What we are witnessing today is a classic case of shadow boxing by two international rating agencies which is causing an upheaval in the Indian stock markets. Is our government to remain a helpless spectator to the butchery of investors in a civilized world?
On 9 November 2011, Moody’s Investors Service revised its outlook for India’s banking system to ‘negative’ from ‘stable’, thereby downgrading our entire banking sector. Moody’s cited an increasingly challenging operating environment for Indian banks due to high inflation and rising interest rates that could adversely affect their quality of assets, capitalisation and profitability. Banking stocks on both national bourses were hammered down on 10th November, after the downgrade. The Bank Nifty fell 2.64% while BSE Bankex declined 2.62% in a clear example of how rating agencies can create havoc in the capital markets.
Earlier on 3 October 2011, Moody’s had downgraded State Bank of India’s (SBI) bank financial strength rating (BFSR) or that is the bank’s standalone rating from ‘C-’ to ‘D+’ on account of SBI's low tier–1 capital ratio and deteriorating asset quality. This downgrade by a notch indicated “modest intrinsic financial strength”, while ‘C’ had denoted “adequate intrinsic financial strength”—a subtle difference it would seem.
However, on 10 November 2011, another international rating agency, Standard & Poor’s (S&P) upgraded India's banking sector from group ‘6’ to group ‘5’citing “a high level of stable, core customers’ deposits, which limit dependence on external borrowings. It also noted that the Indian government is “highly supportive of the banking system”. It also revised India’s economic risk score from ‘6’ to ‘5’ and assigned an industry risk score of ‘5’. The assessment is on a 1-to-10 with ‘1’ signifying the lowest risk and ‘10’ the highest.
The diametrically opposite stand on India’s banking industry by the two leading international rating agencies within a space of two days shows how subjective these ratings are and how little they can be relied upon by the public. Is this a game of one-upmanship or shadow boxing at the cost of a country’s reputation and credit-worthiness? On 5 August 2011, S&P downgraded the long-term credit rating of the US from ‘AAA’ to ’AA+’ on concerns about the government’s budget deficits and rising debt burden. This singular statement by a credit rating agency plunged world markets into economic turmoil, and investors all over the world lost billions of dollars. This was the first time that the US lost its premium rating. S&P was under severe pressure from the US government, which accused the rating agency of making a $2 trillion error in its calculations. S&P admitted the error but said that it did not affect its decision to downgrade US debt rating. In the wake of this unprecedented downgrade of US debt and the rating agency’s stubborn stand despite the error committed by them, the Securities Exchange Commission of US is considering sweeping changes to the rules designed to improve the quality of ratings after their poor performance in the financial turmoil caused by the sub-prime crisis recently.
Here is another goof-up committed by the same rating agency that defies all logic. On 11 November 2011, S&P committed a blunder by accidentally sending automatic messages to some of its subscribers that it had lowered France’s AAA (Triple A) sovereign rating. Fortunately, this mistake happened just after the Paris bourse had closed that saved the day for the French investors. Within two hours, the agency hurriedly put out a statement saying “Following a technical error, a message was automatically sent out to certain subscribers indicating that France’s rating had been changed. This is not the case—the rating of the French Republic is unchanged at AAA, together with a stable outlook…..”
The entire episode was in such a bad taste that the French finance minister has demanded that it be made clear what caused the error and what the consequences may have been. The European Union Internal Market Commissioner Michel Barnier has called for a more rigorous, strict and solid regulation for credit rating agencies.
All these credit rating agencies, despite all their reasoning, are also fallible. The fact remains that these rating agencies are also manned by human beings who can make not only mistakes, but also blunders in their assessment and cause such embarrassment to countries, that it is time to take a cogent view on their usefulness to the world economy in general and the affected countries in particular. Against this background, it is incumbent on the part of the Indian government to consider taking steps to pre-empt any possible downgrade of India’s sovereign debt rating this year. S&P’s India credit rating is presently ‘BBB-’, which is an investment grade. Though India’s growth story is said to be intact according to the finance minister, economic indicators do not appear to be in fine shape. Any downgrading even by a notch will result in pushing India into the speculative grade, resulting in disastrous consequences for the economy in general and the stock markets in particular. This is not to say that the rating agencies should be muzzled, rather, the government should start a dialogue with them to ensure that they do not err on the wrong side, while at the same time take steps to improve the country’s financials by managing the fiscal deficit within the tolerable limits, if not at the targeted levels.
(The author is a banking and financial consultant. He writes for MoneyLife under the pen-name ‘Gurpur’)
The apex bank will discuss the suggestions on pre-penalty on foreclosure of home loan, Internet and mobile banking with the IBA; Out of the 230 recommendation of the Damodaran Committee around 88 have already been accepted by the RBI
The Reserve Bank of India (RBI) has accepted 88 out of the 230 recommendations made by the Damodaran committee on customer services. While some of them are already in the public domain, the apex bank would be discussing the remaining suggestions with the Indian Banks’ Association (IBA) later this month.
Sources say that the 88 recommendations, where bankers had consensus, include recommendations such as banks should sell standalone financial products and not bundle it with any other product, have been accepted by the RBI. Some pending recommendations such as not imposing pre-penalty on foreclosure of home loan and suggestions made on mobile and internet banking, RBI will have a discussion with IBA by the end of this month.
The Committee, headed by former SEBI chairman M Damodaran, was set up by the central bank to look into the issues of customer services and evaluate the existing system of grievance redressal mechanism prevalent in banks, its structure and efficacy and recommend measures for expeditious resolution of complaints.
On housing loan foreclosure charges, the Committee had suggested that banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that a customer is not denied the opportunity to enhance his economic welfare by making choices such as switching to other banks or financial entities to enjoy the benefits conferred on by market competition. While on internet banking, the Committee said that there should be zero-liability on customers for any loss in electronic transactions.
On mobile banking, the committee recommended that there should be tiered security based on different parameters such as transaction value, destination of transaction (two-level authorisation for non-routine destinations), security based on hand-sets, and the frequency of payments. All the grievances of mobile banking should be addressed by the banks only, without referring the customer to the service providers. The agreements of the banks with the telecom service providers should incorporate suitable provisions to address mobile banking grievances.
According to experts, the suggestions relating to the Internet and mobile banking had put an onus on the banks by giving extra power to customers. However, this had irked many banks stating that customers would get away even after committing a mistake.
Sources say that there would be a discussion with the IBA on developing a full proof environment for Internet and mobile banking.
In September, RBI, in its annual conference on banking ombudsmen, had stated that “banks must not recover pre-payment charges in floating rate loans. Banks may offer long-term fixed rate housing loans to their customers and address their asset liability mismatch (ALM) issues by recourse to the interest rate swaps market.”
The current regulations may sound the death knell for the mutual fund industry
The Securities and Exchange Board of India (SEBI) now proposes to regulate financial advisors through a self-regulatory organisation (SRO). Reading the proposed guidelines makes me wonder whether the idea has been sponsored by the insurance industry, which finds itself under keen scrutiny due to the exorbitant...