For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield.” 11 An insurance company that has offered guaranteed minimum rates of return on some of its products might find its solvency threatened by a long stretch of low rates and feel compelled to take on added risk.
We must also appreciate that relatively much longer recovery process of defaulted loans, shorter history of ratings assigned by rating agencies in Indian conditions putting certain constraint on benchmarking them against the international standards, relatively large population of unrated borrowers especially in mid and SME corporate sectors, market risk factors exhibiting more volatilities, etc. add challenges.