DAILY CURRENT AFFAIRS (OCTOBER 26, 2022)

POLITY AND CONSTITUTION

WHAT IS FCRA, AND WHEN CAN AN NGO’S REGISTRATION BE CANCELLED?

THE CONTEXT: Recently, the Ministry of Home Affairs has cancelled the Foreign Contribution (Regulation) Act (FCRA) licence of Rajiv Gandhi Foundation (RGF) and Rajiv Gandhi Charitable Trust (RGCT), organisations that are associated with the Nehru-Gandhi family, for alleged violations of the provisions of the Act.

THE EXPLANATION:  

What is the FCRA?

  • The FCRA was enacted during the Emergency in 1976 amid apprehensions that foreign powers were interfering in India’s affairs by pumping money into the country through independent organisations.
  • These concerns were, in fact, even older; they had been expressed in Parliament as early as in 1969.

Aim: The law sought to regulate foreign donations to individuals and associations so that they functioned in a manner consistent with the values of a sovereign democratic republic.

Prohibition:

The Act prohibits the receipt of foreign funds by candidates for elections, journalists or newspaper and media broadcast companies, judges and government servants, members of legislature and political parties or their office-bearers, and organisations of a political nature.

New guidelines to banks on Foreign Contribution (Regulation) Act rules

  • State Bank of India’s New Delhi branch: A new provision that makes it mandatory for all NGOs to receive foreign funds in a designated bank account at the State Bank of India’s New Delhi branch was inserted.
  • Designated FCRA account: All NGOs seeking foreign donations have to open a designated FCRA account at the SBI branch.
  • The NGOs can retain their existing FCRA account in any other bank but it will have to be mandatorily linked to the SBI branch in New Delhi.
  • Only banking channels allowed: Foreign contribution has to be received only through banking channels and it has to be accounted for in the manner prescribed.
  • OCI or PIO: Donations are given in Indian rupees by any foreign source including foreigners of Indian origin like OCI or PIO cardholders” should also be treated as foreign contributions.
  • Sovereignty and integrity: It requires NGOs to give an undertaking that the acceptance of foreign funds is not likely to prejudicially affect the sovereignty and integrity of India or impact friendly relations with any foreign state and does not disrupt communal harmony.

SATELLITE PHONES: WHAT ARE THEY, AND WHY IS THEIR USE RESTRICTED IN INDIA?

THE CONTEXT: A senior executive of Saudi Arabian oil company Saudi Aramco spent several days in prison in Chamoli district of Uttarakhand after he was arrested by police in July with an unauthorised satellite phone.

THE EXPLANATION:

What’s wrong with carrying a satellite phone?

  • It’s not legal to carry one in India unless you have permission. Visitors to the country are specifically advised not to carry a satellite phone without permission. Restrictions on the possession and use of these phones were tightened after the Pakistani terrorists who attacked Mumbai in November 2008 used these devices to keep in touch with their Lashkar-e-Taiba handlers.
  • The person was arrested under sections of the Indian Telegraph Act and the Indian Wireless Telegraphy Act.

What do these rules say?

  • Section 6 of The Indian Wireless Telegraphy Act, 1933 makes it illegal to possess “any wireless telegraphy apparatus, other than a wireless transmitter, in contravention of the provisions of section 3 [of the Act]”.
  • Section 3 says “no person shall possess wireless telegraphy apparatus” without a licence “save as provided by Section 4”.
  • Section 4 of the Act allows the central government to make rules under the Act to “exempt any person or any class of persons from the provisions of this Act either generally or subject to prescribed conditions, or in respect of specified wireless telegraphy apparatus”.

According to the Department of Telecommunications says: “Satellite phones are permitted: (i) With specific permission/ NOC from Department of Telecommunications, Government of India; or (ii) As provisioned by M/s BSNL in accordance with license granted to M/s BSNL for provision and operation of satellite-based service using Gateway installed in India.”

 

ENVIRONMENT, ECOLOGY AND CLIMATE CHANGE

DELHI BREATHES ITS CLEANEST POST-DEEPAVALI AIR IN 8 YEARS

THE CONTEXT: According to Central Pollution Control Board (CPCB) data, the national capital breathed the cleanest post-Deepavali air in eight years.

