. Another mandates at least five years’ experience for promoters of rating agencies. SEBI has proposed disclosure norms to improve investor awareness about the operations of rating agencies. The spin-off of non-core operations of rating agencies will allow SEBI to focus on regulating just their credit rating operations. SEBI has spelt out its rationale for proposing each of the rules. SEBI’s predominant concern, apart from improving the information available to investors, seems to be to prevent rating agencies from resorting to collusion in reaching decisions. This effort is in line with SEBI’s crackdown on the agencies after the default in 2015 of a highly-rated debt issued by Amtek Auto.
The new rules, if they come into force, may not have any substantial impact on the quality of credit rating in India. Prima facie, the intended effects of the rules sound convincing. What is unclear are their unintended effects on competition in the rating space. Also, how the rules will address the problem of “rating shopping” that plagues the business of credit rating in the country is unknown. The present business model of rating agencies is seen to allow considerable room for issuers of securities to shop for a favourable rating or avoid negative ratings by severing their ties with these agencies. Prudential regulation is thus justified to tackle this problem. This criticism, however, ignores the reputational damage these agencies suffer after each corporate default. Repeated failures have not affected the business of rating agencies, primarily due to the lack of alternative service providers who can help out investors. Individual creditors have thus had to trust the ratings of the existing rating agencies at their own peril, even after repeated crises. As is well-known today, the Indian credit rating market is an oligopolistic one due to the high barriers to entry. SEBI’s proposed move to impose further quality requirements on rating agencies is unlikely to change things for the better, or raise further barriers. The way forward lies in making it easier for new players to enter the credit rating space and compete against incumbents. This will go a long way towards making credit rating agencies actually serve creditors rather than borrowers.
Learn Vocabulary from THE HINDU Article
1) Peril (noun) (जोखिम) - per-il
Meaning - risks/difficulties (of a particular activity), grave and imminent danger
Synonyms - Hazard, danger, jeopardy, menace
Antonyms - safety, security, welfare
Example - Although Vikram Singh knew he was possibly putting his life in peril by enlisting in the army, he wanted to help protect his country.
2)Prudential (adjective) (विवेकपूर्ण) - proo-den-shul
Meaning - showing care and forethought, especially in business.
Synonyms - circumspect, prudent, judicious
Antonyms - imprudent, foolish, impetuous
Example - The US prudential rules prevented banks from lending more than fifteen per cent of their capital to any one borrower’
3) Oligopolistic(adjective) (अल्पाधिकारी) - ol-i-gop-o-lis-tic
Meaning - the market condition that exists when there are only a few sellers.
Synonyms - Patent, ownership, holding
Antonyms - distribution, scattering
Example - Diesel and petrol industry is oligopolistic in nature.
4) Spin-off (noun) (अतिरिक्त उत्पाद,अनपेक्षित लाभ ) - spin-off
Meaning - a by-product or incidental result of a larger project.
Synonyms- outcome, result, by-product.
Antonyms - original, prototype, source
Example - The company put out a report on commercial spin-offs from its research.
5) Collusion (noun) ( मिलीभगत) - co-loo-zhun
Meaning - a private agreement for a dishonest purpose
Synonyms- conspiracy, complicity, collaboration.
Antonyms - Honesty, integrity, morality
Example - Some stock brokers, in collusion with bank officials, obtained large sums of money for speculation.
5)Resorting (verb) (उपयोग) - re-sort-eng
Meaning - turn to and adopt (a course of action, especially an extreme or undesirable one) so as to resolve a difficult situation.
Synonyms- use, utilize, employ.
Example - The RBI is resorting more to open market operations in recent days.
6)Crackdown (noun) (कार्रवाई): krak-doun
Meaning - a series of severe measures to restrict undesirable or illegal people or behaviour.
Synonyms - suppression, repression, attack
Antonyms - defend, protect
Example - A crackdown against terrorism started by Government after the serial blasts in the crowded market.
7) Accountability(adjective) (जवाबदेही) - a-koun-t-bil-i-tee
Meaning -the fact or condition of being accountable; responsibility.
Synonyms - responsibility, liability, answerability
Antonyms - reprieve, undependability
Example - In a large bureaucracy, there is often not enough accountability to ensure good service.
8)Predominant (adjective) – (सर्वाधिक) - pre-domin-ant
Meaning - being the main thing or issue
Synonyms - primary, main, most important.
Antonyms -minor, unimportant, inconsiderable
Example - Flying continues to be the predominant means of travel despite increased airfares.
9)Rating shopping (Phrase)
Meaning -Rating shopping occurs when an issuer chooses the rating agency that will assign the highest rating or that has the most lax criteria for achieving a desired rating. Rating shopping rarely involves corporate, sovereign, and municipal bonds. However, it is common for securitization issues. Rating shopping has a strong effect when one rating agency's criteria is much more lax than its competitors' criteria. Unless investors demand multiple ratings on deals, issuers will tend to use only ratings from the agency with the most lenient standards.
10) Rung (Noun) - पायदानMeaning - a level in a hierarchical structure, especially a class or career structure
Synonyms - stage, step, level, rank, position, status
Antonyms - disorder, indefinite
Example (English) - Australia slipped one rung to fifth in the latest ICC Test rankings.
Example (Hindi) - आईसीसी टेस्ट रैंकिंग में ऑस्ट्रेलिया एक पायदान फिसल कर पांचवें स्थान पर पहुंचा।
Answer the following questions based on the article to improve your reading comprehension skills for the upcoming exams -
- Why is Indian credit rating market an oligopolistic one as per the passage?
- Why has SEBI proposed disclosure norms to the rating agency?
Some words from the same article are given below . Try to make sentences with these words in the comment section which will be reviewed by us.
- Provision
- Compete
- Disclosure
- Predominant
