Why Moody is downgrading our Banks?Moody had downgraded State Bank of India and now it is on down grading spree on other banks of India. Why? It is not doing a disservice to Indian economy. The economic health and other parameters which are taken into account when you downgrade a bank are taken into account superficially. A Bank of State Bank of... |
There is a problem going on in Europe. Many European countries have taken debts more than their entire GDP. We are talking only Government debts. If we add debts taken by private consumers and corporates, the figure will be much larger than the GDP also. There is a possibility that these governments can't repay their debt (including principal and interest) in full. The people and organizations, who have given money to these governments might not get at least some of their money back.
If Moody's come to know as a rating agency, that Indian banks have given money to these governments, it has legitimate reason to downgrade Indian banks. Secondly, if Indian banks have given money to those people who either import from Europe or export to Europe, then also there is a possibility that these banks may not get their full amount back in a foreseeable future. In this second case (when banks are just financing import/export), not getting the money back is just a possibility - not certainty. But there is a principle in accountancy, which is called conservatism. It says that you should make all the preparation if there is even a slight possibility of loss. However, you need not make any preparation if you are expecting profit. Profit should be acknowledged only when it is actually earned.
So, I believe that by downgrading banks, Moody's has warned the banks to prepare for losses if and when they occur because of the European debt crisis.
Your question is also legitimate: do Indian banks really deserve such poor ratings, when other banks are not downgraded? In fact, most European banks are already downgraded. Moody's and other rating agencies have downgraded even the bonds issued by the governments of some European countries. The position of Indian financial system is much better than that in many "advanced" countries.
