Banks cannot reckon the bank loan rating given by External Credit Assessment Institutions (ECAIs) to corporates and NBFCs if the rating disclosure is devoid of the lenders’ details.
In such cases, Banks will be required to apply risk weights of 100 per cent or 150 per cent as applicable in terms of extant instructions, RBI said.
RBI noted that disclosures relating to lenders’ details are not available in a large number of Press Releases (PRs) issued by ECAIs owing to the absence of requisite consent by the borrowers to the ECAIs.
“It is, therefore, advised that a bank loan rating without the above disclosure by the ECAI shall not be eligible for being reckoned for capital computation by banks.
“Banks shall treat such exposures as unrated and assign applicable risk weights...,” the central bank said.
Underpricing of risks
RBI noted that absence of such information may result in banks applying the derived risk weights for unrated exposures, without satisfying themselves regarding adherence to prescribed conditions. This may, consequentially, lead to potentially lower provision of capital as well as underpricing of risks, it added.
Illustratively, a scenario may be assumed, where a borrower has availed credit facilities from Banks A, B and C and external rating from an ECAI is obtained only in respect of the credit facility extended by Bank A.
If the ECAI has disclosed the name of Bank A and the corresponding credit facility rated by it, then Bank A can reckon the said rating for risk weighting purpose, RBI said.
“Banks B and C are permitted to derive risk weights for their respective unrated credit facilities subject to conditions…
“In the event of ECAI not making the above disclosure, none of the banks shall reckon the said rating, and therefore shall apply risk weights of 100 percent or 150 percent as applicable in terms of extant instructions,” the central bank said.
RBI said its instructions on risk weights for exposures to corporates and NBFCs will be effective from March 31, 2023.