Hello and welcome to exampundit. Here is the third Essay of the 3rd Part of UIIC AO 2016 Descriptive Contest. The winner of this topic is Yogita Pandey.
Credit rating Agency (CRA) are specialist commercial firms that assesses the liabilities of companies, institutions and government to service their debts. CRAs are not absolute predictor but give subjective view regarding credit worthiness of companies.
International rating agency is mainly dominated by Moody, Standard & Poor and Finch. Of lately, rating agencies have seen duopoly or oligopoly by these rating players. As these rating agencies are based and controlled by western world and governments, we have seen them being partial towards developing nations. CRAs have time and again come under scanner for their biased and erroneous ratings. They had rated Lehman and Brothers an 'A' rating, a month before its collapse. In past, collapse of several other corporate giants triggered a series of questions on role & credibility of CRAs. It is believed that their revenues are predominantly driven by rating fees earned from issuers.
It is quite apparent that as emerging nations are in the process of development they cannot earmark funds to up their rating. This results in developing nations not getting ratings as per their performance and growth. It has been seen that CRAs denote disproportionate resources in rating western countries, rather than improving their analysis of emerging nations. Rating agencies have also been blamed for contributing to economic turbulence by underestimating the risk attached with the bigger economies of the worlds.
The reasons for such performance of rating agencies are due to several factors. First of all they are not independent bodies and have sufficient influence on their decision makings from the government and big companies who also have been suspected of paying to maintain/increase their rankings. Second, they have not been held accountable for their faulty predictions in the past.
CRAs wield enormous power as gatekeeper to financial markets for companies due to increase regulatory use of ratings. There is a need to strengthen the accuracy of credit rating agencies and make them more unbiased towards emerging economies. There should be a regulatory authority to rank on the basis of their accuracy to rate. Lastly, they should also be held accountable for their faults and inaccurate ratings, making sure there is less government interference in their decision making.
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