RBI asks Sebi to act against agencies for loan rating gaps
Premium- So far, Sebi’s actions against rating agencies have been on lapses in rating bonds, debentures
The Reserve Bank of India (RBI) wants the Securities and Exchange Board of India (Sebi) to widen its role and take action against rating agencies that are found deficient in rating loans, two people with direct knowledge of the matter said.
The central bank has written to the finance ministry in this regard, a move that could trigger another tussle between the RBI and the capital markets regulator.
“In March, RBI wrote to finance ministry stating that when rating agencies are found wanting in rating loans, Sebi, as the regulator for rating agencies, should initiate action," one of the two people cited above said, requesting anonymity.
So far, Sebi’s enforcement and punitive actions against rating agencies have been on lapses observed in rating bonds and debentures.
For instance, orders against Care Ratings Ltd and ICRA Ltd were issued on so-called lapses in rating non-convertible debentures (NCDs) sold by Infrastructure and Leasing Financial Services (IL&FS).
“If accepted and the finance ministry does issue any direction of such nature, it would mean Sebi’s ambit would become much wider. RBI’s stance is since all rating agencies are required to comply with Sebi’s rules, then it would be easier for the market regulator to act on them," the second person said.
Queries emailed to Sebi, finance ministry and RBI remained unanswered till press time.
To be sure, it may be easier said than done to implement RBI’s request.
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Currently, Sebi’s regulatory purview is over some 1,000-odd NCD issuers. If loans are also included in Sebi’s ambit, then its responsibilities will increase manifold.
“It is easier to gauge a bond default since there is an intermediary, i.e., the debenture trustee who ensures that even a one-day, one-rupee default is duly disclosed. Debenture trustees are also regulated by Sebi," the first person said.
“In the case of bank loans, there is no intermediary. Many times, the banks and borrowers would talk among themselves to delay the recognition of defaults. Further, the Sebi Act does not recognise loans/facilities provided by banks as securities. Thus, they are outside Sebi’s regulatory purview," the person added.
An official at a rating firm said the two regulators generally tend to adopt a coordinated approach.
“We go through a joint inspection from both RBI and Sebi. RBI itself tells all the rating agencies that they have to comply with Sebi norms. Analysing a bond and loan for rating agencies is the same process since the financial parameters of the company which has taken a loan or has issued an NCD remain the same. For the market regulator too, in all probability, it would mean analysing the same set of facts and data, whether it is for loans or bonds," the official said, asking not to be named.
Another issue is of INC or issuer not cooperating ratings.
According to Sebi norms, rating agencies have to rate the bonds throughout their lifetime despite an INC tag.
“The rating agencies have observed that many borrowers chose not to share data and be categorised as INC. Not sharing the data prevents the companies from being downgraded. For smaller sized loans of up to ₹200 crore, banks don’t ask for ratings. So, for such borrowers, the INC tag is better than a rating downgrade," the official said.
Credit rating agencies have been asking Sebi to resolve this issue with the RBI since the start of the pandemic, but a resolution has yet to be arrived at, a second rating official said.
“We are seeking that Sebi allows us to withdraw ratings of these borrowers. At the start of the pandemic, there were some 10,000-odd borrowers not cooperating. Now there are some 20,000 issuers and borrowers who do not carry any meaningful rating. The delinquencies in rating smaller borrowers have increased during and post the pandemic," the official said.