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The brand new regulation, which might finish the apply of propping up a company borrower’s credit standing on the again of mechanisms like a ‘letter of consolation’ or ‘letter of enterprise’ from the corporate or its promoter or mother or father, comes into pressure from end-January 2023.
Thus, within the final quarter of the monetary yr, many loans given by banks could undergo a downgrade by at the very least a notch, requiring them to put aside further capital as a result of a decrease ranking means a better danger weight on a mortgage. In keeping with banking rules laid down by the RBI, a financial institution’s capital requirement goes up with the rise within the variety of ‘riskier’ mortgage property on its books.
In keeping with RBI, sure gadgets to boost rankings – and thus, decrease the curiosity price on loans – are “diluted or non-prudent assist buildings” which, not like a water-tight assure, can’t be legally enforced within the occasion of default. This exposes banks to higher dangers.
“Whereas that is comprehensible and we can’t query the knowledge of the regulator, the transition could be much less disruptive if we have now extra time. The ranking revisions can occur over the course of a yr when many loans would come up for renewal. Additionally, debtors and ranking companies can work out whether or not, within the absence of, say a letter of consolation, a downgrade might be averted with extra collateralisation. A couple of month in the past, IBA (Indian Banks’ Affiliation) had put in a request on behalf of the (banking) trade,” a senior banker instructed ET.
“We’ve got not heard something from RBI. However then sometimes, RBI does not reply. If it takes a call, it could announce it nearer to the deadline,” stated one other banker.
Whereas RBI has given ranking companies six months – from July 26, 2022, the date of its communique to CEOs to ranking corporations – to both downgrade or withdraw rankings, banks assume that such a measure ought to be launched solely within the subsequent fiscal. Extra so, due to the divergence in views of the 2 monetary market regulators – RBI and the Securities & Trade Board of India – and the anomaly it might trigger: with Sebi not insisting on discontinuance of sure assist buildings for ‘credit score enhancement’, a financial institution mortgage (lined underneath RBI rules) would have a decrease ranking in comparison with a ranking on a debenture or bond (issued underneath Sebi guidelines) by the identical borrower.
WHY NOT HIGHER RISK WEIGHTS FOR DEFIANT COMPANIES?
“Whereas this is a crucial situation, ranking companies have a much bigger downside at hand, and that is about non-cooperative debtors. It is a matter they’ve mentioned with IBA as it will want the assist of banks,” stated a ranking firm official.
Score companies consider the chance weight on financial institution loans to such defiant debtors ought to be raised and even doubled.
The refusal by many corporations to share information results in a state of affairs the place companies fee them primarily based on insufficient info – which might not totally seize the monetary well being of a borrower and its functionality of servicing a mortgage – or cease ranking them altogether.
However, in lots of circumstances, corporations and banks don’t have any nice disincentive when rankings are withdrawn. It is because the chance weight of an ‘unrated’ borrower (at 100%) is decrease than the (150%) ranking of a ‘sub-investment’ grade borrower (having a ‘double-B’ ranking).
With a capital adequacy regulation of 9%, a financial institution lending say ₹100 crore to an organization having a 100% risk-weight, will want a minimal capital of ₹9 crore; nonetheless, the minimal capital requirement will increase to ₹13.5 crore for a similar quantity of mortgage when the risk-weight on the corporate rises to 150%; and, to ₹18 crore when the risk-weight is larger at 200%.
“In a number of circumstances, corporations that are reluctant to cooperate with ranking companies belong to the sub-investment grade class with borrowings of ₹100 crore or much less. For them in addition to for the banks who lend them, an unrated mortgage is healthier than a sub-investment grade mortgage. There are sturdy grounds for RBI to boost the chance weight on unrated loans to 150% and even 200%. This might additionally push banks to nudge the debtors to get a ranking and share information with ranking corporations,” stated one other trade official.
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