Are credit ratings stifling NBFCs?

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Editor's note: Your debt is—at the heart of it—someone else’s risk. And as a lender, the assessment of that risk is the key to survival. A lot goes into it, but a big part of weighing the likelihood of a borrower paying depends on what are known as credit rating agencies, purveyors of arcane labels such as “AA-” and “Baa3”. In more prosaic terms, rating agencies assess large-scale borrowers, from nations to corporations, on the basis of their ability to pay back loans in a timely fashion. For years now, the effectiveness of credit ratings have been questioned across the world, with critics pointing to flawed business models, misaligned incentives, conflicts of interest and false ratings. On a grand scale, even the value of a credit rating is a matter of some doubt. When Moody’s Investors Services downgraded India’s sovereign credit rating in June, the country’s chief economic adviser, Krishnamurthy Venkata Subramanian, said ratings given by global agencies were no reflection of the state of the economy, and added, for good measure, that the response of markets, “whether foreign exchange, debt or …