INTERPRETING INDIA'S RATING: The Global ANALYST
The
Global ANALYST, December 2015
Interpreting
India’s Rating*
Needed a Domestic Rating Agency
Time is opportune
for India to think in terms of setting up a rating agency of international
standard which will understand India and advise stakeholders about the health of domestic financial institutions and provide
crucial input to the financial institutions and governments abroad with which India
has dealings.
M G
Warrier
On November
02, 2015 Moody's Investors Service changed its outlook for India's banking
system to stable from negative because of the gradual improvement in the
operating environment for Indian banks. Srikanth Vadlamani, a Moody's Vice President
and Senior Credit Officer said that "The stable outlook on India's banking
system over the next 12-18 months reflects our expectation that the banks'
gradually improving operating environment will result in a slower pace of
additions to problem loans, leading to more stable impaired loan ratios," Moody’s spokesperson mentioned that
deteriorating asset quality was the key driver of the rating agency's negative
outlook on India's banking system since November 2011.
Moody's conclusions were contained in its just-released report on
India's banks, entitled, "Banking System Outlook — India: Gradual
Improvement in Operating Environment Drives Stable Outlook," and is
authored by Vadlamani.
The stable outlook is based on Moody's assessment of five drivers:
Operating Environment (improving); Asset Risk and Capital (stable); Funding and
Liquidity (stable); Profitability and Efficiency (stable); and Government
Support (stable).
On the operating environment, Moody's expects that India will
record GDP growth of around 7.5% in 2015 and 2016. Growth has been supported by
low inflation and the gradual implementation of structural reforms. Moody's
points out that an accommodative monetary policy should support the growth
environment.
As for asset risk and capital, Moody's says that asset quality
will stabilize. In particular, while the banks' stock of non-performing loans
may continue to rise, the pace of new impaired loan formation in the current
financial year ending 31 March 2016 will be lower than the levels seen in the
past four years.
Capital levels, however, are low for public-sector (PSU) banks.
Such banks exhibit common equity Tier 1 ratios of only 6%-10%, and their
coverage of non-performing loans with loan-loss reserves averages 55%.
Moody's notes that the Indian government (Baa3 positive) announced
in July 2015, plans to inject INR700 billion into PSU banks over the next four
years. This is a clear credit positive, but this amount is still short of the
banks' overall capital requirements. Ability to access equity capital markets
remains key if the PSU banks have to address their capital shortfall.
By contrast, high capital levels are a credit strength of the
private-sector banks that Moody's rates.
As for funding and liquidity, these factors are credit strengths
for Indian banks because retail deposits are their primary source of funding.
Most banks comply comfortably with required liquidity coverage ratios, even
though only part of their holdings of government securities is categorized as
high-quality liquid assets.
In relation to government support, Moody's says the Indian
government will continue to provide a high level of support to the banks. For
the PSU banks in particular, Moody's expects that the government will not make
any changes that could suggest the possibility of reduced support to or
differentiation among the banks, because doing so could entail significant
systemic risks.
Moody's rates 15 banks in India that together account for around
70% of system assets. Four are private-sector banks and the remaining 11 are
PSU banks. The PSU banks are majority owned by the government.
The four private-sector banks exhibit an average baseline credit
assessment (BCA) of baa3; in line with their supported ratings and India's
sovereign rating of Baa3. By contrast, the PSU banks exhibit weaker standalone
fundamentals and BCAs as low as b3.
Covered almost all the features of Moody’s assessment as the
paragraphs that follow, which take a view on assessments in general by external
rating agencies should not be considered as a criticism of this report which
has several positives and marks a deviation from the usual, known, approach of
rating agencies based in developed countries. We should also appreciate the
predicament of rating agencies in creating ‘models’ factoring in the special
features of Indian banks or financial sector which are insulated from the
vagaries their counterparts elsewhere are subjected to because of their higher
level of integration with markets and lower regulatory controls.
