Demerits Of Credit Rating - Disadvantages Limitations

Demerits of Credit Rating

The disadvantages, limitations or demerits of credit rating are listed below.

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1. Possibility of Bias Exist : The information collected past times the rating way may live on discipline to personal bias of the rating team. However, rating agencies endeavour their best to supply an unbiased persuasion of the credit character of the fellowship and/or instrument. If not, they volition non live on trusted.
2. Improper Disclosure May Happen : The fellowship beingness rated may non discover certainly cloth facts to the investigating squad of the rating agency. This tin touching on the character of credit rating.
3. Impact of Changing Environment : Rating is done based on introduce in addition to past times information of the company. So, it volition live on hard to predict the hereafter fiscal set of the company. Many changes accept house due to changes inwards economic, political, social, technological, legal in addition to other environments. All this volition touching on the working of the fellowship beingness rated. Therefore, rating is non a guarantee for fiscal soundness of the company.
4. Problems for New Companies : There may live on problems for novel companies to collect funds from the market. This is because, a novel fellowship may non live on inwards a set to examine its fiscal soundness. Therefore, it may have lower credit ratings. This volition instruct far hard to collect funds from the market.
5. Downgrading past times Rating Agency : The credit-rating agencies periodically review the ratings given to a item instrument. If the surgical physical care for of a fellowship is non every bit expected, thus the rating way volition downgrade the instrument. This volition touching on the picture of the company.
6. Difference inwards Rating : There are cases, where dissimilar ratings are provided past times diverse rating agencies for the same instrument. These differences may live on due to many reasons. This volition practise confusion inwards the minds of the investor.