MPs' panel for dilution of default definition, but RBI flags concerns

The Reserve Bank of India (RBI) has shown its reservation on reviewing the definition of default. This is a key parameter for credit rating agencies (CRAs) to assign ratings to commercial papers of corporates, even as a parliamentary panel insisted on relaxing the norms. 

The parliamentary committee on subordinate legislation, in a meeting held on Monday, had raised the issue with regulators and the ministry of finance. It sought to soften stance on default criteria which restrict banks to finance low-rated firms. 

Further, such classification of firms into the default category also prohibits them from coming out with debt papers.

The commercial or debt paper is the favourite route of corporates to raise funds when compared with loans from banks. They help meet short-term working capital requirements.  

Sources said companies once categorised in the “default” or “poor” ratings category do not get finance from banks. People who attended the meeting are learnt to have cited certain examples where companies are on the verge of collapse due to the strict approach by banks. Besides RBI, the meeting was also attended by officials from the Securities and Exchange Board of India (Sebi), department of financial services, public sector banks and rating firms.

The meeting also highlighted the whole rating process and discussed how once the instrument of a company gets downgraded, it takes time to upgrade it. 

A rating takes at least a year’s time to come back to investment grade from default status.

According to the CRA guidelines, BB and below ratings are considered speculative grading and above BBB is considered investment grade. The RBI guidelines deal with the definition of curing period, while the time-frame of curing are under Sebi rules.

Based on the RBI guidelines, the capital market regulator, too, has definition of default across various instruments. For instance, in case of term loans, working capital loans, bonds, fixed deposits, certificate of deposits and commercial paper, a default is said to have occurred if there has been a delay of even one day of even one rupee (of principal or interest) from the scheduled repayment date.

For buyer’s credit, packing credit and bill purchase overdue of over 30 days is considered default. Rating agencies normally follow a rating scale that ranges from AAA (highest safety regarding timely servicing of debt) to D (default or expected to default soon).

Rating agencies have been largely blamed for their lax policies and oversight for the 2008 global financial crisis. This primarily spawned from junk-type mortgage bonds and their derivatives worth trillions of dollars that the Wall Street bankers invented and hawked across the globe to get AAA ratings and finally imploded. In the IL&FS matter, rating agencies India Ratings, ICRA and CARE had given its debt papers AAA/AA+ ratings a month before it defaulted in September 2018. 

In the 25th edition of the Financial Stability Report (FSR), the RBI warned of rating shopping by companies for long-term bank loans. This is based on indicative ratings given by CRAs which are not available to banks or investors.