Credit rating agencies likely to get access to loan default details

The Securities and Exchange Board of India (Sebi) is likely to come up with a framework for credit-rating agencies (CRAs) to enable them to seek information from lenders or other institutions about loan repayment or possible default by a debtor.

According to a source, Sebi is planning to amend the regulations on CRAs by adding a clause in the agreement between an issuer and a rater to provide an ‘explicit consent’ from the issuer to obtain information related to loans, repayment, delay, etc. from banks or other lending institutions.

At present, banks do not share with CRAs details of a company’s existing and future borrowing. 

Further, the board may take up the Budget proposal to increase the minimum public shareholding in listed companies to 35 per cent.

Decisions in this regard will be taken in the Sebi board meeting on August 21.

This new norm will address rating agencies’ complaints about not getting full disclosures about the potential credit risks of securities. 

Such risks are considered the possible trigger for a change in rating. Currently, RBI has no provision on this. 

With the consent in place, the matter will get resolved, said a source privy to the development. Under the rules, CRAs are required to keep track of securities and rate them accordingly. Sebi is of the view that delays in meeting bank obligations or loan defaults are easy indicators of financial health and risk factors associated with securities. 

CRAs may be mandated to incorporate the new provision in their rating agreement with issuers/clients, said the source.

This comes against the backdrop of rising debt defaults and concerns about the role of rating agencies in assessing risks. 

India’s top CRAs, including ICRA and CARE, are under regulatory glare for giving high ratings to debt instruments of IL&FS Group firms and not sending out alerts on defaults.

Sebi has been putting in place norms for CRAs since the IL&FS scam broke last year. It had in June asked CRAs to provide the probability of default for various rating instruments. According to it, rating agencies, in consultation with Sebi, should prepare and disclose standardised and uniform benchmarks for probabilities of default for each rating category on their website — both for the short and long runs. Issuing guidelines for enhanced disclosures by CRAs, the watchdog had called for having a standard operating procedure in respect of tracking and recognising defaults.  Besides, the regulator expects CRAs to disclose liquidity conditions by using simple terms like superior or strong, adequate, and stretched or poor, with explanations. 

Also, they will have to devise a model to track deviations in bond spreads.  Additionally, CRAs will now assign the suffix ‘CE’ (credit enhancement) to ratings of instruments having explicit credit enhancement. 

While modifying the computation of the cumulative default rate, the regulator has asked CRAs to follow a marginal default rate approach using a monthly static pool, a move in line with global rating standards.

Meanwhile, Sebi has initiated adjudication proceedings against the brass of top rating firms for alleged interference to ensure good ratings for IL&FS Securities Services. It recently sent two of the rating firms chiefs on indefinite leave, pending investigation.

On increasing minimum public shareholding from 25 per cent to 35 per cent, the Sebi board is likely to discuss the modalities of the proposal and reckon on various factors because there are a lot of public-sector firms yet to comply with the 25 per cent criterion.