Keep financial products simple, exhorts FM

Written by fe Bureau | Mumbai, Mar 28 | Updated: Mar 29 2008, 05:47am hrs
Finance minister P Chidambaram on Friday said financial instruments should be simple, keeping in mind the context and stage of Indias economic development, so that investors understand the products they invest in. The finance minister also said rating agencieswhich were widely seen as partly responsible for the current global financial turbulencealso needed to get their act together.

Speaking at the launch of Crisil Complexity Levels, a first-of-its-kind pro bono initiative launched by rating agency Crisil to help investors understand complex financial instruments, Chidambaram said: There is no need to introduce in this country extremely complex and extremely risky products. That is not the preferred method of either raising money or offering avenues to the investor.

We are still at a very early stage of development. Therefore, only such products, which are justified by the requirements of the economy, must be sold. Maybe after 10-15 years, when the economy deepens, becomes stronger, there (may be) a case for very complex products. I would urge that people keep this in mind while inventing and innovating products, he said.

Chidambaram said one of the contributing factors to the global financial turbulence were the ratings offered by credit rating agencies. It was alleged that many (rating agencies) favourably rated junk collateralised debt obligations (CDOs) in the subprime mortgage business and that loan originators were guilty of packaging subprime mortgages as securitisations and marketing them as CDOs in the secondary mortgage market. Since then, many other such highly risky products have come to notice. In the

Indian context, the one that has come to our attention is currency swaps.

Some of the lending institutions have been taken to court. With the matter now pending in court, I dont wish to comment on that. The point is that products are not easily understood, no effort is made to explain the product and issuers are accused of mis-selling, Chidambaram said.