THE EXPLANATION:

  • Though violations of the ban imposed on bursting crackers were reported from across the city leading to a spike in PM2.5 levels (particulate matter 2.5), the air quality improved with time due to favourable meteorological conditions, according to experts. PM2.5 are fine inhalable particles which can get into the bloodstream through the lungs leading to a number of respiratory illnesses.
  • Experts also attributed better air quality in the city a day after Deepavali to the festival occurring earlier this year when conditions are comparatively warmer and windier, aiding in the dispersion of the pollutants.
  • Every year, Delhi experiences extreme air pollution in winter due to internal and external factors, including stubble burning in the neighbouring States.

Why better?

  • Explaining the meteorological factors behind the fall in PM2.5 levels, experts say when Deepavali occurs later in the year “temperature drops and wind speed also drops. As wind speed drops, pollutants are not effectively dispersed and this leads to their accumulation”.
  • As temperature drops, the mixing height (the height measured from the surface of the earth up to which pollutants can be dispersed in the atmosphere) also reduces.
  • “When wind speed falls and mixing height lowers at the same time, the air gets trapped and this leads to higher pollution. But this year it was warmer, the wind speed was better and the mixing height was also not so low.
  • That is why though firecrackers were burst, there was a dispersion of pollutants and it did not lead to a build-up”.

VALUE ADDITION:

Why Delhi air pollution rises in October?

  • Northwesterly Winds: Month of October marks the withdrawal of Monsoon winds (South-West) from North India, leading to the arrival of North-Easterly winds.
    • Monsoon winds carry Moisture and rainfall all over the country, whereas northwesterly winds carry dust from dust storms originating in Rajasthan and sometimes Pakistan and Afghanistan.
    • As per the study conducted by scientists at the National Physical Laboratory, 72 per cent of Delhi’s wind in winters comes from the northwest, while the remaining 28 per cent comes from the Indo-Gangetic plains.
    • One of such examples is a storm of 2017, originated from Iraq, Saudi Arabia and Kuwait that led to a drastic dip in Delhi’s air quality in a couple of days.
  • Low-level inversion: Another factor is the temperature dip in the month of October. Low-temperature results in low-level inversion i.e. the layer that stops the upward movement of air from the layers below. It leads to the concentration of pollutants in the air at the lower heights.
  • Wind speed: High wind speed in summers facilitates the faster movement of particulate matters in the air. As the wind speed decreases in winters, the air is not able to draw the pollutant away from a region.
  • Industrial chimney wastes: There are a number of industries which are source of pollution. The chief gases are SO2 and NO2. There are many food and fertilizers industries which emit acid vapours in air.
  • Automobiles pollution: The Toxic vehicular exhausts are a source of considerable air pollution. In all the major cities of the country about 800 to 1000 tonnes of pollutants are being emitted into the air daily, of which 50% come from automobile exhausts. According to the IIT Kanpur study, 20 % of PM 2.5 in winters comes from vehicular pollution.
The Central Pollution Control Board (CPCB)

  • It is a statutory organisation under the Ministry of Environment, Forest and Climate Change. It was established in 1974 under the Water (Prevention and Control of pollution) Act, 1974.
  • It is also entrusted with the powers and functions under the Air (Prevention and Control of Pollution) Act, 1981.
  • It provides technical services to the Ministry of Environment and Forests under the provisions of the Environment (Protection) Act, 1986.
  • It Co-ordinates the activities of the State Pollution Control Boards by providing technical assistance and guidance and also resolves disputes among them.
  • It is the apex organisation in country in the field of pollution control.

 

THE PRELIMS PERSPECTIVE

THIS WORD MEANS: HAWK AIR DEFENCE EQUIPMENT

THE CONTEXT: The United States is considering retrieving older HAWK air defence equipment from storage to send to Ukraine which is facing a heavy barrage of Russian drone-fired and cruise missiles.

THE EXPLANATION:  

HAWK after Stinger

  • The HAWK interceptor missiles would be an upgrade to the Stinger missile system, which is a smaller, shorter-range air defence system. The US sent the shoulder-fired anti-aircraft Stingers to Ukraine early on in the war, and then placed orders for more stocks of the missiles with Raytheon Technologies Corp. after they demonstrated great success in stopping Russian air assaults.
  • The US would likely initially send interceptor missiles for the HAWK system to Ukraine because it was unclear if enough US launchers — in storage for decades — were in good repairs.

