Last week, the US Department of Justice charged Standard and Poors of intentional fraud - of making 'limited, adjusted and delayed updates' to its rating criteria resulting in the agency giving favourable ratings to several structured finance papers , leading to massive losses to investors.
S&P and their ilk do not give recommendations - they just give 'opinions', and hence they have always claimed constitutional protection for freedom of speech....and so, they cannot be just pulled up for. Some argue that what happened was essentially a mistake on the part of the investor.... caveat emptor ( buyer beware !) -nothing prevented the investor from doing his own due deligence.
While this does appear to be a strong point for the agencies, there is a catch. Regulators across most countries, insist that investments made by banks and financial institutions have to be rated and they also specify acceptable rating agencies and S&P , Moodys and Fitch surely figure in most of these lists. (While rating agencies do a lot of things these days, I am not sure if the agencies would be in the pure ratings business if regulators do not insist on investments being rated). This means, they 'enjoy' a quasi-official status. Investors hence rely on their ratings to invest. There hence is a fiduciary responsibility that agencies owe - to protect investors by giving a true and objective assessment. So, while one should not take away the responsiblity of an investor to look with care before he invests, one should not also take away the responsibility of the agency to be true - particularly as the investor is directed to take the view into consideration, by regulators. And the standard of work by the agencies in discharging this responsibility has been pretty poor.
The other way of looking at this is that a seller is responsible for ensuring that his product performs to standards that it claims to have. Agencies, certify the level of standard and get paid for it. So, when the product fails to meet the standards, the seller has to be pulled up - and with him the Agency which abetted in the sale.
Any which way one sees this, the agencies need to be made accountable. Ever since the financial crisis, there have been several attempts to pull up the agencies for their flawed ratings and to regulate them. And frankly, I am happy that S&P is being hauled to courts - and irrespective of the final judgment ( or settlement), there are two possible gains :
1) Investors will not rely on these ratings beyond a point (infact, investors of sovereign debt market have begun to repudiate rating actions.
2) Agencies will hopefully become more responsible in their job.
The move by the US Gov is however surprising - why is there a case against only S&P ?... Moodys and Fitch too played their part in the crisis. Is it because the US Gov is still in a bad mood after the S&P downgrade in August 2011 ?
Showing posts with label Regulation. Show all posts
Showing posts with label Regulation. Show all posts
Sunday, February 10, 2013
Thursday, January 17, 2013
IMF's comments on the Indian Regulatory System
The IMF has recently released the India: Financial System Stability Update. While commending on the fact that the system has a tightly controlled regulatory and supervisory regime and is reasonably resilient with no likelihood of near time stress recommends certain actions, some of which merit some thought - while others are merely incremental in nature.
a) That the regime for large exposures and connected lending needs tightening in line with good international practice. The report points to the fact that the maximum level permissible at a group level including lending for infrastructure is high at 50% of bank's capital and that it needs to be reduced to 10-25% in line with international practises. While this can be a goal post over a long time period, reducing the limit steeply will reduce availability of finance to some sectors. The solution to this could be development of alternate markets for financing which will temper , if not reduce significantly , the requirement of bank finance.
b) Reducing SLR holding limits : While appreciating the fact that CRR and SLR requirements help ensure liquidity availability during crises, IMF recommends reduction in SLR holdings in Goverment Securities. The recommendation, to my mind, comes from IMF's observation of the unsavory experience with the European banks which have held large investments in Government Bonds. This recommendation fails to take into cognizance the fact in general the G Sec investment holdings in most banks is significantly higher than the mandated requirement, which in any case is being lowered in a slow manner. This also fails to take into consideration that what is held by Indian Banks is national debt ( not international debt as in the case of most European banks)and the Debt to GDP ratio of India is better than its European counterparts. Any risk of sovereign default is hence far fetched. There is also no reason to believe that reduction in SLR norms will lead to improvement in the Corporate bond market (which acceptably has to develop in the country), as what matters is the levels of government borrowings.