The rating agencies including Moody’s, of late, are under pressure
to be transparent about the rating parameters and eminent economists and
analysts have started questioning them for negative comparisons which can be
attributed to their constituency interests. Earlier, developed countries on
whose mercy ‘poor’ nations survived, could dictate terms while doling out ‘aid’
by enforcing conditionalities which had no direct alignment with the projects
they financed. The recipients of ‘aid’, which was always repayable in some
manner, had no option to read the fine print in the loan agreements. Times are
changing.
Still, rating agencies remain subservient to their masters and try
to help in announcing prescriptions, which are not always relevant to the
context in which they are made. The recent report in the media flashed under
the caption ‘S&P
retains India’s rating at BBB- with stable outlook’ points to such a situation.
The rating agency announced that its rating will not be changed for two years. In
today’s world two years can be too long to predict growth trajectories of
countries like India. Three other factors mentioned in S&P’s assessment show
the agency’s anxiety to show India in poor light. One, the agency’s expectation
as to how a yet-to-be constituted monetary policy committee should function,
which is a matter internal to India. Two, the size of India’s GDP is not
comparable with GDP figures of developed countries as a large proportion of
India’s savings still remain unmapped. Three, for historic reasons, economic
development in India has not been uniform in all geographic regions, and some
of the relatively more developed regions have populations larger than some
developed countries and have a higher level of economic development.
Moody’s had, in April
2015, raised India’s rating outlook from ‘stable’ to ‘positive’ without
altering the country’s investment grade which remains at the last rung at Baa3.
The rating agency’s observation that “India has grown faster than similarly
rated peers over the last decade due to favourable demographics, economic diversity,
as well as high savings and investment rates. Moody’s expects these structural
advantages, supported by relatively benign global commodity prices and
liquidity conditions, will keep India’s growth higher than that of its peers
over the rating horizon” gave comfort to India’s Chief Economic Advisor Arvind
Subramanian who said ‘the upgrade validated the direction of Centre’s(GOI’s)
reform programme’ and expressed hope for a bump-up in India’s rating. According
to him “It confirms something that we have been saying for some time now that
the growth prospects and the macro-economic prospects for the economy are
improving.”
India
is a victim of foreign domination even today when it comes to assessment of the
country’s self-esteem. Our credit-worthiness, poverty level, comparative
position in several other Human Development Indicators and ability to protect
against environmental hazards are all decided by outside agencies which have no
independent means to judge us other than data fed by our own agencies within
the country.
It is comforting to see
that a change in approach in Delhi through various initiatives including the
effort to promote slogans like ‘Make in India’ and acceptance of the need for
infusing professionalism in governance and better financial sector management
have started yielding results.
All these point to the need for India to set up an internal
agency capable of collecting and interpreting data to the country’s advantage. Now that NITI Aayog has relatively less
responsibilities, this body could be entrusted with the task of making the
existing organisations responsible for compilation of statistics and rating the
country in relation to other countries with reference to different parameters
factoring in purchase power parity and aggregate resources availability and
institutions like banks using internationally acceptable standards. If existing
organisations are irreparably incompetent, new ones should replace them fast.
Global rating agencies have a habit of running
with the hare and chasing with the hound! Moody’s capsuled its own positive
note last time, with a warning that India’s rating can be upgraded only if
evidence emerge in the coming months that efforts to enhance growth and
stabilise economic and institutional reforms are succeeding and there will be a
downgrade, if economic, fiscal and institutional strengthening appears
unlikely, or banking system metrics remain weak or balance of payments risks
rises”. Such stances which are regular ingredients in ‘global’ rating agencies’
prompted me to make the following averments a couple of years back:
“…Time is opportune for
India to think in terms of setting up a rating agency of international standard
which will understand India and advise stakeholders about the health of
domestic financial institutions and provide crucial input to the financial
institutions and governments abroad with which India has dealings. Agencies
like Standard & Poors and Moody’s are doing their work within their
limitation and even they would be benefited if an internationally acceptable
rating agency comes into being in India.”(Page 15, “Banking, Reforms
&Corruption: Development Issues in 21st Century India” By M G Warrier).
