Rising defaults: SEBI unveils wider disclosure guidelines for credit rating agencies

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Updated: June 14, 2019 6:57:20 AM

The CRAs will also have to comply with a uniform Standard Operating Procedure (SOP) in respect of tracking and timely recognition of default.

According to sources in the rating agencies, the move will bring in more transparency in assessment of these agencies and ensure that quality of rating remains the same across the agencies.According to sources in the rating agencies, the move will bring in more transparency in assessment of these agencies and ensure that quality of rating remains the same across the agencies.

With rising instances of debt defaults and credit rating agencies (CRAs) failing to forewarn the investors of the deteriorating credit profiles of firms, the Securities and Exchange Board of India (Sebi) on Thursday came out with a set of wider disclosure norms for the CRAs.

Under the new framework, these agencies will be required to disclose a matrix on the probability of default (PD) for various rated instruments. The CRAs will also have to comply with a uniform Standard Operating Procedure (SOP) in respect of tracking and timely recognition of default.

“In order to enable investors to discern the performance of a CRA vis-a-vis a standardised PD benchmark scale, CRAs, in consultation with Sebi, shall prepare and disclose standardised and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run,” Sebi said.

According to sources in the rating agencies, the move will bring in more transparency in assessment of these agencies and ensure that quality of rating remains the same across the agencies.

“Right now, we publish cumulative default rates (CDRs) for all rating categories….What the regulator has been doing so far is to make us disclose these on an annual basis,” said a source from one of the CRAs.

According to analysts, the Sebi’s move will be a key step in aligning India’s regulatory norms for rating firms with global practices. The idea is to make credit decisions dependent on not just ratings given but also better understanding of the chances of default.

The regulator has said the standardised and uniform PD benchmarks shall be disclosed on the website of each CRA for ratings of long-term and short-term instruments, on a consolidated basis for all financial instruments rated by a CRA, by December 31, 2019. Sebi in its circular also stated that, in order to make the disclosures meaningful to the end users, it has been decided to mandate disclosure of liquidity indicators using standardised terminology.

As for computation of Cumulative Default Rates (CDR), regulator said that these shall be calculated issuer-wise using the Marginal Default Rate (MDR) approach and monthly static pools. “… in order to improve transparency, the CRA shall have a specific section on ‘Rating Sensitivities’ in the Press Release which shall explain the broad level of operating and/ or financial performance levels that could trigger a rating change, upward and downward. Such factors shall be disclosed in quantitative terms to the extent possible, discernible to the investors, and should not read like a general risk factor,” Sebi added.

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