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Caught napping on IL&FS, credit rating agencies took little time to knock the debt issued by Dewan Housing Finance Ltd (DHFL) to “default" grade after it skipped its interest payments due on some debentures. The worsening “liquidity profile" of the non-bank financier was cited as the reason, and though DHFL’s brass protested the assessment, Rs1 trillion worth of debt was effected, dragging down other assets with it. DHFL had suffered downgrades a month earlier, too, and while they ought to have spotted its troubles long before, we should be thankful that its current cash crunch isn’t a surprise.

By and large, the record of rating agencies on alerting the market to rising risks of debtors failing to repay lenders has been poor, with downgrades typically issued much too late to be of help. Several instances can be cited of rotten bonds that had investment-grade ratings before the stench got out. Globally, the credibility of credit ratings slid after it took a big blow in 2008-09, when dodgy loans hidden in “safe" bundles of debt created a crisis that tipped the US into its Great Recession. Weaknesses were spotted and dealt with. In India, though, the problem of unreliable ratings was left unattended.

A lingering issue that even Reserve Bank of India Governor Shaktikanta Das had called attention to is that of a conflict-of-interest borne by rating agencies. If the firms that assess the debt of large borrowers also depend on the same companies’ patronage of other services on offer, the quality of their appraisals could be compromised by this need for add-on revenues. The hiving off of allied services, as RBI recommends, could be an answer. But then, can agencies survive on their core business?

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