984 Who gave horns and fangs to International Credit Rating Agencies?

Bulls, deer etc. have horns on their heads for self-defence. Dogs, Wolfs etc. have fangs to split steaks they eat. But International Credit Rating Agencies which are four or five in number, seem to have horns to intimidate developing and under-developed countries, and fangs to feed on timid countries. Who gave them these horns and fangs? Not the Affluent Nations like U.S.A., U.K., France, Germany, Japan, China. But, developing and underdeveloped, poor countries like India. Why did they give? For mobilising foreign investments from Foreign Portfolio Investors (FPIs), Foreign Institutional Investors (FIIs), Foreign Individual Investors, Foreign Governments, Foreign Banks, Foreign Investment Agencies, Merchant Bankers, some of whom seem to attach great values to the Ratings given by these International Rating Agencies. But how many of those FPIs, FIIs, Foreign Governments care to check whether the Ratings made by the International Rating Agencies are accurate, and are not based on whims and fancies of the Directors/Managers of the Rating Agencies? If such checking had been done, the 2008 World Recession, following the Sub-prime Lending Crises in American Banks and the Wall Street Investment Empires such as Goldman Sache would not have taken place. Ratings obtained from International Rating Agencies, might have helped the Investment Decision-makers from embarrassment-s and loss of fat jobs, which might have enabled such decision-makers to hide under the not-too-reliable expertise of the Rating Agencies.

Criticism of Rating Agencies, by Mr. Arvind Subramanian, the Chief Economic Adviser of India

CEA's Criticism	yb-a-donkey's view
Rating Agencies have not upgraded India "despite clear improvements in our economic fundamentals" which include inflation, growth, and current account performance. Despite its rapid growth, India still has a BBB rating. China's rating has been upgraded to AA, despite its slowing growth and rising debts.	India is a Sovereign Nation. It has vast human and natural resources. It can produce any goods and services on a massive scale for exports. The export profits can be used as 'fresh investments' for setting up new export-oriented businesses, both manufacturing, and service businesses. India can also use Keynesian Investment Multiplier, by pump-priming (introducing newly created Central Bank's moneys into productive, export-oriented ventures. It can also buy required technologies. Where is the need for canvassing for Foreign Portfolio Investments, and Foreign Institutional Investments. Mr. Manmohan Singh, the Former Prime Minister of India, and the intermittant Vajpayee Government might have committed an error of judgement, or forced by circumstances, to invite foreign investments. But, the new 2014 NDA Government, there is no such compulsion. Why are we continuously begging for Foreign Investments? Have we fallen in a Foreign Investment trap? (similar to Foreign Debt Trap).
"Given this record, what we call Poor Standards, my question is - why do we take these rating analysts seriously at all?"	Instead of asking the question himself, CEA ought to have tried to answer the question. Another important observation which can be made is: Even IN SPITE OF / NOTWITHSTANDING low/mediocre ratings given by Fitch, Moodys, and Standard & Poor, India could mobilise considerable foreign investments. Hence, we should stop hankering about the Ratings given by the International Agencies. We can ignore them. If we have been paying them some subscriptions, we should stop. If we have been paying some commissions to Lobbyists in U.S.A., and Europe, we should stop.
They consistently fail to provide advance warnings of financial crisis and downgrade a country after the fact. In the US, they had given AAA ratings to mortgage-ridden securities, which later dragged down the economy and created a crisis.	Have we understood this harsh truth, too late?

Related news link

Click here to go to http://www.ndtv.com/india-news/chief-economic-advisor-arvind-subramanian-slams-rating-agencies-for-not-upgrading-india-1692288. A few quotes from this news report:

India has been consistently pushing for better ratings, which is expected to act as an endorsement to Prime Minister Narendra Modi's economic policies and help bring in much-needed investment. Since coming to power in 2014, the NDA government has aggressively chased investment - taking measures to streamline processes and bring down inflation.

But the three key ratings agencies --- Moody's, Standard & Poor's and Fitch - have not upgraded India, contending that the government needs to do more. In November, Moody's refused to upgrade India, said the economic initiatives of PM Modi's government are yet to produce results.

Among the issues the rating agencies have red-flagged are India's high debt-GDP ratio and bad assets of its banks. The agencies argue that the debt-GDP ratio, at 69%, is on the higher side and acts as a deterrent to private investment.

Personal views of ybrao-a-donkey, not intended to be imposed on others

Why should India have been consistently pushing for better ratings?
Why do Prime Minister of India's Economic Policies, need an endorsement from Foreign Rating Agencies?
Why should India aggressively chase foreign investments? We can chase domestic investments?

