'Don't treat credit ratings as gospel truth'

New Delhi: As part of efforts to rein in soaring bad loans and restructuring of assets, banks should upgrade skills for greater due diligence to evaluate credit ratings, which need to be treated as "opinion" rather than "gospel truth", says a study.

All participants including regulators, credit rating agencies (CRAs), corporate, banks and borrowers need to work jointly towards a better system of credit risk assessment and monitoring, it said.

"A holistic regulatory framework encompassing participation from all stakeholders in credit rating ecosystem is imperative to improve efficacy of CRAs and effective credit risk assessment and monitoring in India," said the joint study by Assocham and PwC.

The study, 'Growing NPAs in Banks: Efficacy of Credit Rating Agencies', said credit risk assessment, administration and monitoring of banks have increasingly come into focus due to rise in levels of non-performing assets (NPAs) or bad loans as well as stressed assets in past few 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.

Banks should treat credit rating only as an "opinion" and not as the "gospel truth", it added.

Information generated by ratings should be used in conjunction of banks' credit risk framework to decide on suitability of loan exposure, said the study.

"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," it added.

That, it said, will reduce NPAs systemically and avoid panic and knee-jerk reactions.

Considering that financial education in India is still at a nascent stage, the ratings should be displayed on a common website for comparison, the report suggested.