The rating agency, for instance, does not perform an audit and has to rely, instead, solely on information provided by the issuer.

"Consequently, to the extent that the information provided is inaccurate and incomplete, the ratings process is compromised," the RBI has said in its Report on Trend and Progress of Banking in India, 1997-98.

The central bank has said that while the ratings process attempts to provide a guidance to investors and creditors in determining the risks associated with an instrument or credit obligation, it does not attempt to provide arecommendation and does not take into account factors like market prices and personal risk that might influence investment decisions.

The central bank has also said that to the extent that a certain instrument of a specific companyattracts a lower rating, the company has an incentive to shop around for the best possible rating, compromising the authenticity of the rating process itself.

Since the setting up of the first credit rating agency--Credit Rating Information Services of India Ltd (Crisil)--in India in 1987, there has been a rapid growth of credit rating agencies in the country.

The major players in the Indian market, apart from Crisil, include Investment Information and Credit Rating Agency of India Ltd (Icra), promoted by IFCI in 1991, and Credit Analysis and Research Ltd (Care), promoted by IDBI in 1994.

Duff & Phelps tied up with two Indian non-banking finance companies in 1996 to set up Duff & Phelps Credit Rating India (P) Ltd.Crisil rated the first bank in the country in 1992.

The ratings methodology for banks and financial institutions is essentially based on the CRAMEL approach (capital adequacy, resources, asset quality, management evaluation, earnings and liquidity).