The markets regulatorSecurities and Exchange Board of India
(SEBI)introduced enhanced
disclosure guidelines for credit rating agencies (CRA). SEBI
asked the rating companies to disclose
the probability of default for the issuers they rate,
troubled by the raters’ track record of detecting defaults or near-defaults.
Reason
for the move:
Since the global financial crisis in 2008,
the credibility of the rating agencies has been eroding because of the conflict of interest that
arises from the fact that they are paid by the issuers to rate their securities
and for their failure to downgrade troubled firms until they are on the verge
of bankruptcy.
The recent
Infrastructure Leasing and Financial Services Ltd’s (IL&FS) liquidity
crisis among non-bank lenders in India has focused
attention again on credit rating agencies.
The
guidelines:
The rating companies must create an uniform
probability of default
benchmark for each rating category on their website, for
one-year, two-year and three-year cumulative default rates, both for the short
term and long term.
They should use marginal default methodology to
arrive at default rates. The methodology should be revised. This can bring the
rating companies in line with global best practices and increased disclosures
for liquidity and rating sensitivity factors.
SEBI defined the terms that the companies should use to describe
the liquidity position of issuer, that is, strong,
adequate, stretched and poor.
Tracking
the probability of default is
a step towards aligning Indian rules with global standards. The Probability of
default is the likelihood of a default over a particular period.
