The central bank’s direction to credit rating agencies (CRAs) in April was followed by clarifications in July that CRAs are not permitted to rely on support structures like letters of credit (LoC), letter of support, obligor-co-obligor structure, etc, for deriving rating comfort while assigning CE ratings.
Ratings based on pledged shares have also been disallowed. Such structures were used by subsidiaries or special purpose vehicles in infrastructure-linked sectors like power, roads and construction to borrow long-term funds at a lower cost.
Jitin Makkar, senior vice president and head – credit policy at
, said the revised norms could lower existing CE ratings by two notches.
“The weighted average risk weight of the affected debt is estimated to be around 35% currently, which could increase to 48% upon a potential lowering of the ratings,” Makkar said.
Icra estimates that out of the 3,000 entities rated by it, about 100 could suffer a potential lowering of the credit ratings, corresponding to ₹35,000 crore of the rated debt.
Sectors that will be impacted most would be power, healthcare, engineering, construction, and roads, which account for 60% of the total entities whose ratings could be potentially affected. These sectors account for 44% of the total debt that could be potentially affected, Icra said.
Bankers said the companies will have to bear the cost of higher interest rates as banks will have to increase the risk weights on loans which have been downgraded.
“What it means is that banks will have to revise their interest rates based on the current rating, which is lower than the previous one. For example, a company is rated ‘A’ and is downgraded to ‘BBB’, which is just at investment grade, the interest rate on its loans changes. Parent companies may totally decide to withdraw any LoCs and look for other ways to support since it is now not worth keeping that comfort,” said a senior private sector bank executive.
For banks, the capital requirements are not much as they will pass on the higher costs to their customers but projects which depend on parent support to become viable may face challenges.
Makkar from Icra estimates that a two-notch rating downgrade from ‘AA-’ to ‘A’ could lead to an increase in risk weightage to 50% from 30%. Rating agencies were given six months or till the time of next annual renewal to revise the ratings according to the new norms.
CRAs have been allowed to rely on LoCs issued by the central or state governments for
on loans.
RBI has directed that for the purpose of drawing CE comfort, the CRAs can rely only on explicit guarantees extended by externally rated third parties, including parent/group entities, or by financial institutions like banks and non-banking finance companies.
The new rating approach would be applicable for all fresh rating assignments, henceforth, which means CRAs can no longer assign CE ratings to the bank facilities that are backed by a guarantee that lacks an invocation and payment mechanism.