PATRIOT predecessor

  • HAWK, short for ‘Homing All the Way Killer’, entered service with the US Army in 1959, during the Vietnam war. It underwent upgrades over the decades that followed, including a major one in 1971 that produced the so-called I-HAWK (or improved HAWK), with a kill probability of 85%.
  • The HAWK system was the predecessor to the PATRIOT missile defence system that Raytheon built in the 1990s. US forces largely stopped using HAWK from the early years of the new century. PATRIOT remains off the table for Ukraine.

 

 

THE CONTROVERSY AROUND BHOOTA KOLA RITUAL DEPICTED IN KANTARA

THE CONTEXT: Kannada film Kantara is being appreciated from all corners for its visual storytelling as well as compelling music and performances. However, the movie has also garnered controversies regarding the cultural practice of Bhoota Kola depicted in the movie.

THE EXPLANATION:  

What is Bhoota Kola?

Bhoota Kola is an annual folk ritual of Tulu-speaking people in Dakshina Kannada, Uttara Kannada and Udupi in Karnataka where local spirits or deities are worshiped.

  • As per Tulu Adivasi tradition, Bhoota Kola or Daiva Kola is a “non-vedic” ritual where Bhootas or Daivas (guardians and ancestors) are worshipped, reports The Quint.
  • “Idols representing ‘bhoothas’ are taken out in a procession to the beating of drums and bursting of firecrackers.

Performance: Bhootada Kola is performed by a trained person who is believed to have temporarily become a god himself.

  • The performer displays an aggressive outlook, dances fiercely and performs multiple rituals.
  • This performer is feared and respected in the community and is believed to give answers to people’s problems on behalf of god. Drums and music give company to the dancing and pooja rituals.

Popular Bhootas: Panjurli, Bobbarya, Pilipoota, Kalkuda, Kalburti, Pilichamundi, Koti Chennaya are some of the popular gods (Bhootas) worshipped as part of Bhootada Kola.

Influence: Bhootada Kola is said to have some influence from Yakshagana, a more popular and widely performed folk dance in coastal Karnataka. Some of the Bhootada Kola rituals also involve walking on a bed of hot coal.

 

CYCLONE SITRANG’

THE CONTEXT: According to the India Meteorological Department (IMD) the developing cyclonic storm in the Bay of Bengal — Cyclone Sitrang — will bypass Odisha and make landfall near West Bengal-Bangladesh coasts.

THE EXPLANATION:

  • The India Meteorological Department forecasted that a low-pressure area is likely to form over the southeast and adjoining east-central Bay of Bengal.
  • The low-pressure area in turn could intensify into a cyclonic storm that could affect Odisha, West Bengal, the northern part of Andhra Pradesh and adjoining areas.

The name Sitrang

  • The name Sitrang has been given by
  • Sitrang will follow cyclone Asani, which developed in the Bay of Bengal in early May this year. This will be the second cyclonic storm of 2022.
  • The cyclones that are forming over the north Indian Ocean, including the Arabian Sea and Bay of Bengal, are given names by IMD. Thirteen members—Bangladesh, India, Iran, Maldives, Myanmar, Oman, Pakistan, Qatar, Saudi Arabia, Sri Lanka, Thailand, United Arab Emirates, and Yemen—are given warnings about tropical cyclones and storm surges by the IMD.

 

 

 

 

 

 




Ethics Through Current Development (26-10-2022)

  1. Ramrajya is founded with awakening of godliness READ MORE
  2. Knowing God READ MORE



Today’s Important Articles for Geography (26-10-2022)

  1. Why cyclones like Sitrang stoke fear? Loss & damage worth billions due to Indian Ocean storms READ MORE
  2. Vast ice sheet facing climate fight on two fronts READ MORE
  3. Using the ocean to fight climate change raises serious environmental justice and technical questions READ MORE



Today’s Important Articles for Sociology (26-10-2022)

  1. ‘Divide and rule’ does not work READ MORE
  2. Can artificial intelligence help predict suicides? READ MORE
  3. Maternity Benefits Should be Available to the Mother in Case of Neonatal Death READ MORE
  4. Bad News on the Poverty Front READ MORE



Today’s Important Articles for Pub Ad (26-10-2022)

  1. Children, children: Governors and state govts’ unedifying fights harm universities most. Make institutions independent READ MORE
  2. Long years of apathy on constitution bench over. Supreme court set to make more headlines READ MORE



WSDP Bulletin (26-10-2022)

(Newspapers, PIB and other important sources)

