Ratings devoid of lenders detail should be treated as unrated exposure: RBI

Capital charge to be linked to risk weight for unrated lending

In a move that may put pressure on the capital adequacy of banks, the Reserve Bank of India (RBI) on Monday said loan ratings without information about lenders’ details should be treated as unrated exposure.
 

Capital should be set aside using risk weightings applicable for unrated exposure to companies and non-banking finance

companies.
 

The RBI said these instructions would be effective on March 31, 2023. Thus, any burden on account of higher capital charges will be in the current financial year (FY23).
 

The press releases (PRs) issued by external credit assessment institutions (ECAI) on ratings often do not have lenders’ details.

This is despite the regulator’s communication in June last year on giving the names of the banks and the corresponding credit facilities by August 31, 2021, after obtaining consent from borrowers.
 

These disclosures are not available in communications issued by ECAIs owing to the absence of borrowers’ consent, the RBI said. This may result in banks applying risk weightings without satisfying themselves regarding adherence to prescribed conditions. This can, consequentially, lead to potentially lower provisions of capital as well as underpricing risks.
 

Under Basel III capital regulations, banks derive risk weightings for unrated exposures based on ratings for a specific rated debt subject to certain conditions.
 

The bank’s facility ranks on a par (aka pari passu) or senior to the specific rated debt in all respects.
 

The maturity of the unassessed claim is not later than the maturity of the rated claim, the RBI said.