c) RBI nominees on PSB Boards may lead to conflict of interest: While the recommendation in theory is probably correct, the fact is that the presence of a RBI nominee helps the regulator to get information on a real time basis and thus help in supervision. It also helps act as a deterrent , preventing activities that may be inimical to the bank and the system at large. Considering the pros and cons, RBI would do well to retain this system or retain the right to use this option.
d)Insolvency framework businesses and more particularly for proprietorship firms - which are the majority businesses in the country. The amendments to the Company's Act, which provide for OPC (One Person Company) will largely address this issue.
e) International and domestic supervisory information sharing : This is being addressed by RBI considering supervisory colleges for particularly large banking organizations. RBI has already set up supervisory colleges for SBI and ICICI Bank which have significant international presence.
The report indicates that the Indian regulatory system is clearly in good shape and while being structured to suit Indian needs meets international requirements in most cases - and what will work is independent and tight regulation. 'Gaps' (if one may say so) which are there are either by design or are already being worked on. The recent crisis has exposed the weaknesses of the neo-liberal light regulatory framework that was championed by developed nations and the Bretton Wood Twins. And as they say, it is only when the tide goes down, that we know who has been swimming naked. IMF's commendation is this context is hence an interesting development.
a) That the regime for large exposures and connected lending needs tightening in line with good international practice. The report points to the fact that the maximum level permissible at a group level including lending for infrastructure is high at 50% of bank's capital and that it needs to be reduced to 10-25% in line with international practises. While this can be a goal post over a long time period, reducing the limit steeply will reduce availability of finance to some sectors. The solution to this could be development of alternate markets for financing which will temper , if not reduce significantly , the requirement of bank finance.
b) Reducing SLR holding limits : While appreciating the fact that CRR and SLR requirements help ensure liquidity availability during crises, IMF recommends reduction in SLR holdings in Goverment Securities. The recommendation, to my mind, comes from IMF's observation of the unsavory experience with the European banks which have held large investments in Government Bonds. This recommendation fails to take into cognizance the fact in general the G Sec investment holdings in most banks is significantly higher than the mandated requirement, which in any case is being lowered in a slow manner. This also fails to take into consideration that what is held by Indian Banks is national debt ( not international debt as in the case of most European banks)and the Debt to GDP ratio of India is better than its European counterparts. Any risk of sovereign default is hence far fetched. There is also no reason to believe that reduction in SLR norms will lead to improvement in the Corporate bond market (which acceptably has to develop in the country), as what matters is the levels of government borrowings.
c) RBI nominees on PSB Boards may lead to conflict of interest: While the recommendation in theory is probably correct, the fact is that the presence of a RBI nominee helps the regulator to get information on a real time basis and thus help in supervision. It also helps act as a deterrent , preventing activities that may be inimical to the bank and the system at large. Considering the pros and cons, RBI would do well to retain this system or retain the right to use this option.
d)Insolvency framework businesses and more particularly for proprietorship firms - which are the majority businesses in the country. The amendments to the Company's Act, which provide for OPC (One Person Company) will largely address this issue.
e) International and domestic supervisory information sharing : This is being addressed by RBI considering supervisory colleges for particularly large banking organizations. RBI has already set up supervisory colleges for SBI and ICICI Bank which have significant international presence.
The report indicates that the Indian regulatory system is clearly in good shape and while being structured to suit Indian needs meets international requirements in most cases - and what will work is independent and tight regulation. 'Gaps' (if one may say so) which are there are either by design or are already being worked on. The recent crisis has exposed the weaknesses of the neo-liberal light regulatory framework that was championed by developed nations and the Bretton Wood Twins. And as they say, it is only when the tide goes down, that we know who has been swimming naked. IMF's commendation is this context is hence an interesting development.
