The Credit Rating Agencies are regulated by mainly SEBI and RBI policies. In fact SEBI through The Securities and Exchange Board of India ( Credit Rating Agencies) Regulations, 1999 was one of the first regulators globally to devise an effective and comprehensive regulatory framework for CRAs
SEBI regulation for CRAs has been designed to ensure the following:
- Only credible players enter and exist in the business
-The regulations are devised in such a way that fair and objective opinions are given by the CRAs
-Investors have widespread access to ratings
- The applicant should be registered as a company under the Companies Act, 1956 and possess a minimum network of Rs.5 crore.
Additionally, the International Organisation of Securities Commissions (IOSCO) has suggested certain changes in its code of conduct to enhance the credibility of the CRAs. The proposals once put in place will have to be adopted by all the national regulatory authorities. The proposed changes include enhancing provisions to safeguard the integrity of the credit rating process in order to avoid conflict of interests and increase transparency and at the same time safeguard public information. (Source: The Economic Times, 10 February, 2014)
Crisil was the first credit rating agency to set up shop in India in 1987. At that time the industry was in nascent stage and faced several hurdles because of the following issues
-Absence of bond market
-Absence of market-determined interest rates
However the liberalization of Indian economy aided the growth of the industry due to rapid economic growth in the country which prompted both private as well as government enterprises to look at the capital market for financing options.
The industry received further boost when the Reserve Bank of India on April 27, 2007 issued fresh guidelines on capital adequacy in banks as per Basel II guidelines. This mandated banks to use credit ratings assigned by External Credit Assessment Institutions (ECAIs) which include CRISIL, ICRA and CARE in India to determine the credit risk in loan portfolios.
The growth of Small and Medium Scale Industries will further aid the growth of this industry as ratings play a pivotal role on the lender’s decision to grant loans to these industries. So SME industry grows as a whole, it will require more participation from the rating agencies which will boost their growth.
The Credit Rating Industry in India has fared much better compared to its global counterparts. The reason for rating agencies growth in India is mainly due to good regulations which have been put in place by SEBI and RBI which has ensured that the rating agencies maintain a distance from the industry and hence avoid conflict of interests.
Another reason which has contributed to the growth of the industry as a whole is that the rating agencies instead of focussing one particular area has cleverly diversified its business.
Porter’s Five Force Model:
The Indian Credit Rating...