Mortgage lenders like banks should look at credit rating of a borrower as an opinion by a credit rating agency and not a gospel truth, states an Assocham and Pricewaterhouse Coopers (PwC) study.
"Banks should treat the credit rating only as an 'opinion' and not as the gospel truth and the information generated by their ratings should be used in conjunction of banks' credit risk framework to decide on suitability of loan exposure," said a statement issued by Assocham on Monday.
"Improving efficacy of CRAs (credit rating agencies) needs to be looked from a holistic perspective where all participants in the ecosystem, the regulators, CRAs, corporate, investors (banks), borrowers and others need to work jointly towards a better system of credit risk assessment and monitoring," noted the study titled Growing NPAs in Banks: Efficacy of credit rating agencies.
According to the study, banks' credit risk assessment, administration and monitoring have increasingly come into focus owing to considerable increase in levels of non-performing assets (NPAs) and stressed assets (SA) in past couple of years.
"The banks, apart from putting up a strong regulatory framework, should also upgrade their skills for greater due diligence to effectively evaluate the ratings given by the CRAs," it said.
The study also suggests that banks need to move towards risk based pricing whereby they can use rating as more than just a mandatory exercise by identifying greater incentives for them to adopt ratings.
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The study also suggests that the banks should be encouraged to develop their internal rating models and validate these ratings by comparing them with publicly available ratings and also seek more information from the rating agencies.
A forward-looking and market based credit rating mechanism as part of a move towards risk based pricing can also help the system to take proactive corrective steps to reduce the burden of stressed assets and potentially reduce NPAs systemically and avoid panic and kneejerk reactions, the study recommends.
Besides, early warning systems along with dynamic rating mechanism measuring all the risks of the market can help the banks and other lending institutions to effectively predict the credit risk associated with the borrower and take necessary actions to mitigate such risks.
Considering that financial education in India is still at a nascent stage, the ratings should be displayed on a common website for comparison, the study recommended.
--IANS
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