No Credit to Global Rat­ing Agencies

Crit­i­cised for method­olo­gies and the dif­fer­en­tial treat­ment shown to­wards In­dia and China

The Economic Times - - Companies: Pursuit Of Profit -

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

less-cash econ­omy.

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