RBI guidance notes on credit-enhanced ratings

Debt worth Rs 35K cr rated by Icra could be downgraded

This translates into an additional capital requirement of around Rs 400 crore for the banking system, Makkar said.
This translates into an additional capital requirement of around Rs 400 crore for the banking system, Makkar said.

Debt worth Rs 35,000 crore of 100 entities rated by Icra could be downgraded as a result of the Reserve Bank of India’s (RBI) guidance notes on credit-enhanced (CE) ratings, the rating agency said on Wednesday. The top five sectors which stand to be affected by the central bank’s diktat are power, healthcare, engineering, construction and roads, and they account for 60% of entities whose ratings could be lowered.

“Our assessment suggests that if the credit profile of these entities does not undergo any change when the review happens in the next few days, the earlier assessment or the existing rating that is outstanding stands, then based on this scenario, there could be an average impact of around two notches to the existing ratings,” said Jitin Makkar, senior VP and head – credit policy, Icra.

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Since many of these facilities are in the high investment-grade categories, the risk weights corresponding to these ratings stand at 20%, 30% or 50%, corresponding to the ‘AAA’, ‘AA’ and ‘A’ categories. The facilities collectively carry a risk weight of 35% at present, which could rise to 48% if their ratings are downgraded by two notches. This translates into an additional capital requirement of around Rs 400 crore for the banking system, Makkar said.

The RBI recently came up with certain guidance notes and FAQ documents addressed to all credit rating agencies (CRAs) concerning assignment of credit-enhanced (CE) ratings, as applied to bank loan ratings.

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The regulator has said only guarantees are to be considered as valid third-party explicit support forms. Other support forms such as letters of comfort (LoCs), letters of support, obligor-co-obligor structures have been identified as less prudent support forms by the central bank. Hence, they should not be factored in while considering the rating of any bank facilities, according to the guidance notes.

However, LoCs issued by the central or state governments and shortfall undertakings that meet certain attributes will be considered exceptions to the rule on CE ratings. The regulator has also stated in its guidance document that for ratings of debt securities or bank loans based on pledge of shares, where timely debt servicing is unlikely, the beneficiary has the right to liquidate the shares and make good the payments. Ratings where the underlying is a volatile security like a share have been disallowed by the RBI.

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