Hello there. I came across your query regarding the limitations of credit rating in India. I would like to help you with the same by sharing the disadvantages of credit ratings for investors, issuers, financial intermediaries and regulators. Credit ratings are extremely crucial for portfolio management, but they have their drawbacks as well. I will give you a detailed explanation of this subject below.
Credit Rating Limitations
Here are the disadvantages of credit rating in India:
Limitations for Investors
A credit rating’s worth is tied to the quality of information it is based on. Companies don’t give out enough information to a rating agency. In such scenarios, the rating issued by an agency may not help investors or even turn out to be misleading.
Credit ratings depend on the borrower’s ability to pay its debt in the future. There is always a hint of uncertainty about the future, even if the assumptions are good. Hence, there is always a risk with credit ratings.
Limitations for Issuers
It can turn out to be expensive for a company to gain ratings from a reputed agency. It involves a fee because a rating agency needs to deeply analyse the creditworthiness of an issuer.
The share prices take a major hit when a rating agency downgrades the credit rating of a company.
Limitations for Financial Intermediaries
Credit rating only explains the credit risk of a debt instrument or a bond. There are more risks in such investments, such as price risk, inflation risk and liquidity risk. Even a highly rated bond can give a low return because of risks not captured by credit ratings. So, it is risky for an intermediary to suggest a bond with his client on the grounds of credit ratings alone.
Limitations for Regulators
All the limitations of such ratings from investors’ perspective are relevant from the viewpoint of regulators, too.
This is all about the limitations of credit rating in India. I hope it helps.
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What are the Limitations of Credit Rating In India?
vikram
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5 months
2024-12-24T10:34:07+00:00 2024-12-24T10:34:08+00:00Comment
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