1. To check conflict of interest, RBI mulls creating fund for firms paying rating agencies

To check conflict of interest, RBI mulls creating fund for firms paying rating agencies

Rating agencies, however, said the move is unlikely to impact their overall issuer-pays model.

By: | New Delhi | Updated: May 25, 2017 8:15 AM
With an aim to prevent any conflict of interest, Reserve Bank of India (RBI) wants to make drastic changes in the operating framework of credit rating agencies in India. (Reuters image)

With an aim to prevent any conflict of interest, Reserve Bank of India (RBI) wants to make drastic changes in the operating framework of credit rating agencies in India. The central bank is planning to create a fund from which payments will be made to rating agencies, according to Indian Express report. RBI believes that once this fund system is implemented, it will replace the existing practice wherein the borrower or the issuer company pays the agency rating its credit worthiness, the report says. According to IE report, RBI and other banks will contribute from which the proposed fund will be created. It is expected to be implemented for large borrower accounts in the first place, a senior government official told IE.

Rating agencies, however, said the move is unlikely to impact their overall issuer-pays model. They (RBI) are talking about some specific mandate (NPA accounts) and not for the overall rating business, Naresh Takkar, MD and Group CEO, ICRA Ltd, said.

On May 22, RBI had said it will reconstitute the oversight committee (OC) under its aegis to operationalise the banking ordinance for resolving the issue of bad loans that have soared to over Rs 8 lakh crore.

The RBI also had said it envisages an important role for the credit rating agencies in the scheme of things and, “with a view to preventing rating-shopping or any conflict of interest, is exploring the feasibility of rating assignments being determined” by the central bank itself.

Agencies would be paid for from a fund to be created out of contribution from the banks and the Reserve Bank. The RBI further said the proper exercise of the enhanced empowerment would require coordination with and cooperation from several stakeholders including banks, ARCs, rating agencies, IBBI and PE firms. It would be holding meetings in the near future with these stakeholders.

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