There is a need for an emerging market rating model: Exim Bank

Interbank cooperation is one the key aspects of the BRICS summit. It can go unhindered by ongoing political activities. Spelling out the plans to take interbank cooperation among countries, New Development Bank chief KV Kamath and Yaduvendra Mathur, CMD of Exim Bank, say that a global framework has to be aligned to see that political risks don’t go up, when cross border lending operations trade and other issues are addressed. Mathur says that there is a need for an emerging market rating model to address investor concerns. “The current rating models are not giving the granularity when it comes to distinguishing within emerging economies,” he adds. Below is the transcript of KV Kamath and Yaduvendra Mathur’s interview to Latha Venkatesh on CNBC-TV18.

Q: One of the things I learned from the chairman of the various development banks is they are all in favour of an alternative rating agency. Your brainchild, you always argued for it, so when you were even before the creation of the BRICS?

Kamath: The thought needs to be further deliberated on. Where I come from is the fact that we need to also have a buy in from the investor that when we have finally rated the country or an instrument or a company that we have a buy in from the investor. That is something that we will deliberate on, this is something that we have agreed we will work further on and I look at it on that context.

Q: Is that only your next worry that there has to be a buy in by the users? The creator themselves are on the same page, the BRICS nation?

Kamath: I need to understand from all of them where they are on the page. However, I am looking at it purely from a technical point of view. What form and how do get buy in, is something that I am sure that technical group will have to look at.

Q: As you were presiding over the interbank cooperation meetings did you get the sense that FY17 will be a calmer year, a year of growth for emerging markets?

Mathur: Most certainly, I think the cooperation framework is only one of the measures but I think the reform agenda in the main led even in India so as one of the most stable macroeconomic reforms in India in no small measure have really contributed.

However, going forward I do feel that with the stable world and with other concerns which enhance political risks once they are strongly addressed including destabilised economies due to war and strife and other terrorist activities so these events are where the banking system is also getting impacted. I do feel the strong political message going out that if we need to address these concerns where political risks need to come down and a global framework has to be aligned to see that political risks don’t go up when cross border lending operations trade and all are addressed.

So, we did agree to continue the strong cooperation which was set in place over the earlier meetings and the working groups on local currency financing, on financing of innovations, high tech activities should be financed cross border as well as on staff exchanges in personnel, so these three working groups will now have two more working groups. One is looking at the technical issues of a new rating an alternate model and I completely agree with president

Kamath’s concerns on seeing how the new rating architecture would actually address the concerns of investors. So, I do feel there is a need for an emerging market rating model. So, the current rating models are not giving the granularity when it comes to distinguishing within emerging economies. That is one thing which was clearly acknowledged and going forward we would love to see traction on that. The other is the great initiative on the knowledge, on a knowledge institute, the virtual kind of a framework to begin with.

We would be guided by KV Kamath’s leadership on taking the newness of the new development bank to include not only Development Finance institutions (DFIs) under the cooperation mechanism but DFIs worldwide. I think the world DFI ecosystem is looking forward to this strengthening of the DFIs. Q: Time permitting, I will come back to the rating agency, but  Mr. Mathur raises an important point about world development financial institutions.

Q: What is your sense? Will the NDB shortly have more members?

Kamath: This is entirely a matter for governors to deliberate on. They will be expected to think on this in the coming years. But we in the interim have to make sure that our foundation is firm amongst the members, we have laid out a path as to how we will govern and how we will proceed. All this is stated in our charter as it was, but with the actual experience, we can then take a look at how to proceed on this front.

Q: To come back to the rating agency, what is the next step we should expect? Do you have a timetable when a rating agency might be in place?

Kamath: This is something that the mechanism was looking at and it was being underpinned by work done in India. So we will have to understand the work done and to look at it in a larger context. To talk on the same subject, but in a slightly different context is important. That is my one year of engagement now, as a multilateral development bank (MDB), clearly indicates that there are things that we need to discuss with rating agencies and there are certain seminal things that come up. Today, you have well laid down Basel norms. It looks to me that we are adopting norms when looking at MDBs and these sort of institutions which are significantly tighter than Basel norms. When your counterpart is a sovereign, you have a yard stick which is tighter than commercial banks. To me as a commercial banker, I need to understand this better. With all the risks that are there in the commercial banking field. So, why? If you could have a better leverage, for example, you could do much more with the capital that you have.

Q: But was there is a buy-in for that idea that the development finance institution (DFI) like MDB is being backed by sovereigns?

