A Case Study on Performance of Credit Rating Agencies: An Overview

Abstract

Credit rating is one of the significant supporting services for the development of debt capital market. Recently, credit rating agencies have also started playing a pivotal role in the development of Indian common stock market by grading IPOs. But the rating agencies and their services are under scanner, particularly after the eruption of recession. In the backdrop of debate over the working of credit rating agencies all over the world, an attempt is made in this paper to evaluate the performance of credit rating agencies in India. The study made use of secondary data from different authenticated sources to draw meaningful conclusion. The study highlights stability of ratings assigned. It concludes that the ratings are issuer-biased and need to be looked into seriously. The credit rating industry has historically been dominated by just two agencies, Moody’s and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories. The quality of external credit ratings has scarcely been examined. Credit rating agencies (CRAs) are an integral part of the modern capital markets.