Prelim and Main

  1. Updates: Russia mulls secure zone around Zaporizhzhia plant READ MORE
  2. Focus on India-U.K. ties as Sunak becomes British PM READ MORE
  3. Credit offtake hits decade’s high of 17.9% on higher retail, working capital demand READ MORE
  4. The heaviness of rockets, why it matters in space flight READ MORE
  5. Climate change amplifying health impacts of multiple crises, says The Lancet report ahead of COP27 READ MORE
  6. Are critically endangered Great Indian Bustards now migrating to Pakistan? READ MORE
  7. This Word Means | HAWK air defence equipment READ MORE

Main Exam

GS Paper- 1

  1. Why cyclones like Sitrang stoke fear? Loss & damage worth billions due to Indian Ocean storms READ MORE
  2. ‘Divide and rule’ does not work READ MORE
  3. Can artificial intelligence help predict suicides? READ MORE
  4. Vast ice sheet facing climate fight on two fronts READ MORE

GS Paper- 2

POLITY AND GOVERNANCE

  1. Children, children: Governors and state govts’ unedifying fights harm universities most. Make institutions independent READ MORE
  2. Long years of apathy on constitution bench over. Supreme court set to make more headlines READ MORE

SOCIAL ISSUES

  1. Maternity Benefits Should be Available to the Mother in Case of Neonatal Death READ MORE
  2. Bad News on the Poverty Front READ MORE

INTERNATIONAL ISSUES

  1. Betting on change: an American dream: There is chaos aplenty on the horizon as the West imagines a new regime in Iran, Russia and China READ MORE
  2. In the North of South Asia, an arc of peace READ MORE
  3. Why the UN must evolve to fight modern-day terror READ MORE

GS Paper- 3

ECONOMIC DEVELOPMENT

  1. PLI scheme and Atmanirbharta READ MORE
  2. Banks, finance and the 2022 Economics Nobel Prize READ MORE
  3. PM Kisan’s direct transfers can help food distribution. But there are four challenges READ MORE

ENVIRONMENT AND ECOLOGY

  1. Using the ocean to fight climate change raises serious environmental justice and technical questions READ MORE

SECURITY

  1. Why development projects are critical for rooting out extremism READ MORE

GS Paper- 4

ETHICS EXAMPLES AND CASE STUDY

  1. Ramrajya is founded with awakening of godliness READ MORE
  2. Knowing God READ MORE

Questions for the MAIN exam

  1. ‘The battle against internal terror cannot be fought without the help of the people’. Discuss, why development projects are critical for rooting out extremism?
  2. How far do you agree with this view that the recent supreme court concern against hate speech is a good move, but this is the administration and executive that can work effectively against the propagation of hate? Justify your view.

QUOTATIONS AND CAPTIONS

  • History reminds us that dictators and despots arise during times of severe economic crisis.
  • The Global Hunger Index exposes the falsity of poverty estimates that do not take into account the true rise in cost of living.
  • Grazing by mammalian herbivores can be a climate mitigation strategy.
  • The quest for Atmanirbharta has to be an ongoing and long-term endeavour that must take due note of its adverse impact on the military’s short and mid-term operational effectiveness.
  • Water resources are essential for economic development. India has 4 per cent of global water resources for its use. India’s water resources are under immense pressure.
  • India needs to embark on export-led growth to create high-income jobs with a big role of MSMEs.
  • The Government should identify better alternatives and encourage innovation that can eventually lead to the betterment of public health. It is essential for the government to take on a multidimensional and unprejudiced stance in adopting harm reduction alternatives for the betterment of its citizens.
  • Consensus among political parties is needed to avert the financial disaster that freebies will lead to in the long run.
  • Fostering peaceful coexistence of the diverse sects and sections of society is crucial for India’s image globally, too, as its voice gains credence in diplomatic and geopolitical affairs.
  • The Supreme Court’s intervention in the matter is welcome. Now, political and legal action must follow in case of hate speech.
  • Development projects bolster internal security and help policing become more focused and result-oriented, ensuring a government-people bond.
  • Administrative bias on the one hand and the spread of social prejudice on the other cannot be allowed to vitiate the national mood. the Court must do everything possible to nudge authorities to enforce the law against the propagation of hate.

ESSAY TOPIC

  • Education is the kindling of a flame, not the filling of a vessel.
  • Overcoming poverty is not a gesture of charity but an act of justice.

