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RBI Rules Squeeze Small Firms & Agencies
27 May
Summary
- New RBI rules effective April 1, 2027, tighten credit access.
- Stricter capital requirements impact smaller rating agencies.
- Borrowers refusing to cooperate face higher borrowing costs.
The Reserve Bank of India has introduced a new framework for external credit assessment institutions, slated to take effect on April 1, 2027. This policy is anticipated to restrict credit accessibility for micro, small, and medium enterprises (MSMEs) and intensify pressure on smaller credit rating agencies.
Industry experts suggest the framework's stricter capital requirements, tied to borrower ratings and agency default performance, may lead banks to favor larger agencies. Smaller agencies, often rating mid-sized firms and MSMEs, could face disadvantages. Companies classified as 'Issuer Not Cooperating' (INC) for over six months will see increased risk weights and higher borrowing costs.
These changes align India's banking regulations with Basel III reforms. MSMEs, crucial to India's economy, rely heavily on smaller agencies. The RBI's framework monitors agencies' default rates, potentially impacting banks' capital holdings. Experts advocate for a review of the mechanism, especially concerning how defaults are measured.
The framework measures defaults by borrower count, not value, which experts argue creates a bias against smaller agencies rating numerous smaller, vulnerable entities. This disparity gained attention following the 2018 IL&FS default crisis, despite the company holding top-tier ratings. The regulatory push for stricter oversight aims to enhance credit system reliability.
