RBI asks SEBI to act against agencies for loan rating gaps

What is the News?

The Reserve Bank of India(RBI) wants the Securities and Exchange Board of India(SEBI) to widen its role and take action against rating agencies that are found deficient in rating loans.

What does SEBI regulate currently?

Currently, It is observed that the SEBI’s enforcement and punitive actions against rating agencies have lapses in rating bonds and debentures.

But the action against rating agencies that are found deficient in rating loans are outside SEBI’s regulatory ambit.

What are the issues with SEBI regulating rating agencies that rate loans?

Difficult to Rate Loans: It is easier to rate a bond default compared to rating bank loans.

In the case of bonds, there is an intermediary, i.e., the debenture trustee who ensures that even a one-day, one-rupee default is duly disclosed. Debenture trustees are regulated by SEBI.

But in the case of bank loans, there is no intermediary. Many times, the banks and borrowers would talk among themselves to delay the recognition of defaults. Further, SEBI Act does not recognise loans provided by banks as securities. Thus, they are outside SEBI’s regulatory purview.

Issuer not Cooperating(INC) Ratings: According to SEBI norms, rating agencies have to rate the bonds throughout their lifetime despite an INC tag.

However, rating agencies have observed that many borrowers chose not to share data and be categorized as INC. Not sharing the data prevents companies from being downgraded.

For smaller sized loans of up to ₹200 crores, banks don’t ask for ratings. So, for such borrowers, the INC tag is better than a rating downgrade.

Source: The post is based on the article “RBI asks SEBI to act against agencies for loan rating gaps” published in Livemint on 30th April 2022.