India, Others Prepare Plans to Reduce Dependence on Rating Agencies: Report

Various countries and regulatory agencies, including from India, have prepared action plans to reduce reliance on ratings by credit rating agencies in standards, laws and regulations, according to the Financial Stability Board (FSB).

The FSB, which has entities from more than 20 countries and jurisdictions, had set out a road map in 2012 for reducing mechanistic reliance on CRA (credit rating agencies) ratings in standards, laws and regulations.

The Finance Ministry, Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) are members of the FSB, which works to ensure global financial stability.

"All FSB members have prepared action plans, which represent significant steps toward reducing reliance on CRA ratings in standards, laws and regulations," the FSB said in a report.

"A common challenge faced by national authorities is in developing proposals for alternative definitions of creditworthiness and incentives for market participants to enhance their own risk assessment processes."

Earlier this week, the FSB came out with its final peer review report on national authorities' implementation of the FSB Principles for Reducing Reliance on CRA ratings.

According to the report, national authorities need to re-focus on the objectives of the FSB principles "to end mechanistic reliance on CRA ratings" by market participants and establish stronger internal credit risk assessment practices instead.

The report emphasised that market participants need to adopt alternative approaches and review reliance on CRA ratings in private contracts, such as ratings triggers, which represent mechanistic reliance on them.

"National authorities should engage in dialogue with market participants on strengthening internal credit assessment processes and developing alternative measures of creditworthiness," it added.

The objective behing this is not to eradicate CRA ratings but to promote sound judgement in assessing creditworthiness, said Ravi Menon, chairman of the FSB's Standing Committee on Standards Implementation (SCSI).

"This means taking account of a more comprehensive set of factors besides CRA ratings. We have made some progress in reducing reliance on CRA ratings but there is still some way to go in identifying an array of practical and suitable complements to CRA ratings," Mr Menon, also managing director of the Monetary Authority of Singapore, said in a statement.