Politics of Ratings
Injecting doses of fear among the investors is uncalled for
WHAT'S UP BY SAJAD BAZAZ
Are Indian banks going to face crisis? This is the question in which I summed up the central idea of various emails which I received after global credit rating agency Moody’s Investors Service announced revision of its outlook for India’s banking system to negative from stable. However, there were others who had expressed their confusion over the ratings and for them, the media headlines provoked them to know about this business of ratings and its impact.
Moody’s has attributed its future outlook of the Indian banking system to the concern that “India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates.” Based on these factors, they say that an increasingly challenging operating environment will adversely affect asset quality, capitalisation and profitability of the Indian banks over the next 12-18 months.
However, the Moody’s downgraded rating took a beating from its counterpart when another leading rating agency Standard & Poor’s (S&P) differed with the downgrade accorded by Moody’s. S&P has upgraded risk profile of the Indian banking sector saying its domestic regulations are in line with international standards and the regulator (Reserve Bank of India) has a moderately successful track record. Thus sidelining all apprehensions vomited by the Moody’s.
Notably, Moody’s and Standard & Poor’s are two of the three largest credit rating agencies in the world. Before discussing the politics of these credit rating agencies, let me address to the confusion of some readers who want to know the business of credit rating. Credit rating is process of an assessment of the credit worthiness of individuals, corporations and government. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. It is an evaluation made by a credit rating agency of the debt issuers simply to gauge the chances of default. These rates are determined by credit ratings agencies which accord credit rating after evaluating of qualitative and quantitative information for a company or government; including non-public information obtained by the its analysts.
Now coming back to the war of rating between Moody’s and S&P over stability of Indian banking system, it gives an indication that the rating analysis by these agencies is not foolproof. The situation forces us to believe that the systems and procedures prevalent in the agencies are so flexible that they can be moulded as per the requirement of the entity. There is every possibility that this flexibility in methodology of analyzing the credit reputation of the companies and governments can be used as a harassing tool and extract profits rather than earning them by the rating agencies. What we have seen that these agencies use different vehicles of media to propagate downgraded or poor rating of an entity among the masses and create a situation where panic looms large. Later, the same agency corrects its opinion and contradicts its own ratings. Why they do this? I think this needs no elaboration, as we all know it’s profit extraction, not profit earning tactics adopted by these agencies.
We find that these agencies, particularly Moody’s and S&P, have been injecting unnecessary doses of fear among the investors across the globe. The level of fear is let lose in such a way that even a common man who is least aware of this complex financial gimmickry gets alerted. He is forced to believe that something like atom bomb is on the verge of exploding through these credit ratings. I have come across the reports where these agencies had even threatened to destablise the credibility of US in the past when they gave indications of lowering the bond rating of the US on some pretext.
If on one hand the ratings of the agencies have created furor across the globe, on the other the reputations of these agencies has come under sharp criticism. Today top financial and banking experts call it an absurdity to think that these two agencies have even a bit of credibility left ever since they refused to downgrade the AAA rating of junk subprime mortgages. For these agencies, the financial crisis is an opportunity to earn huge profits. In other words, we can say that they make profits out of others’ crisis.
Now coming to our banking system. I think the recessionary period of 2008 destablised the global economy, but it was our banking system which was least impacted. The regulatory mechanism of our system was vetted strongest among the strong when it braved the economic crisis peacefully. So the Moody’s credit rating is just to create headlines and won’t affect the peaceful growth of the banking industry.
The views are of the author &
not the institution he works for.
Lastupdate on : Fri, 11 Nov 2011 21:30:00 Makkah time
Lastupdate on : Fri, 11 Nov 2011 18:30:00 GMT
Lastupdate on : Sat, 12 Nov 2011 00:00:00 IST
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