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.
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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.