July 08, 2016

The Silent Role of Credit Ratings in India’s Bad Loan Crisis

Praveen Chakravarty, Senior Fellow at IDFC Institute, writes on the role of Credit Rating agencies in India's bad loan crisis in Bloombergquint.

Chakravarty uses results from a detailed data analysis project that objectively analysises if bad loans to the defaulting corporate groups were solely a function of crony lending by public sector banks. The numbers suggest that the credit ratings for the now defaulting corporates were exemplary giving banks not much reason for doubting their credibility. Given how important a role credit rating agencies play in the decision of banks to lend, due accountability needs to be affixed to them. Read exerpts below:

"Credit ratings and sometimes equity ratings are very critical inputs to a large loan decision in any bank. If the entire financial system was oblivious to the dangers of such indiscriminate borrowing, how is it that the throats of only the public sector bankers are being choked? It could well be the case that a macroeconomic slowdown was the larger reason for loans going awry. Had the credit rating agencies not been so liberal with their ratings, would banks still have lent such large sums to these corporates? Of course, we won’t know the answer to this counter factual question but the fact remains that this question did not even arise. Ironically, the most popular solution mooted by experts to prevent such future crises is to privatise these public sector banks when an entire swathe of credit and equity analysts from the private sector were equally guilty of bad judgments during the current crisis... Lest this be misconstrued, this is not to insinuate any mala fide intent by these rating agencies. This is to merely place the bad loans crisis in a larger perspective and argue for a holistic solution."


Read the full article here.


Watch Praveen's video explanation below:

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