It's herd mentality to blame rating agencies: India Ratings

"Sometimes there is a herd mentality to blame the rating agencies, if you do not find anything else to blame," India Ratings' Managing Director and CEO Atul Joshi said.

Last Updated: Mar 24, 2013, 15:37 PM IST

New Delhi: Terming Indian regulations for credit ratings as very effective and forward-looking, global giant Fitch's India unit head has said that at times there is a herd mentality to blame rating agencies for every financial problem.

"Sometimes there is a herd mentality to blame the rating agencies, if you do not find anything else to blame," India Ratings' Managing Director and CEO Atul Joshi said.

India Ratings, formerly known as Fitch India, is a wholly-owned subsidiary of global ratings major Fitch group.

Ever since a financial crisis broke out in the US in 2007-08, credit rating agencies have been often blamed for predicting a rosy picture of large banks and other institutions even when they were on the brink of collapse.

In an interview here, Joshi also said that there may be a need to make the investors familiar with the meaning of various ratings and symbol, but the regulator Sebi has defined various ratings in a very effective manner and agencies keep on addressing these issues through investor education programmes.

When asked why the rating agencies follow symbols like AAA, AA+ and BB-, rather than simpler terms like excellent, good, bad or average for creditworthiness of the entities, Joshi said: "In ratings space, there are always things between black and white, and moreover there are many shades of grey as well."

"If you have to move from black to white or from white to black, you come across a number of other shades. For example, there is not just day or night in 24 hours. There are also mornings, noons, afternoons and evenings," he said.

Joshi further said that the broad users of ratings were typically are institutional investors, HNIs, bankers, insurance companies and FIIs, who have their own credit departments doing their own research and analysis.

"The money invested by them is not a few thousands, but hundreds or thousands of crores of rupees. So they like to know more details and understand the different shades of grey," he said.

Joshi further said that Sebi has given definitions for different ratings, explaining what all these symbol means and the agencies need to follow the directions given by the regulator in this regard.

"We are required to assign ratings from an already defined set of ratings and rating symbols defined by the regulator," he added.

"The Sebi definitions for various ratings and symbols are very clear. The symbols are given so that the entities with different ratings could be differentiated easily.

"With different ratings, mostly it becomes easier for the investors in the first look to understand that one company is better than the other.

"The confusion arises when you are talking about cross-over or near cross-over ratings, such as BBB+ and A-. These are the instances when an investor would need to look at the definitions and understand the difference.

"But, by and large the ratings have been classified in such a way that intuitively people get to know whether a rating is good, bad or poor," he said.

Joshi said that India Ratings also lists out the triggers for its upgrades and downgrades and these triggers are very quantitative in nature.

"We give a very forward looking trigger, where we would say that there could be a downgrade if the debt level of a company reaches a certain point.

"These triggers help investors take an informed decision, as they can track whether the trigger point is getting closer or not. Similarly, we say there would be an upgrade if the company meets certain trigger points," Joshi added.

Praising the forward-looking approach of India regulators, he said that India got its rating regulations right 11 years ahead of most of the advanced economies.

"There is a decent amount of oversight, inspections, reviews etc. One of the major areas where the world today looks up to India is the forward-looking and conservative approach of financial regulators.

"There was a time when we were criticised for our conservative approach, but in times of crisis this conservatism along with a forward looking approach has paid off well," he said.

Joshi said that there not been any credit meltdown in India and therefore it was anyway incorrect to compare the Indian experience with the global scenario.

"Our regulators have always been forward looking, be it RBI or be it Sebi. If you look at developed markets, there were not any effective regulations for rating agencies till 2008 or so. But we had such regulations in place way back in 1997," he said.

"For the criticism levelled against rating agencies, I think that people do not look at the transition and default data.

"I'm not saying that there was no blame that rating agencies could take for the financial crisis, but mostly it is a herd herd mentality to blame the rating agencies if you can not find anything else to blame," he said.

Joshi said that the data for the last hundred years is available in public domain on the websites of the rating agencies and they show that the agencies have very accurately predicted the transitions and defaults.

"Markets even today continue to price to the rating. People feel more comfortable using ratings as benchmark and they now that ratings are assigned on the basis of a huge amount of data spread across all geographies of the world," he said.