Singapore: Regulators Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) are working on a framework that will allow for freer and more accurate exchange of borrower data between banks and credit rating agencies (CRAs), two people with direct knowledge of the matter said.
In a meeting on 9 September, a working group of officials from financial sector regulators—which, apart from RBI and Sebi, included members of the Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority—found that default rates disclosed by rating agencies differed from what were reported on RBI’s Central Repository of Information on Large Credits (CRILC). The RBI-Sebi framework being developed is aimed at bridging this gap.
Rating agencies’ inconsistent record on downgrading ratings of borrowers over the past four years is at odds with the frequent changes in regulations. Despite six episodes of changes, the rules have failed to address the fundamental issue of flow of information from banks and issuers to rating agencies.
CRILC is a borrower-level database focusing on systemically important credit exposures. Banks report to CRILC credit information on all their borrowers having aggregate fund based and non-fund based exposure of ₹5 crore and above.
“RBI, following an internal analysis, pointed out at the recent meeting that there is a divergence in default rates computed by CRAs and the default available in CRILC," one of the two people cited earlier said on condition of anonymity.
For instance, there are non-performing assets and defaults in AAA to A papers, but this was not reflected in the rates published by rating agencies.
“This divergence is due to the banks’ reluctance to pass on any information about delays in payment of principal/interest to CRAs. Also, the CRAs do not have an access to CRILC," the second person said, requesting not to be named.
Typically, the first signs of trouble for borrowers are visible in bank accounts, so an improved flow of information on default data from banks to rating agencies would help them in timely recognition of defaults.
While this argument makes sense, there is a concern about confidentiality and legal constraints in allowing direct access to CRILC data set.
“RBI is more comfortable with rating agencies getting borrower information from credit information companies (CICs). But Sebi pointed out that there is generally a lag in the information to CICs, names of banks not available to cross-check it with the lender, and CRAs cannot cite CIC as the source of information for rating revisions. Sebi also felt that rating agencies should be given limited access to CRILC with an enabling legal framework," said the second person.
RBI is yet to agree on allowing a third party—such as rating agencies—access to this sensitive database but has agreed to address the issues surrounding CICs. RBI has initiated an inspection of CICs to assess the quality of information.
“RBI will also advise banks to update the data with CIC more frequently and to maintain the quality of the data. If banks are found lapsing in updating information, RBI will initiate action against them," said the first person.
Rating agencies have the task of providing external validation on the affairs of a company and its debt servicing capability. The spate of downgrades by several notches and recent exits at the rating agencies indicate something is amiss. This resulted in the formation of the inter-regulatory working group at the start of last year to review policies and processes related to rating an instrument.
“Since the formation of the inter-regulatory group, the regulators in consultation have introduced three sets of rule changes aimed at making the processes better," said the first person.
Jayshree P. Upadhyay is in Singapore for the Asia Journalism Fellowship, a programme of Temasek Foundation and the Institute of Policy Studies, National University of Singapore.