Ad-H Ad-H

Credit rating of Rs 35,000 cr debt could be lowered due to RBI diktat: Icra

Ad P

The Reserve Bank of India’s (RBI) diktat directing credit rating agencies to adopt specific criteria while assigning credit enhanced (CE) ratings to bank facilities could potentially lower the credit ratings of around 100 entities, corresponding to Rs 35,000 crore of rated debt, rating agency Icra has said.

The rating agency is making certain changes in its methodology for assessing explicit third-party support forms like guarantees, letters of comfort (LoC), co-obligor structures, etc.

Power, healthcare, engineering, construction, and road sectors account for 60 per cent of the total entities whose ratings could potentially be affected. These sectors account for 44 per cent of the total debt that may be affected.

Also Read: How RBI repo rate hike may impact you

According to the RBI diktat, for the purpose of drawing credit enhancement comfort, the credit rating agencies 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.

Further, the credit rating agencies have been prohibited from relying on other support structures like LoC, letter of support, obligor-co-obligor structure etc, for deriving rating comfort while assigning CE ratings. And the CE ratings are not permitted to be assigned based on credit enhancement derived through pledging of shares.

“Triggered by the methodology change, the revised non-CE ratings, on an average, could be expected to be around two notches lower than the existing CE ratings outstanding. The weighted average risk weight of the affected debt is estimated to be around 35 per cent currently, which could increase to 48 per cent upon a potential lowering of the ratings. This translates into a possible rise in the capital requirements of lenders by around Rs 400 crore, which is not material,” said Jitin Makkar, Senior Vice President & Head-Credit Policy, Icra.

mail Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Source link

Leave a Comment