50-WORD TALK

  • Comparative dip in pollution level in Delhi this Diwali is a relief but no cause for celebration or self-congratulation for AAP government. Early Diwali, unexpected rains delaying peak in stubble-burning and warmer temperatures contributed to it. AQI is still in very poor category. Complacency can be a potential health hazard.
  • Excited polemical exchanges between Indian politicians over Rishi Sunak miss the point. The new UK prime minister was picked for his talent, not ethnicity. Like Sunak, millions of immigrants have infused energy into the economy and public life of democracies. Immigration—of people and ideas—empowers societies. Xenophobia dooms them to mediocrity.

Things to Remember:

  • For prelims-related news, try to understand the context of the news and relate it with its concepts so that it will be easier for you to answer (or eliminate) from given options.
  • Whenever any international place is in the news, you should do map work (marking those areas in maps and exploring other geographical locations nearby, including mountains, rivers, etc.) applies to the national places.)
  • For economy-related news (banking, agriculture, etc.) you should focus on terms and how these are related to various economic aspects; for example, if inflation has been mentioned, try to relate with prevailing price rises, shortage of essential supplies, banking rates, etc.
  • For main exam-related topics, you should focus on the various dimensions of the given topic; the most important topics which occur frequently and are important from the main point of view will be covered in ED.
  • Try to use the given content in your answer. Regular use of this content will bring more enrichment to your writing.



Day-315 | Daily MCQs | UPSC Prelims | CURRENT DEVELOPMENTS

[WpProQuiz 360]




TOPIC : THE TYRANNY OF CREDIT RATING AND CREDIT SCORE

THE CONTEXT: Recently, there is a debate on illusion of rating agencies. Basically, the issues are -their necessities, flaws & fragilities, and the need for regulation. Similarly, credit score has also become complicated due to the current covid induced financial crisis.

WHAT IS A RATING AGENCY?

Credit rating is an informed opinion of a recognised entity on the relative creditworthiness of an issuer or instrument. In other words, it is an opinion “on the relative degree of risk associated with the timely payment of interest and principal on a debt instrument”. Such recognised entity is known as Credit Rating Agencies (CRAs).

CRAs typically rate on the basis.

  • Debt securities
  • Short term debt instruments, like commercial papers
  • Structured debt obligations
  • Loans and fixed deposits

WHY THERE ARE ISSUES OF ILLUSION?

IDEOLOGICAL BIASES

  • CRAs might lower ratings for left governments as a strategy to limit negative policy and market surprises as they strive to keep ratings stable over the medium term.
  • For e.g. a panel analysis of Standard & Poor’s, Moody’s, and Fitch’s rating actions for 23 Organisation for Economic Co-Operation and Development (OECD) countries from 1995 to 2014 shows that left executives and the electoral victory of nonincumbent left executives are associated with significantly higher probabilities of negative rating changes.

CONFLICT OF INTERESTS

  • CRAs are funded by the very companies they rate.

LACK OF ABILITY TO PREDICT

  • CRAs follow the market, so the market alerts the agencies of trouble. This reason can be attributed to CRAs ability to predict frequent near default, default, and financial disasters.

NEGLIGENCE & INCOMPETENCE

  • The methodology of CRAs has come under question. For example, even after using different methodologies, the result for sovereign debts comes the same. It is also alleged that CRAs can make a sound judgement on rating, but they didn’t make an effort to do it.
  • For e.g. Moody accepted that it did not have a good model on which it could have estimated a correlation between mortgage-backed securities, so they made them up.

POLITICALLY MOTIVATED

  • It has also been alleged that CRAs, through their rating mechanism, force the govt to follow the path they prescribe.
  • For e.g. during the turmoil in Tunisia, S&P issued a report warning of “downward rating pressures” on neighbouring governments if they tried to calm social unrest with “populist” tax cuts or spending increases. Further, after Crimea annexation, rating agencies downgraded the rating of Russia.

POLICY MEDDLING

  • In 203, to stop predatory lending state of Georgia brought a law. Other state of the USA, were to follow suit until S&P retaliated. And it is well known that predatory lending is responsible for the financial crisis of 2008-09.

HOW A RATING AGENCY FUNCTION

1. FOR COMPANIES

It is evident from the Above picture that credit rating agencies depend upon the audited statements. The agencies are only as effective the as honesty of their clients.

