No Credit to Global Rating Agencies
Criticised for methodologies and the differential treatment shown towards India and China
The Survey points out that banks are not passing on the interest rate benefits to borrowers as they try to compensate “for the lack of earnings from the non-performing part of their portfolio by widening their interest margins.” It attributes the recent easing of interest rates to the demonetisation drive after which banks were flushed with funds. “It has become increasingly clear that the underlying debt problem will finally need to be addressed, lest it derails India’s growth trajectory,” it states, adding that efforts to offset these trends by providing macroeconomic stimulus are not proving sufficient. The Survey reiterates that the RBI is exceptionally highly capitalised and that it would be more productive to redeploy some of this capital in other ways. Citing prominent precedents for governments using its capital in the central bank for its own purposes, the Survey states that excess capital in the RBI, including that created by demonetisation, is a balance sheet or wealth gain and not an income gain. Other than using reserves for bank capitalisation, the Survey notes that it can used for extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position. Mumbai: The Economic Survey has slammed credit rating companies for their inconsistency in making projections and criticised the methodologies adopted by them. It is also critical of the differential treatment they showed towards India and China while assigning a rating.
Quoting an example, the Survey noted that China had launched a massive credit expansion in 2009, resulting in the rise of its credit-GDP ratio by about 63 percentage points of the GDP. But growth in GDP slowed from over 10% in 2010 to 6.5% in 2016. When these two parameters (credit-GDP ratio and economic growth) are plotted on a graph, it creates a scissors pattern. “How did Standard and Poor’s react to this ominous ‘scissors pattern’, which has universally been acknowledged as posing serious risks to China and indeed the world,” the Survey pointed out.
The Survey has criticised the rating agencies’ failure to anticipate the slowdown and the risks associated with it.
In December 2010, rating agencies raised China’s rating from A+ to AA- and it has never adjusted it since, even as the credit boom unfolded and growth experienced a decline. In contrast, India’s ratings has remained stuck at a much lower level of BBB-, despite the country’s dramatic improvement in growth and macro-economic stability since 2014. “These contrasting experiences raise a question: can they really be explained by an economicallysound methodology,” the Survey pointed out.
The Survey was also critical of rating agencies’ tendency to pool economies and make a relative assessment of their credit worthiness according to income size. But it notes that India has been an outlier among emerging market peers, posting one of the fastest growths in the group.
“India is not only among the world’s fastest growing major economies, underpinned by a stable macro-economy with declining inflation and improving fiscal and external balances, it was also one of the few economies enacting major structural reforms. Yet, there is a gap between this reality of macro-economic stability and rapid growth on the one hand, and the perception of the ratings agencies on the other,” it added.
The Survey has warned banks against thwarting efforts of interoperability of the payments systems, saying the success of digitalisation depends on the payment modes being interoperable across financial institutions. Citing data from National Payments Corporation of India for Aadhaar Enabled Payment Systems (AEPS) as of mid-January, the Survey said there is a higher chance of transactions failing in case of payments originating from a different bank than those from the same bank. “The decline rate for Off-US transactions (when banks are different) was nearly 56% or almost double than that for onUS transactions (when the banks are same),” it said, adding that the reason for such a drastic difference could be the fact that “larger banks are declining transactions originating from
smaller remitting banks”, hurting the country’s shift to a