Is money-laundering of $100 million so easy?

Domestic Fund Flows may be moving abroad through Money Laundering Channels, and coming back to India as Foreign Investments from Hong kong, Singapore, China, Mauritius, etc. etc. If we can prevent outward flight of domestic funds, by plugging loop holes in our Foreign OUtward Remittance Systems, our Imports-payment systems, Export-Realisation Systems, there will be no need for us to beg for foreign investments.

One latest 2017 May example: A sum of Rs.6 billion (nearly $100 million) was remitted by a criminal business man in Visakhapatnam to Hong Kong, Singapore, China, ostensibly for import of software. The criminals are reported to have promoted about 30 shell Companies, opened accounts in various banks in Visakhapatnam, received funds from Kolkata collaborators, and remitted them to Hong Kong, Singapore, China, on the pretext of software imports. How easily and swiftly they could do ? Now those $100 million may be coming back to us as Foreign Portfolio / Institutional Investments.

Besides, we have to study why Indian domestic fund owners are hesitating to investment their funds in India directly, without sending them through the Money Laundering Route.

Who are these Moody's, S&P, and Fitch to prod and push India saying that "Government needs to do more". We need not do more. Who are they to say that our initiatives are not producing results?

If at all our Debt/GDP Ratio, bad assets of our banks are REALLY HIGH, that should be our headache. It is our duty to attend to them. Others need not PUSH us.

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978 Musings on Basil Convention, International Rating Agencies, Indian Public Sector Banks

Since the last many years, one question which has continually been tormenting me, without disappearing from my memory, although there is no need for me to remember it continuously, is: Should India ceaselessly promise this or that, to somebody or other, in numerous meetings, both formal and informal? Latest trigger for my this outpouring of mine, is the string of promises made by Mr. Arun Jaitley, Finance Minister of India, as reflected in Economic Times New Report dated 9.5.2017, while addressing some meetings in Tokyo. Click here to go to http://economictimes.indiatimes.com/news/economy/policy/government-open-to-providing-more-funds-for-banks-recapitalisation-arun-jaitley/articleshow/58584283.cms . According to the FaceBook Page of Hon. Shri Arun Jaitley, he might have been addressing the Investors' Round Table in Tokyo. Click here to go to the Facebook page of Hon. Arun Jaitley.

Some quotes from Relevant Links

"...Where more funds are required from the government, we will be quite willing to look at that. But once the health of the banks improve, we have also announced that the government will be willing to bring down its equity in the banks to 52 per cent and that can be used for banks' recapitalisation ..."

ybrao-a-donkey's personal views, not intended to be imposed on others, in the following paragraphs marked 'yb'

Citizens of India deposit their moneys with Public Sector Banks in India, based on their INHERENT TRUST IN THEIR GOVERNMENT AND ITS ORGAN RESERVE BANK. They do not bother about the Balance Sheets of the Public Sector Banks, or their Capital. After demonetisation, this trust of the People on their currency notes and their Banks, has temporarily got bruised. Of course, 'Time is the best healer'. This Trust has not been irretrievably damaged. It was only a temporary phenomenon.

Whether to hold 100% Capital, or 52% of Capital in Public Sector Bank, is a Sovereign decision to be taken by the Government. It is an internal affair of India. In addition, it will not be prudent for Indian Public Sector Banks to issue Shares to Foreign Investors, whether 'individual' or 'institutional'. When Private Banks in India were nationalised in 1969, one of the principles adopted was 'Public Funds should not be controlled by Private Individuals and Institutions. Reason: Private Industrialists had a dirty habit of diverting Private Bank funds to their own Companies surreptitiously. If it is not safe to allow Indian Private individuals and institutions to control people's funds deposited with Banks, where is the question of allowing Foreign Individuals and Institutions to invest in Indian Public Sector Banks?

It is not clear why Hon. Jaitley is so devotedly, and dedicatedly promising the Government's bringing down its share to 52% in Indian Public Sector Banks, to Foreigners whether existing investors or prospective investors.

This is a 1000 page subject. More to write.

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924 Why should India give undue value to the predictions made by Fitch Rating?

