Are Loan Ratings Really Fair? BIS Raises a Red Flag

The new BIS report questions how fair loan ratings really are, and if smaller agencies are painting a false picture of safety.

Can a “safe” loan be riskier than it looks? The Bank for International Settlements (BIS) said in its Financial Stability Report (October 2025) that some private loan ratings are inflated by nearly 2.7 notches compared to insurers’ internal assessments. Smaller credit agencies, it said, often give better grades to keep business.

The concern is not just about numbers. It is about fairness of global loan ratings, which decide how much banks lend and how investors price risk. If the rating itself is biased, the whole system bends.

Can We Still Trust Loan Ratings? BIS Report Says Maybe Not

The BIS studied how credit rating firms judge private loans. Nearly one-fourth of U.S. life insurers’ portfolios depend on “private letter ratings” confidential scores that aren’t shared publicly. These are often issued by lesser-known agencies that face pressure to please clients.

A few numbers from public records and official reports show how the problem looks on paper.
 

This is why BIS concerns over credit rating bias are being taken seriously. Inflated grades can mislead lenders and mask risks that only appear in a crisis.

Why Does the BIS Think Loan Ratings Are Too Generous?

The loan rating system transparency issues are not only global. In India, the story runs parallel. According to LoansJagat (October 2025), bank credit grew 11.4% year-on-year, while deposits grew only 9.9%. That gap shows banks are lending faster than they collect funds.

At the same time, loan fraud cases rose by 38% this year. If the same optimism that drives inflated ratings creeps into domestic lending, it could hurt both banks and borrowers.
 

Numbers like these make one thing clear, when loans grow faster than trust, cracks begin to show.

Loan Ratings Look Good on Paper, But Are They Real?

Similar concerns surfaced after the 2008 financial crash. Back then, the U.S. Securities and Exchange Commission and European Central Bank found inflated ratings worsened loan defaults. The same playbook seems to be repeating.

Earlier this year, LoansJagat News covered “India’s Rising Loan Defaults and Digital Lending Pressures”, warning that rating flaws could spread through online lending. Feels like the dots are connecting again.

Conclusion 

The Reserve Bank of India (RBI) had tightened loan classification rules in 2016. The U.S. Federal Reserve soon followed with checks on rating models. Still, as the BIS notes, ratings continue to drift upward whenever markets boom. That’s how cycles repeat.

And maybe this time, the BIS warning on unfair loan assessments will make regulators act before the damage spreads.
 

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