What are the limitations of Credit Rating?

LIMITATIONS OF CREDIT RATING : Credit rating is done on the present and the past
historic data of the company, therefore, it is only a static study. Prediction of the company’s
health through rating is not static or fixed because anything can happen after assignment
of rating to the company. Rating is not the guarantee of the soundness of a company.
Many changes take place in economic environment, political situation, government which
directly affect the working of a company. Therefore, dependence for future results on the
basis of rating, defeats the very purpose of risk assessment of rating. There may be
human bias for unavoidable personal weakness at the time of rating. Rating company may
conceal material information from the investigating team of credit rating and therefore, it
will affect the quality of rating. Time factors also affect rating because sometimes
misleading conclusions are drawn, and a company may be temporarily in adverse
condition, for which it may get low rating. Rating is down from time to time when the
company wants to sell debt instruments. Credit Rating Agencies may review the grade and
down grade the rating which results into impairing the image of the company. Similarly,
Rating done by two different Agencies for the same instrument of the same issuing
company may not be identical. Such difficulties may arise due to value judgement.