Search This Blog

May 26, 2013

Role of Credit Rating Agencies in Lending

Well for a start off.. This article goes Non-conventional ways so open yourself a little.

What are Credit rating Agencies (CRA)?
CRA are considered to be Financial expert people who can guide/ advice Non-financial people on financi position of a company for investment purposes.

They are only for some non financial people?
No. With Time now users of this expert advice have increased from Banks to Creditors

So who uses it mainly?

Let take a story for off track for some time
Sub Prime Crisis > Sleuths said that Bank's have been accepting deposits and lending and as borrowers defaulted Banks defaulted to repay their depositors. Had Bank's had some of their capital in invesments I.e instead of Deposits on one side and loans on other side, Banks should had Capital+ Deposits on one side and assets on another. SO THE WHOLE THIS WAS THAT CAPITAL WAS MISSING.

To meet this risk a Hype called Basel Norms were invented.. Which in nutshell said that based on Loans given by Bank's there must be some capital. The linked capital to risk in loan given by bank i.e if given to more risky customer (i.e more chance of bad debt), more capital to be kept.

To judge the risk either Bank could have their internal model as approved by RBI or they can take the rating given by CRA.

So far RBI has not approved any Bank's Internal Rating Based (IRB) approach. So how to keep capital... Yes yes u are getting close to answer ..................... Credit Rating Agencies..............

They are left like a King with all of the loans in Bank (Plz exclude retail small loans in lacs for housing, education etc). Following RBI dictate bank's have to send any corporate borrower to these rating agencies to get their opinions.

So that answer's why these rating are sought.

So what's bad in it?
Who pays these rating agencies... The one those are there to be rated..

What stakes are involved of these rating agencies... Nothing.. the loan to be given is by Bank
Bank's fund are public funds whose responsibility is with Bank's Officials...

Means they sell/issue careless ratings?
No.. They do a little (YES I MEAN LITTLE) due diligence so as to ensure that the company rated good by them does not default .. Otherwise their creditability in the market will go down.. 

Means their rating can be trusted?
No.. As its not their money they are involved they do not care much.... They may rate a troubled account A.. Whats the big deal.. The day they come to know that the company may default they change it overnight to D...

So whats wrong in it?
The investment decisions taken by Bank's can not be changed overnight like that...  Once they have lent Crores of ruppes to a company based on these rating.. They can't withdraw/Call back overnight...
The trouble starts.. rating agency washes their hand of the dirt by simply downgrading a rating and thats it... They are out of here...
Left are the Bank's and investors who trusted their rating initially to invest their money.....

Ha.. Once they ditch Banks, no one will come for thier rating?
No. :(...... Sadly Once Decived Bank's will still knock at the doors of these rating agencies as RBI requires Bank's Loans over Rs 5 cr to be rated.

So let the things go why are you bothered buddy?
Because i work for Bank.
Because once the account goes Bad, no one see that loan was given based on external rating. All investigating/accountability/inquiry authorities catches hold of the Bank employee who processed/disbursed the loan. (and yes the junior most officer is the one most grilled, haven't seen any DGM level or above officer being questioned).

No comments:

Post a Comment