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Disadvantages of credit rating

Disadvantages of Credit Rating

Credit rating suffers from the following limitations
(1) Non disclosure of significant information: Firm being rated may not provide significant or material information, which is likely to affect the investor's decision as to investment, to the investigation team of the credit rating Company. Thus any decisions taken in the absence of such significant information may put investors at a loss.

(2) Static study: Rating is a static study of present and past historical data of the company at one particular point of time. number of factors including economic, political, environment, and government policies have direct bearing on the working of a company. any changes after the assignment of rating symbols may affect the very purpose of risk indicativeness  of rating.

(3) Rating is no certificate of soundness: Rating grades by the rating Agencies are only and opinion about the capability of the company to meet its interest obligations. rating symbols do not pinpoint towards quality of products for management or staff etc. in other words rating does not give a certificate of the complete soundness of the company. users should form an independent view of the rating symbol.

(4) Rating may be biased: Personal bias of the investigating team might affect the quality of the rating. Dekho companies having lower grade rating do not advertise or use the rating while raising funds from the public. in such a case the investors cannot get the true information about the risk involved in the instrument.

(5) Rating under unfavorable conditions: Rating grades are not always representative of the true image of a company. company might be given low grade because it was passing through unfavourable conditions when rated. Thus misleading conclusions may be drawn by the investors which hampers the company's interest.

(6) Difference in rating grades: Same instrument may be rated differently by the two rating agencies because of the personal judgement of the investigating staff on qualitative aspects. This may further confused the investors.
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