At the heart of the matter is depositor protection. Many depositors know fully well the risks involved, and it was higher returns which induced them to deposit their money. The rationale for regulation of deposit-taking isthe information asymmetry between the depositor and the deposit-taker. This asymmetry has to be bridged by disclosure. One mode of such disclosure is credit rating. The panel has also proposed more disclosures in advertisements soliciting deposits from the public. There could also be special requirements for NBFCs when publishing their quarterly results, including information about asset-liability mismatches, quality of assets, etc. But once such disclosures are made, there is little need to link ratings to deposits. In fact, a change in rating could put pressure on managing liabilities, as it would result in having to repay deposits.

Serious asset-liability mismatches could arise. It must be recognised that NBFC failure poses little systemic risk, and trying to molycoddle investors will only invite moral hazard, apart from stifling the growth of a valuable market intermediary.