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Indian Economy September 28, 2017

Do We Need a ‘DESI’ Credit Rating Agency?

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Credit rating agencies (CRAs) play a crucial role in the financial l andscape.The entire economy works on investment and credit, and these agencies help investors and lenders take an informed decision. In their absence, one may end up placing money in an unproductive/ risky asset. This is what makes S&P, Fitch and Moody’s preferable destinations for investors seeking high returns in theleast possible duration. These three majors assess the potential and viability of privately or publicly held entities as well as the sovereign ones and shape how investments flow cutting across borders.

In his latest address to the BRICS nations, Prime Minister Modi stressed on the need to set up a new credit rating agency to serve the purpose of five economically strong and growing countries – Brazil, Russia, India, China and South Africa.The idea is clear – The west based CRAs named above cannot cater to the need of an altogether different economic and financial setup that exists in developing economies of the east. Moreover, are these developing nations,which are outpacing western countries in terms of GDP growth rate, so deprived of talent who can undertake exhaustive studies on the financial credential of entities?

Another concern is that of vested interests. Operating out of countries that may not hold the potential for future growth, S&P, Fitch and Moody’s (all three headquartered in New York) are under an implicitcompulsion to not project the east as more commercially-viable a region in comparison to the west. The flight of capital to the east, which although has been high in recent years, is still not proportionate to the potential the region holds. The lower-than-expected sovereign rating of world’s fastest growing economy, India, is evidence that these foreign rating agencies will intentionally not allow unhindered flow of capital to any of the BRICS countries.

The New Development Bank, established as a sign of cooperation between BRICS nations, has already challenged the clout of Bretton Woods Institutions and the next aim should bediminishingthe dominance of foreign credit rating agencies.Otherwise, do you expect the bank set up for development of the region to rely on prejudiced ratings of sovereign and corporate bodies by foreign CRAs while undertaking due diligence of a project seeking finance? The idea was proposed in 2016, but any development hasn’t followed owing to diplomatic and geo-political tensions between member nations. But economic development is a different sphere and to tap it, the nations have to showa strong will to move forward.

An agency, government-backed or otherwise, working on market-oriented norms of the member countries will serve as the facilitator for spurring investment and financing.

Also read: How to maintain your CIBIL score?

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3 responses to “Do We Need a ‘DESI’ Credit Rating Agency?”

  1. Sahil Sinha says:

    I agree with your view!

  2. Akansha Goel says:

    Growth will drive the foreign investment and not credit rating. Modi needs to focus more on improving the gdp numbers

  3. D Rajesh says:

    However noble the intentions be, the nature of execution would be the key. My fear is that the Desi CRA may borrow the same colored vision from the 3 established global CRAs. We have seen a similar scenario for domestic CRAs like CARE Ratings Ltd and SMERA Ratings Ltd.

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