Kamath: No, it is not only now an MDB issue. I think it is a much larger global MDB issue because I have been raising this for the last one year and now, there is traction that this indeed is an issue. So, there could have been a reason why this was so for the last seven decades or so, but I am saying in today’s context, where the regulatory context, where the Basel level showing us, in a way, a path forward, we need to then recalibrate as to whether the way we are rated and the way we are looked at is appropriate or needs change. And I am sure this is going to be part of the process of dialogue going forward. And I am sure this would have weighed in the context of wanting to set up your own. So, there is, I would think a background to this which needs to be further discussed in a wider rating context globally. Q: Those are two different issues although they are related, I agree. Kamath: But one stems from the other. Q: But, what is your sense that these issues will be resolved, ownership of the rating agency as well, how would it be an alternative? Where would it be and how would it be different?

Q: All these questions will be answered in a year you think?

Kamath: I would think that the technical rope should work on it and I am sure we will have outcomes which will allow the path forward as we go along.

Q: A question on inter-bank cooperation yielded by this eighth summit itself. Are there any new projects that the other development banks said they would finance in India or in any of the BRICS countries, though of course, I am more interested in whether any projects for India were discussed between you on the sidelines.

Mathur: Not specifically, because those are conversations going on bilaterally. So on the bilateral front, all these five banks and other financial institutions have been engaging and under the framework, we have agreed on documentation exchange, exchange on best practices, and sharing project financing, skill set. So, those are very critical issues and there is a lot of experience that India has brought on the table in financing projects and good governance and taking forward into third countries and the mechanism would get strengthened now with this cooperation we will enter into with the new development bank tomorrow. So, that would really close the circle which was started many years ago. And with the NDB being the fulcrum around which all these institutions would engage, as President Kamath mentioned today in the meeting, there would be a newness and there would be a new global financial development architecture in which our south-south cooperation would really stand out.

Q: Was there any discussion on a common bond market? India does not have too much to boast in terms of a corporate bond market, they are mostly held to maturity bonds, but any first steps?

Kamath: There was a discussion today on the need to understand each other’s bond markets and the next steps on that front. So, what you are seeing probably is an end game, but we are definitely taking a look at the first steps in this and if you recollect, when I talked about local currency financing, it becomes important to understand each other’s markets and see what could be done because it is not just provision financing, it is not just NDB taking or raising money. It is facilitating trade and understanding of each other’s markets becomes critical. And one of the sub-groups that were proposed today is a technical group looking at this very subject to try to reach an end game as we go along. Just to touch on the earlier point that you made about the pipeline and the things of that order on the project front, we had a very good exchange in the meetings today and I find that at least two or three of the banks who have a pipeline which they would discuss with the NDB in terms of going forward. So, it is very productive from that sense.

Q: Are there any Indian projects?

Kamath: Indian projects, we have a pipeline from the government. It is from the other countries where we are trying to work on developing a pipeline that probably there is something ready which we can work on.

Q: You have already raised a renminbi bond. Will you be raising a masala bond shortly?

Kamath: Our idea was to raise up to USD 10 billion in renminbi which we have approval for. We have raised the first strand there of USD 3 billion as a green bond. And in the rest of it also, we will possibly raise as a green bond because we have demand for green energy from China itself. The next step is India and I would hope that in the first quarter of the coming calendar, we should be ready to tap into an offshore bond issue. And we will discuss at least on the sidelines here, opportunities in both Russia and South Africa to start with in terms of accessing later in the calendar, maybe second quarter local bond issues. And of course, we will also work on the hard currency issue. But clearly to me, the newness and the interest that I see in our member countries, one of the thoughts was standing on your own feet. Push this thought of standing on your feet is extremely satisfying that the countries are making this move and understanding that there is an alternative to what we have been doing. As I said yesterday, when we talked, that all of us, some total will do, is going to be only a small part of the development needs. But if we can bring innovation and difference, make a difference in this context, we would have taken first few small steps.

Q: What do you think is going to be state of the global economy? Does it look to you that tremors in the BRICS countries are behind us? Not only will we not see a repeat of the fragile five or the fragile three or a fragile three, but will be economic development better in the emerging markets in 2017?

Kamath: If you look at where the most tremors were, there were all commodity driven and oil is correcting quite sharply and we hope that as we see settling down of the global economy, the other markets will also improve. And it should take them not too much time for these economies to get back to their earlier growth rate. So, I do not think it is that fragile going forward. And in any case, we cannot take any decision based on a one or two-year ratio. We have to look at this as a longer term issue. So, I am not too concerned about fragility at this point in time. I am looking at it as a long term thing which we need to build a foundation and delivery on.

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