India is a Sovereign Country. It can conduct, manage and organise its own Economy in the best manner, which it deems fit, keeping in view the welfare of its People. Whoever in the Government of India has first started this practice of approaching Credit Rating Agencies such as Moody's, Standard and Poor, Fitch Ratings for getting the country rated by them, didn't/do not seem to have taken into consideration that this country of ours is a Sovereign Nation. The Rulers of India of those days, might have, in their haste and hurry, and idiotic craze to mobilise foreign investments, might have succumbed to the temptation of approaching International Credit Rating Agencies such as Standard and Poor, Moody's, Fitch Ratings etc. India may be, unnecessarily, paying them some fees every year, towards their services. India, may be lobbying using services of some Consultant Lobbyists with the Rating Agencies for getting improved ratings. But, this type of this do not befit a Sovereign Country, which claims to be the 6th Largest Economy in the world, and wants to become the World's Largest Economy in near future, at a phenomenal speed.

Context. Observations made by Fitch Ratings

Fitch Rating is reported to have commented on the capabilities of Indian Public Sector Banks:-

Fitch Ratings-Mumbai/Singapore-08 March 2017: Some Indian banks remain at risk of skipping coupon payments on capital instruments over the next couple of years; despite measures by the Reserve Bank of India (RBI) to ease pressures, and injections of government capital into state banks, says Fitch Ratings. Mid-sized state banks are the most at risk of breaching capital triggers.

Distributable reserves at small- to mid-sized state banks were down by one third in 9M17 compared with financial year 2015 (FY15, to March 2015), reflecting persistent losses and weak internal capital generation. Five state-owned banks suffered losses that were equivalent to more than 30% of distributable reserves in 9M17 alone. The RBI's recent decision to allow banks to make additional Tier 1 (AT1) coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state banks' reserves are likely to continue falling.

The RBI has made several regulatory adjustments in the last few years to avoid potential damage to sentiment in the domestic market for capital instruments. These changes have been applied to the sector as a whole and are not unique to India, but their timing suggests the RBI has felt pressure to provide headroom to state banks.

Some banks are also at risk of missing coupon payments on capital instruments as a result of breaching minimum capital requirements. Fitch's analysis indicates that the total capital adequacy ratio (CAR) of 12 banks was at or below the 11.5% minimum that will be a prerequisite for payment of coupons on both legacy and Basel III AT1 capital instruments by FYE19. There were also 11 banks with CET1 ratios at or below the 8% minimum that will be required to make coupon payments on AT1 instruments by FYE19.

We estimate that banks require around USD 90 billion in new capital by FYE19 to meet Basel III standards - state banks account for around 80% of that. State banks are constrained in raising new equity due to heavy discounts on valuations while limited market depth remains a hurdle to issuing capital instruments domestically. Banks which are capable of tapping overseas markets have been reluctant to do so due to pricing concerns. This leaves state banks largely reliant on the government for recapitalisation. The USD10.4bn that the government has earmarked for capital injections into state banks is unlikely to be enough to support balance-sheet growth.

yb-donkey's personal views, not imposed on others. Criticism is welcome.

ARE ALL THE EUROPEAN BANKS AND AMERICAN BANKS, PARAGONS OF VIRTUE?

These International Credit Rating Agencies rate European and American Banks quite favorably, overlooking their exposures and short-comings. Many Euro and American Banks fudge their Balance Sheets. Yet, these rating agencies consider the Western Banks as paragons of virtue. If they were really paragons of virtue, and exemplary Bankers, how could the 2008 Wall Street Crises take place? How could the 2008 Recession threaten the whole world? Even today, American Banks have not rectified their sub-prime lendings, either through recoveries, or by strengthening their Credit Disbursement and Supervision Methods.

It is my humble personal view that India should shed this ugly lust to get foreign investments from abroad, by getting good ratings from International Credit Rating Agencies. India should not pay any fees to these rating agencies. India should not lobby for good ratings. If no foreign individual / institutional investors do not want to invest in India, because ratings are not good, India can leave their decisions to their own wisdom(s).

It is my humble personal view that Indian Public Sector Banks need not abide even by the Basle (Basel) Capital Requirement Norms. Reason: People of India, trust Indian Public Sector Banks greatly, whether they have adequate Capital or not. The accumulation of Non Performing Assets of Indian Public Sector Banks is mainly owing to failure of Legal Enforcement Apparatus for issuance of decrees, and sale of Stressed Assets. Indian Banks should take the task of selling Stressed Assets on a war footing. Government of India should take steps to plug the loop holes in the SARFAESI ACT 2002 ( Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ) which empowers banks to auction residential and commercial properties to recover loans. Public Sector Banks should be permitted, and they should not hesitate, to sell assets even at BELOW RESERVE PRICE. Once Indian Public Sector Banks start selling high value assets both primary and collateral securities even below Reserve Prices, willful defaulters get shivering feets, and they will recycle their diverted stashed funds, to save their stressed assets.

This is a thousand page subject. Some other day, some other time.

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