Rating disruption due to moratorium will pinch markets: Raters to Sebi

Extension of moratorium also discussed with Sebi

Credit rating agencies (CRAs) have informed markets regulator Securities and Exchange Board of India (Sebi) that the disruption in the rating process, due to the moratorium, could harm financial markets.

Sebi had called a meeting of top executives from CRAs last week to discuss the economic situation and get an update on the credit quality scenario, said people in the know.

The meeting was called ahead of the maturity of debentures issued by non-banking financial companies (NBFCs), worth Rs 2.5 trillion. A large portion of these papers are facing repayment challenges, given the liquidity and payment crisis triggered by the lockdown.

The people said CRAs apprised Sebi regarding the rating action on these corporate bonds and commercial papers, which were not covered under the Reserve Bank of India’s (RBI) moratorium and sought immediate action.

Sebi is particularly concerned about these papers, given the high exposure of mutual funds (MFs), which it regulates.

Last month, the RBI had provided an additional liquidity window of Rs 50,000 crore to MFs.

The people cited above added that Sebi and CRAs discussed the eventuality of an extension in the three-month moratorium. 

Rating firms are of the opinion that deferment in rating action would be threat to the banking system.

CRAs also highlighted the categories of borrowers adding the most to loan defaults. Retail borrowers and small businesses were worst-hit, CRAs told Sebi, said a person privy to the discussion.

Rating agencies cited studies that showed rising bad loans in the small and medium enterprises (SME) sector. 

For retail borrowers, unemployment, lay-offs, and salary cuts are key reasons for the stress. As the economy slips into recession, defaults by retail borrowers could double, CRAs told Sebi.
 

Rating firms also pointed out the stress in the financial sector. 

“Real estate developers may face acute liquidity challenges, which may result in a further rise in bad loans,” said another person.

CRAs also raised the issue of sustainability of sovereign guarantee to certain loans, and whether there are sufficient guarantees for private lenders to lend money.

Sebi had issued guidelines to rating firms, asking them to avoid assigning a default tag to firms unable to pay, owing to the lockdown.

However, rating firms awaiting more clarity from the regulator to decide action on bonds.