Credit ratings are difficult to live with and just as difficult to live without. A lot of ink has been spilled about the fact that the bonds of Infrastructure Leasing & Financial Services Ltd (IL&FS) were rated investment grade as late as July 2018. The firm started defaulting on its debt in September. IL&FS is not unique. One can’t but think that aggressive lobbying by powerful rating agencies has a lot to do with that. This piece outlines the sources of the problems and the potential solutions. Problem 1: Conflicts of interest from non-rating business. Solution: Rating agencies should be forced to divest from non-rating business. Problem 2: Issuer-pay model. Solution(s): a) The regulator should pick the rating agency, or b) greater disclosure. Problem 3: Over-reliance on ratings in regulations. Solution: Provide alternatives to ratings. The RBI should also insist that bank borrowers obtain multiple ratings with the regulator picking the agency. Competition combined with reward for good performance will enhance the quality of ratings.

(Live Mint)