By Kate Lim

THE Risk Management Institute (RMI) of the National University of Singapore (NUS) will be developing what it believes is the world's first credit rating system to be offered by an academic institution.

The non-profit initiative - which will serve as a 'scientific competitor' to what is offered by existing commercial credit rating agencies - aims to provide ratings for 500 Asian firms by 2011.

Commercial agencies have been criticised for structural shortcomings that are widely acknowledged as having affected how ratings were awarded to fee-paying debt issuers.

Critics say this fee structure results in a conflict of interests as it encourages debt issuers to shop around for favourable ratings. Also, an agency might be reluctant to downgrade a client's rating.

Credit rating agencies came under intense scrutiny during the recent financial crisis because of the high ratings they gave out to risky structured products. Investors often rely on these ratings when assessing the riskiness of a particular investment.

RMI intends to address such concerns by developing innovative and more accurate rating methods.

In a distinctive approach, it will be 'drawing on cutting-edge research to develop new metrics for assessing credit risk', said Professor Tan Eng Chye, the university's deputy president of academic affairs and provost, in his opening address yesterday at RMI's Third Annual Risk Management Conference.

RMI will collaborate with external institutions to formulate and refine the new metrics. Over the next year, at least seven teams will evaluate and critique one another's work so as to improve and perfect the rating models.

Unlike the commercial agencies, the RMI initiative will not take fees from the companies it chooses to rate.

'We do not need to charge debt issuers and will not face the same conflict of interests,' said a spokesman.

The project is expected to cost about $7 million over four to five years, and will be funded out of RMI's own resources.

Transparency is a priority for the new system as well, so the rating methods will be published when they are finalised, said Dr Oliver Chen, a senior research fellow and programme director at RMI.

He is confident the new rating system will take off despite the dominance of commercial agencies now: 'The best endorsement is to just be good and accurate. If we do a good job, people will naturally take it up.'

This article was first published in The Straits Times.