Ajay Kumar, Commodity Online
MUMBAI: Credit rankings by the renowned rating agencies have come under question following the collapse of high ranking bankers including Lehman Brothers and Goldman Sachs last year and also the continuing bubble seen in highly rated Citi Group.

Credit ratings are generally used for the reference by the investors, bankers and funders. Investment banks and brokers use credit ratings in calculating their own risk portfolios, while, larger banks and brokers conduct their own risk calculations, but rely on CRA ratings as a "check" against their own analyses.

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However, there has been serious criticism against the credit ratings by the credit rating agencies. According to experts, in the wake of increasing cases of well rated financial filing bankruptcy has raised the concerns of investors and other regulatory authorities, who heavily depend on these rankings.

Credit rating agencies found to be lax in downgrading companies. Taking the example of Enron, which had filed its bankruptcy, was having investment grade mere four days before its bankruptcy. More interestingly, the credit rating agencies were said to be aware of the company’s financial problems for months before.

In addition to this, many rating agencies have been found to be having familiar relationship with company management, which may lead them to undue influence and thereby fall prey to the investors’ wrath.

The ratings given by the agencies affect the company’s performance, especially when a company is downgraded. The fall in the credit rankings is most often considered as a fall in the credit worthiness of that company. Several recent examples of downgraded ratings of the companies include Goldman Sachs and Lehman Brothers.

According to experts, these financial institutions once held AAA or higher ratings by the rating agencies but later, as their financial conditions started getting into trouble, the rankings started tumbling. But the trust worthiness of these ratings itself has come under doubts, as the rating system is not transparent and the agencies take a suspicious stand while taking about the system of giving ratings to the companies.

These agencies are sometimes accused of being oligopolistic, while sometimes their rating methodology was placed under question, particularly assigning AAA ratings to structured debt, which in a large number of cases has subsequently been downgraded or defaulted.

Ratings are often given to the corporations, individuals and governments. The prominent rating agencies include some of the noted names like, Standard and Poor’s, Fitch Ratings and Moody’s of the US, while some prominent rating agencies in India include CRISIL and ICRA.

These credit ranking agencies have been considered as the most powerful organizations next to the superpower America, as their ratings upgrades or downgrades not only the companies or financial institutions but also affect the credentials of the governments too.

This has led to a situation where these agencies, despite failing to save the global investor community from the financial collapse of the giants like Lehman Bros. and others, were left scot free despite giving good rankings to the broken financial companies.

Like scores of auditors who continue to enjoy the immunity against failure, even rating agencies act like a chameleon. Can the public bring them to book?

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