The Hindu Business Line : We need to educate users on the meaning of ratings: Fitch

“But given the strong growth (in the economy) seen during the past few years, and the current estimates, we expect the impact will be low – impacting sentiment more than performance.”

D. Murali

Chennai, Aug. 23 What does the sub-prime crisis mean to Indian investors? Do you expect to see any impact of the crisis on Indian financial institutions and businesses?

“Regarding India, our own read is there is no direct impact as the ba4ks have no or virtually no exposure to sub-primes. The Indian banking system still remains relatively insulated from the global one,” says Mr Amit Tandon, Managing Director Fitch Ratings India (Pvt) Ltd, in response to these currently widespread anxieties.

If that is reassuring, he hastens to add that the banking system and business may however be impacted to the extent global liquidity dries up, or risk recalibrated – again impacting flows to India.

“But given the strong growth (in the economy) seen during the past few years, and the current growth estimates, based on information we have reviewed, we expect the impact will be low – impacting sentiment more than performance.”

Here, he takes on a few questions from Business Line, over the email.

Does Fitch rate sub-prime products, across the globe?

As a full service agency, we cover all parts of the debt capital markets, including sub-prime residential mortgage securitisation.

With the rating agencies under focus (as in the case of the EU) what is Fitch’s response?

We have a regular dialogue with the regulators.

In Europe, we have a formal meeting annually with CESR (the Committee of European Securities Regulators) to review developments over the year (already scheduled for early October this year).

This year’s European review was already scheduled to look at structured finance (back in the spring). CESR have as a result already been taking formal market soundings through a public consultation process specifically on structured.

We have been actively participating in this consultation.

We are also actively participating in the parallel work being done by IOSCO (the International Organisation of Securities Commissions) to review structured finance ratings.

Generally, we welcome the input of regulators and have additionally pro-actively been meeting with major supervisors and central banks over recent months specifically to discuss ways in which we may take our rating scales forward, new elements that can be included and how users of ratings can be kept better informed on risk.

What are the lessons of the crisis?

One early conclusion we can draw among others is that we need to educate users more on the meaning of ratings, and the limitations of what they can express (i.e. they are not based on our expectations of how an instrument will price, or how those prices will develop in the market, but instead address relative default and loss considerations).

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