IMF
view
In response to a recent
observation by the IMF Chief while in India to the effect that ‘When adjusting
for differences in purchasing prices between economies, India’s GDP will exceed
that of Japan and Germany combined. Indian output will also exceed the combined
output of the three next largest emerging market economies-Russia, Brazil and
Indonesia’, I had commented that ‘India’s toiling masses, entrepreneurs and the
availability of resources within the country have not changed overnight and
what forced some ‘celebrities’ and international rating agencies turn positive
on India was the prevailing confidence of the Indian people, infused by the
political and financial sector leadership provided by Narendra Modi and Dr
Raghuram Rajan.
India has a tradition of
self-reliance. The following stanza from Gita emphasises the need for
self-reliance:
“Uddharedaatmanaatmanam
Naatmanamavasaadayet
Aatmaiva hyatmano
Bandhuraatmaiva Ripuraatmanah”
(One should lift oneself
by one’s own efforts and should not degrade oneself; for one’s own self is
one’s friend, and one’s own self is one’s enemy.)
(Bhagavadgita,
6.5)
Aid and poverty alleviation
Misleading comparisons are not a
unique feature of releases from rating agencies. Data usually get doctored or
edited or misquoted while presenting poverty figures or while preparing
documents to make presentations on social responsibility initiatives. Just to
give one example, the Gates Foundation 2014 Annual Letter mentioned the names
of eleven countries which were former recipients of foreign aid that have
grown so much that they receive little
aid today. A cross-check showed that the eleven countries listed as former
recipients of aid together had a population of just 51 crore and about 25
percent of this population under poverty line.
Back in India (a country with a
population of 125 crore of which 30 per cent still remain below the Poverty
Line) NITI Aayog has taken a stand not to estimate its own poverty line. Still,
poverty elimination (as has been achieved only in Singapore with a population
of 56 lakhs on this part of the globe) there is a need to have a nationally
accepted method to arrive at poverty line- even if the line for different
geographical regions within India may vary- and that method having the sanction
of NITI Aayog and GOI. This is because several government schemes for poverty
alleviation(now poverty elimination) relate the eligibility criteria to poverty
line.
International comparisons, fear of
loss of image if the number of those below poverty line goes up during a
particular period, total disconnect of poverty line or comparable indicator for
different countries with purchasing power parity and several other constraints
make poverty estimation highly subjective and sometimes prejudiced in India. Economists
and consultants help out policy makers in such situations by creating confusion
with figures. There cannot be a better method than the one based on spending
capacity and purchasing power of the rupee.
Once NITI Aayog decides on the
poverty line for the purpose of extending benefits under central schemes, some
agency should estimate and publish information about Indians living below
poverty line and proportion of the population with (a) capacity to spend double
the expenditure ceiling for poverty line (b) capacity to spend four times the
ceiling (c) capacity to spend eight times the ceiling and (d) others. Such an
estimation will help policy makers to revisit some of the concepts on which
poverty alleviation and financial inclusion efforts are based.
It is agonising to see
the dependence of the Indian elite which waits for a Prime Minister to speak
from the ramparts of Red Fort to take cleanliness and toilet facilities for all
seriously or to move forward in the direction of indigenous minting of coins or
producing quality paper and ink inside
India for printing currency notes. Successive RBI Governors have expressed
their concern about reliable current data to base their policy decisions. These
are areas where perceptible improvements can be made without ‘huge’ financial
investment.
Now that NITI Aayog has
relatively less responsibilities, this body could be entrusted with the task of
making the existing organisations responsible for compilation of statistics and
rating the country in relation to other countries with reference to different
parameters factoring in purchase power parity and aggregate resources
availability and institutions like banks using internationally acceptable
standards. If existing organisations are irreparably incompetent, new ones
should replace them fast.
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(MG
Warrier is former general manager, RBI, Mumbai. His email ID is
mgwarrier@gmail.com)
*Submitted
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