Rating agencies look to RBI for curbing non-cooperation by companies

To be sure, the RBI has hinted in the past that it could increase the standard risk weight for unrated loans in certain cases. (REUTERS)
To be sure, the RBI has hinted in the past that it could increase the standard risk weight for unrated loans in certain cases. (REUTERS)

Summary

When companies stop sharing information that rating agencies require to maintain a watch over their credit ratings, they are termed non-cooperative

Mumbai: Credit rating agencies are looking to the central bank for a decision on their demand to penalise banks that do not share no-objection certificates (NOCs) required to withdraw ratings of companies that withhold key information, two rating agency officials said.

The issue gains significance considering that at present, more than 60% of all rated issuers or companies are estimated to be non-cooperative, and rising, they added.

According to the officials, who spoke on condition of anonymity, discussions with the RBI were initiated by the Association of Indian Rating Agencies (AIRA) to better manage the issue of non-cooperative issuers. 

The officials said rating agencies are yet to hear from the regulator on their proposal to raise risk weights on loans where companies are not cooperating with rating agencies, adding that the problem of non-cooperation was more prevalent with smaller companies than the bigger ones.

The Economic Times had reported in June 2023 that RBI sought details of companies withholding information.

Banks use ratings assigned by external agencies to decide the risk weight on loans as per regulatory guidelines. These risk weights, based on the risk perception of various loan categories, determine how much capital will be consumed for a specific loan. The higher the perceived risk, the higher its risk weightage.

“We have to spend time and resources on these ratings even as the companies do not respond to requests for data," said the first person. 

The second person said that the agencies had approached both markets regulator Sebi and RBI, but given that most of these non-cooperative ratings pertain to loans and not bonds, their efforts are now concentrated towards convincing the central bank.

Also read |  Sebi releases master circular on credit rating agencies. Details here

Bankers, on their part, denied they are holding back withdrawal of ratings. According to two senior bankers who also spoke on condition of anonymity, many companies want to change their rating agency in search of better rating since it allows them to raise cheaper funds. They said banks give NOCs on a case-by-case basis.

Emails sent to Crisil Ratings, Care Ratings, India Ratings and Research, RBI and Sebi remained unanswered, while a spokesperson for rating agency Icra declined to comment.

Sankar Chakraborti, managing director and chief executive officer, Acuité Ratings & Research, said a rating agency cannot stop covering a rating even when the issuer is not cooperating. “Both rating industry and banks need to work closely to find a solution to this problem," he said.

Experts said Sebi guidelines mandate rating agencies to carry out periodic review of the securities they have rated. “In case of non-cooperation by the issuer, CRA (credit rating agency) is required to carry out the review on the basis of best available information," said Shrishail Kittad, a partner at law firm IndiaLaw LLP.

Others said companies might conceal risks from rating agencies by selectively presenting financial data, downplaying potential vulnerabilities, or omitting pertinent information.

“They could also employ complex financial structures to obscure risks or misrepresent their financial health. Additionally, companies may attempt to influence the rating process through lobbying, providing incentives, or withholding critical information," said Jidesh Kumar, managing partner, King Stubb & Kasiva, Advocates and Attorneys.

The issue of non-cooperation

When companies stop sharing information that rating agencies require to maintain a watch over their credit ratings, they are termed non-cooperative. 

“The submission of rating agencies is that when a listed company is non-cooperative, a rating agency can still look at data available in the public domain," said the first person. "But most of the issuers are unlisted and, hence, there is not enough data available publicly to carry out meaningful surveillance." 

The first person added that rating agencies are now hoping they can move INC (issuer not cooperating) ratings out of their remit by withdrawing the ratings, when they have been classified as non-cooperative a couple of years ago. 

Also read |  Sovereign credit ratings: Give local rating agencies a chance

“Currently, lenders can give an NoC to the CRAs to withdraw the rating, but most lenders are not giving it and there should be some regulatory nudge that would tell lenders that you either get the issuer to cooperate or give an NoC. Failing to do neither should result in some penal charges," said the first person. 

How risk weights work

As per current RBI guidelines, unrated corporates attract a lower risk weight of 100% than those rated BB and below. However, corporates and non-bank financiers, except core investment companies, which were rated earlier and then turned unrated, will attract a risk weight of 150% if the overall debt from banks is more than 100 crore. For exposures higher than 200 crore, the risk weight on all unrated corporates is 150%. 

Also read |  RBI rejects reappointment of RK Bansal as Edelweiss ARC chief

To be sure, the RBI has hinted in the past that it could increase the standard risk weight for unrated loans in certain cases. “As part of the supervisory review process, the Reserve Bank (of India) would also consider whether the credit quality of unrated corporate claims held by individual banks should warrant a standard risk weight higher than 100%," it said in its master circular on Basel III capital regulations released in April 2022. 

The second person said that the problem typically lies with smaller companies and those that are not so well rated. This essentially means that their bank exposure could be below the thresholds of 100 crore or 200 crore prescribed by RBI for higher risk weights in the unrated category. “The higher rated companies are usually cooperative, but at the lower end of the rating spectrum, we see a higher proportion of companies becoming uncooperative," he said.

 

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