2. FOR COUNTRY

Following are the parameters on which a country is rated

  • Regulatory framework
  • Tariffs
  • Fiscal Policy
  • Monetary Policy
  • Foreign Currency Control
  • Physical and human Infrastructure
  • Financial Markets
  • Macro Factors (Consumer spending, Inflation, Interest Rates)

WHY RATING AGENCY IS REQUIRED

From the 80s onwards, as the financial system became more deregulated, companies started borrowing more and more from the globalised debt markets, and so the opinion of the credit ratings agencies became more and more relevant.

ROLE OF THE CRAs

REDUCE INFORMATION ASYMMETRY

  • Since CRAs get access to the company’s management and confidential information about its working, they can give an informed opinion about the ability of an instrument to meet its obligations.

UTILITY FOR ISSUERS

  • Issuer concisely communicates the quality of their issue through the rating of the CRAs, which help it establish its creditworthiness.

GATEKEEPERS FOR FINANCIAL MARKETS

  • CRAs provide tangible benefits to financial market regulators by reducing the costs of regulation. Regulators such as RBI use CRAs to improve the awareness and decision-making of their regulated entities. For instance, credit ratings are used to determine the capital adequacy of banks the resolution of stressed assets.

PURVEYORS OF REGULATORY LICENSES

  • Some financial regulators mandate that certain instruments must be rated mandatorily before they are issued. Extensive integration of CRAs into the financial system transforms their role as purveyors.

MORAL SUASION

  • It compels developing countries to pursue more prudent and sensible monetary and fiscal policies.

INSTANCES WHEN RATING AGENCIES FAILED

  • The financial collapse of New York City in the mid-1970s
  • Asian financial crisis
  • Enron scandal,
  • Global Financial Crisis
  • During the global financial crisis, hundreds of billions of dollars worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating.
  • The US Financial Crisis Inquiry Commission called them “key enablers” of the financial crisis and “cogs in the wheel of financial destruction.”

THE HISTORY OF RATING AGENCY

  • Credit rating agencies were first established after the financial crisis of 1837 in the US. Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers.
  • Systematic credit rating started with the rating of US railroad bonds by John Moody in 1909.

COMPARATIVE RATING SYMBOLS FOR LONG TERM RATINGS

DEGREE OF SAFETY  –   RATING  –   Meaning

Highest – AAA – Timely payment of financial obligations

High – AA – Timely payment of financial obligations

Adequate – A – Changes in circumstances can adversely affect such issues more than those in the higher rating categories.

Moderate – BBB – Changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal.

Inadequate – BB – Less likely to default in the immediate future

Greater likelihood of default – B – While currently financial obligations are met, adverse business or economic conditions would lead to a lack of ability or willingness.

Vulnerable to default – C – Timely payment of financial obligations is possible only if favourable circumstances continue

In default or are expected to default – D – Such instruments are extremely speculative and returns from these instruments may be realised only on reorganisation or liquidation.

Some factors which render instruments outstanding meaningless – NM – Factors include reorganisation or liquidation of the issuer; the obligation is under dispute in a court of law or before a statutory authority etc.

CREDIT RATING AGENCIES IN INDIA

CRISIL

  • This full-service rating agency is India’s major credit rating agency, with a market share of more than 60%.
  • It is offering its services in the financial, manufacturing, service, and SME sectors.
  • The headquarter of CRISIL is in Mumbai.
  • The majority stake of CRISIL was held by the world’s largest rating agency, Standard & Poor’s.

CREDIT ANALYSIS AND RESEARCH LIMITED RATINGS (CARE) RATINGS

  • Credit Analysis and Research Limited Ratings was established in 1993.
  • It is supported by Canara Bank, Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), and other financial and lending institutions.
  • This is considered the second-largest credit rating company in India.
  • The headquarter of Credit Analysis, and Research Limited Ratings is in Mumbai.

SMALL AND MEDIUM ENTERPRISES RATING AGENCY (SMERA)

  • It is a rating agency entirely created for the rating of Small Medium Enterprises.
  • It is a joint enterprise by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and some chief banks in India.
  • The headquarter of SMERA is in Mumbai
  • It has accomplished 7000 ratings.

ONICRA CREDIT RATING AGENCY

  • Mr. Sonu Mirchandani incorporated it in 1993
  • It investigates data and arranges for possible rating solutions for Small and Medium Enterprises and Individuals.
  • The headquarter of ONICRA Credit Rating Agency is located in Gurgaon
  • It has broad experience in performing a wide range of areas such as Accounting, Finance, Back-end Management, Analytics, and Customer Relations. It has rated more than 2500 SMEs.