Thursday, October 14, 2010
Regulating MFIs
MFIs are back in the news and once again for the wrong reasons - or probably the right ones. I am not talking about the sacking of Suresh Gurumani as SKS's CEO - days after the successful IPO.
The AP CM has again raised issues about the interest rates being charged by MFIs and has sought regulation of MFIs. Reports talk of some MFIs charging effective interest rates as high as 45% and about the farmer suicides ( The average lending rate is around 27-30%). A few years back - roughly 5 years back ( during Dr YSR's time) too, the AP Gov raised this as an issue. If my memory serves me right, I remember Dr Nachiket Mor, who was then heading the agri biz (among other things) at ICICI bank flew down to meet the AP CM to sort out the issues. ICICI bank then had a large exposure to MFIs - mostly in AP . Issues have time and again been raised about the way MFIs do their business ...the only thing that remains to be done is regulation.
Most of the MFIs have ROA well above 2 % (SKS reported 3.07% ROA and Spandana - for instance reported an ROA of around 4.68%) in contrast to the ROA of around 1 to 1.5 of scheduled commercial banks ). There is a resistance among MFIs to bring down the rates. For instance SKS justified the ROA as being 'justified and appropriate' as the business was unsecured. While on the face of it , it appears a correct reasoning, the fact is that - the social / peer security structure that works when lending is done is as effective - if not more than secured lending. Most MFIs report neglible portfolios in stress ( basically overdue portfolio). The on-time repayment rates are upwards of 98% and ultimate repayment is much higher. Infact most MFIs trumpet this achivement of on time repayment when they seek funding assistance from banks , who would naturally be wary of lending money for on-lending small and unsecured amounts. It requires ingenuity to use the same point to argue both ways !
40% interest and 3% ROA are only a shade better than what money lenders make. And that ' shade better' is because these MFIs are sophisticated, organized , - some owned by management grads from premier institutions and have letter pads ....
SKS has the following mission statement
'Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need'
The only point that I used to keep pondering over was ' whose poverty are these MFI's seeking to eradicate' ?. With the phenomenal success of SKS's IPO, I think I have the answer.
The AP CM has again raised issues about the interest rates being charged by MFIs and has sought regulation of MFIs. Reports talk of some MFIs charging effective interest rates as high as 45% and about the farmer suicides ( The average lending rate is around 27-30%). A few years back - roughly 5 years back ( during Dr YSR's time) too, the AP Gov raised this as an issue. If my memory serves me right, I remember Dr Nachiket Mor, who was then heading the agri biz (among other things) at ICICI bank flew down to meet the AP CM to sort out the issues. ICICI bank then had a large exposure to MFIs - mostly in AP . Issues have time and again been raised about the way MFIs do their business ...the only thing that remains to be done is regulation.
Most of the MFIs have ROA well above 2 % (SKS reported 3.07% ROA and Spandana - for instance reported an ROA of around 4.68%) in contrast to the ROA of around 1 to 1.5 of scheduled commercial banks ). There is a resistance among MFIs to bring down the rates. For instance SKS justified the ROA as being 'justified and appropriate' as the business was unsecured. While on the face of it , it appears a correct reasoning, the fact is that - the social / peer security structure that works when lending is done is as effective - if not more than secured lending. Most MFIs report neglible portfolios in stress ( basically overdue portfolio). The on-time repayment rates are upwards of 98% and ultimate repayment is much higher. Infact most MFIs trumpet this achivement of on time repayment when they seek funding assistance from banks , who would naturally be wary of lending money for on-lending small and unsecured amounts. It requires ingenuity to use the same point to argue both ways !
40% interest and 3% ROA are only a shade better than what money lenders make. And that ' shade better' is because these MFIs are sophisticated, organized , - some owned by management grads from premier institutions and have letter pads ....
SKS has the following mission statement
'Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need'
The only point that I used to keep pondering over was ' whose poverty are these MFI's seeking to eradicate' ?. With the phenomenal success of SKS's IPO, I think I have the answer.
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