The Securities Exchange Board of India (SEBI) on June 13, 2019 prescribed for the Guidelines for Enhanced Disclosures by Credit Rating Agencies (CRAs). These norms aim to foster and elevate rating standards and credibility of CRAs.
SEBI has revised its methodology for calculating Cumulative Default Rates (CDR) for ensuring uniformity with global practices. CDR, as of now shall be calculated using Marginal Default Rate (MDR) method. CDR shall be disclosed by CRAs on annual basis with average one-year, two-year and three-year default rates for long-run and short-run average default rates.
SEBI has also called for uniform Standard Operating Procedure (SOP) for tracking and timely recognition of default. CRAs in consultation with SEBI are required to prepare SOP which shall be disclosed at the website of each CRA.
SEBI has also introduced Probability of Default (PD) benchmark which every CRA in consultation with SEBI is required prepare and disclose standardized and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates for long-run and short-run. The PD will be assessed on rating categories- AAA (Zero for 1 and 2 year default rate and 3 year default rate with a tolerance level of 1%), AA (Zero for 1 default rate and 2 and 3 year default rate with a tolerance level of 2%) and A (Zero for 1 year default rate with a tolerance level of 3%).
SEBI has empowered CRAs to frame procedure assessing Credit Enhancement (CE) structure for assigning the suffix ‘CE’ to the rating instruments having explicit credit enhancement.
In order to improve transparency, SEBI has directed to every CRA to make a specific section for ‘Rating Sensitivities’ in the Press Release which will disclose the factors to which rating is sensitive and will explain levels of operating and financial performance that could trigger changes in ratings.
SEBI has also mandate disclosures on liquidity indicators and tracking deviations in bond spreads. The liquidity indicators will highlight parameters such as liquid investments, access to unutilized credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc.
The disclosures mandated are issued by SEBI with intent to infuse more transparency to facilitate better judgment on behalf of the investors and provide more credibility to the rating standards.
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