THE HINDU Editorial Vocabulary- September 11, 2017- Topic 1

Search for quality

On credit rating agencies

Credit rating agencies may be in for a tough ride as the Securities and Exchange Board of India continues to tighten the screws on them. The market regulator has released a consultation paper seeking feedback on a new set of rules drafted to improve “market efficiency” and enhance “the governance, accountability and functioning of credit rating agencies”. 

Among them are provisions to restrict cross-shareholding between rating agencies without regulatory approval to 10%, and increase the minimum net worth requirement for existing and new agencies from ₹5 crore to ₹50 crore. Another mandates at least five years’ experience for promoters of rating agencies. SEBI has proposed disclosure norms to improve investor awareness about the operations of rating agencies. The spin-off of non-core operations of rating agencies will allow SEBI to focus on regulating just their credit rating operations. SEBI has spelt out its rationale for proposing each of the rules. SEBI’s predominant concern, apart from improving the information available to investors, seems to be to prevent rating agencies from resorting to collusion in reaching decisions. This effort is in line with SEBI’s crackdown on the agencies after the default in 2015 of a highly-rated debt issued by Amtek Auto.

The new rules, if they come into force, may not have any substantial impact on the quality of credit rating in India. Prima facie, the intended effects of the rules sound convincing. What is unclear are their unintended effects on competition in the rating space. Also, how the rules will address the problem of “rating shopping” that plagues the business of credit rating in the country is unknown. The present business model of rating agencies is seen to allow considerable room for issuers of securities to shop for a favourable rating or avoid negative ratings by severing their ties with these agencies. Prudential regulation is thus justified to tackle this problem. This criticism, however, ignores the reputational damage these agencies suffer after each corporate default. Repeated failures have not affected the business of rating agencies, primarily due to the lack of alternative service providers who can help out investors. Individual creditors have thus had to trust the ratings of the existing rating agencies at their own peril, even after repeated crises. As is well-known today, the Indian credit rating market is an oligopolistic one due to the high barriers to entry. SEBI’s proposed move to impose further quality requirements on rating agencies is unlikely to change things for the better, or raise further barriers. The way forward lies in making it easier for new players to enter the credit rating space and compete against incumbents. This will go a long way towards making credit rating agencies actually serve creditors rather than borrowers.

Vocabulary

Tighten: make or become tight or tighter.

Example: Tighten the bolts

Synonyms: pull taut, tauten, pull tight, stretch, tense; narrow, constrict

Screw: fasten or tighten with a screw or screws.

Example: Screw the hinge to your new door

Synonyms: fasten, secure, fix, attach

Enhance: intensify, increase, or further improve the quality, value, or extent of.

Example: His refusal does nothing to enhance his reputation

Synonyms: increase, add to, intensify, heighten, magnify, amplify, inflate

Governance: the action or manner of governing.

Example: A more responsive system of governance will be required

Restrict: put a limit on; keep under control.

Example: Some roads may have to be closed at peak times to restrict the number of visitors

Synonyms: limit, keep within bounds, regulate, control, moderate, cut down

Disclosure: the action of making new or secret information known.

Example: A judge ordered the disclosure of the government documents

Synonyms: revelation, declaration, announcement, news, report, leak

Rationale: a set of reasons or a logical basis for a course of action or a particular belief.

Example: He explained the rationale behind the change

Synonyms: reason(s), reasoning, thinking, logic, grounds, sense, principle

Predominant: present as the strongest or main element.

Example: Its predominant color was white

Synonyms: main, chief, principal, most important, primary, prime, central

Crackdown: severe measures to restrict or discourage undesirable or illegal people or behavior.

Example: A crackdown on crime and corruption

Intended: planned or meant.

Example: The intended victim escaped

Synonyms: deliberate, intentional, calculated, conscious, planned

Considerable: notably large in size, amount, or extent.

Example: A position of considerable influence

Synonyms: sizable, substantial, appreciable, significant, goodly, fair

Prudential: involving or showing care and forethought, typically in business.

Example: Unfortunately, within the Government's rules, prudential borrowing would not provide the solution to our problems.

Criticism: the expression of disapproval of someone or something based on perceived faults or mistakes.

Example: He received a lot of criticism

Synonyms: censure, condemnation, denunciation, disapproval

Peril: serious and immediate danger.

Example: His family was in peril

Synonyms: danger, jeopardy, risk, hazard, insecurity, uncertainty

Incumbent: necessary for someone as a duty or responsibility.

Example: It is incumbent on all decent people to concentrate on destroying this evil

Synonyms: necessary for one to, essential that, required that