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New RBI Rule Jolts Credit Rating Industry
29 Jun
Summary
- RBI guideline penalizes rating agencies with high default rates.
- Banks will treat borrowers from penalized agencies as riskier.
- Smaller rating firms warn the rule could severely hurt their business.
A new Reserve Bank of India (RBI) guideline, set to take effect in April 2027, is causing a significant rift within the credit rating industry. This rule introduces penalties for rating agencies whose default rates surpass established thresholds for various rating categories.
Under this guideline, banks will be required to treat borrowers rated by agencies with high default rates as posing a greater risk. This could lead to increased borrowing costs for these entities. For example, if an agency's default rate for 'BBB'-rated borrowers exceeds 0.4%, banks will reclassify these ratings to 'BB', necessitating higher capital reserves.
Smaller rating agencies have voiced strong concerns, warning that the rule could severely impact their businesses. They argue that their smaller client base means even a few defaults could disproportionately inflate their default rates compared to larger competitors. India has seven rating agencies, including established players and newer entrants.
The Association of Indian Rating Agencies (AIRA) has submitted a request to the RBI for clarification on several points related to the calculation of default probability and cohort duration. Some agencies report that their current default rates are within the RBI-prescribed ranges, while data suggests that certain smaller agencies fail to meet the thresholds for 'A' and 'BBB' ratings.