FITCH (INDIA RATINGS & RESEARCH)

  • Fitch Ratings is a global rating agency dedicated to providing the world’s credit markets with independent and prospective credit opinions, research, and data.
  • The headquarter of Fitch Ratings is in Mumbai.

ICRA

  • It was created in 1991 by prominent financial institutions and commercial banks in India with a devoted crew of experts for the MSME sector
  • Moody’s, which is considered as the international credit rating agency holds the major share.

DIFFERENT BUSINESS MODELS OF CREDIT RATING AGENCIES

MODELS

ISSUER PAY MODEL

ADVANTAGE

  • Ratings are available to the entire market free of charge and will greatly aid small investors.
  • It gives the rating agencies access to high-quality information that enhances the quality of analysis.

DISADVANTAGE

  • It can lead to serious conflict of interest since the company pays the CRAs to get the rating. The CRAs may inflate the rating to satisfy the company.
  • It may lead to ‘Rating Shopping’ which refers to the situations where an issuer approaches different rating agencies for the ratings and then choose to publish the most favourable ratings to disclose it to the public via media while concealing the lower ratings.

INVESTOR PAYS MODEL

ADVANTAGE

  • It would avoid the serious conflict of interest of the CRAs.
  • This would enable the investors to get the credit rating based on the company’s true and actual financial condition.

DISADVANTAGE

  • Ratings would be available only to those investors who can pay for them and takes ratings out of the public domain and thus affects the small investors.
  • The company may not always share all the necessary information with the CRAs which can have an adverse impact on the quality of the ratings.
  • It can pose serious conflict of interest involving the investors themselves. If investors are the payees, they can influence CRAs to give lower-than-warranted ratings to help them negotiate higher interest rates.

REGULATOR PAYS MODEL

ADVANTAGE

  • It eliminates the conflict of interest as seen in both Issuer Pay Model and Investor Pay Model.

DISADVANTAGE

  • The problem with this model lies in choosing the CRA and payment to be fixed.
  • The CRA chosen by the regulator may not provide the best credit rating. Further, if the regulator pays less amount of money to the CRA, the CRA may find it difficult to continue with its business and could have an adverse impact on the quality of the ratings issued.

SHOULD RATING AGENCIES BE REGULATED?

  • RATING SHOPPING: It has often been seen that both issuer and investor are involved in rating shopping. CRAs inflate the rating particularly for structured product markets for getting more market share and profit margins.
  • OLIGOPOLISTIC TENDENCIES: Around 95% of the market is controlled by only 3 CRA VIZ. S&P, MOODY’S and  Further, they use expansionist marketing. For e.g. Hannover Re lost a big chunk of the market share when it didn’t pay the service fee. (CRAs promised it free service).
  • HEGEMONIC CONTROL: As the big three CRAs are located in north America, America exerts a great control on the functioning of CRAs. When CRAs downgraded USA, CRAs were fined. Further, rating of country is not done objectively. UK was rated lower than USA, even when the fiscal deficit of UK was lower than USA.
  • CONTROL: CRAs have great control on the world economy as their rating can result in the flight of the capital.
  • ACCOUNTABILITY: CRAs are not accountable to any country and their functioning is not transparent

CHANGES THAT IS IMPERATIVE FOR BETTER FUNCTIONING

DODD FRANK ACT

In response to the Global Financial Crisis of 2008-2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. It encourages CRAs to invest in due diligence, strengthen internal controls and corporate governance, and improve their methodology. But some of the following provision of it are still unimplemented:

  • legal liability of credit rating agencies should be increased.
  • Use of credit ratings in regulations that set capital requirements and restrict asset holdings for financial institutions should be removed or replaced.
  • Internal controls, conflicts of interest for credit analysts, standards for credit analysts, transparency, internal conflict of interest, and rating performance statistics should be ruled based and regulated.

THE WAY FORWARD

  • A ratings agency run by the UN, funded by pooled contributions from both lenders and borrowers should be established. Ratings business must be made a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits
  • With the help of technology, open-source models with fully transparent inputs and outputs should be created and promoted. Credit Risk Initiative of National University of Singapore Risk Management Institute is one such example.

THE CONCLUSION: CRAs play a valuable role in financial markets by analysing credit for many investors, but their inaccurate ratings can create problem of enormous proportion for world economy. A unified, integrated effort by all the country is needed to avoid another economic meltdown which would severe repercussion for both, any country or its citizen