Learning from the bank blunder: Roopa Kudva

I believe the global financial crisis of 2008 offers three big lessons. The first lesson is keeping things simple can help avoid problems and increase confidence. Nowhere is it more important than in financial products. The second lesson is the importance of transparency, be it greater availability of information in the system or greater disclosures by firms and market participants. And, finally, the crisis underscored the importance of strong regulatory oversight over market participants.

As market intermediaries, there have been several lessons for Indian credit rating agencies, too. Globally, credit rating agencies were caught in the eye of the storm during the financial crisis. In India, strong regulations for rating agencies — instituted way back in 1999 — and the absence of exotic instruments helped avert a financial crisis of the kind developed markets saw. Nevertheless, the questions asked about the methodologies and transparency of credit rating agencies provided us an opportunity to look at what we could change for the better. Consequently, we strengthened our surveillance processes to keep ratings current in an increasingly volatile environment. We stepped up our communication with investors by introducing the concept of Credit Alerts as we saw new risks emerging in specific sectors. And, we improved the transparency in our rating rationales, including explaining the assumptions we used in rating structured finance transactions.

An important development is improved transparency in the Indian system in recent years, which is not talked about much. Today, there are about 20,000 firms rated in India, compared with only around 1,000 in early 2008. This has significantly improved information availability — the public availability of detailed credit reports on such a large scale is unprecedented. This is helping lenders and investors take more informed decisions. Importantly, the coverage on smaller companies has brought them to the notice of investors and banks, thereby enhancing their fund-raising opportunities.

 

Roopa Kudva
MD & CEO, CRISIL