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- The Securities and Exchange Board of India (Sebi) has prescribed guidelines to strengthen the disclosures made by credit rating agencies to enhance the rating standards.
- SEBI has asked credit rating agencies(CRAs) to start disclosing a probability of default(PD) benchmark for the companies rated by them.
- Probability of default(PD) is a financial term describing the likelihood of a default over a particular time horizon.It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations.
- SEBI has also directed CRAs to disclose sensitive factors that could potentially impact the rating of the instruments which include financials and sector specific information.
- SEBI’s directive comes in the backdrop of ILFS crisis where rating agencies had given AAA rating to IL&FS at a time when the firm was in dire financial conditions.
- As a result,investors and lenders didn’t get financial status of the company at the right time which eventually led to defaults on repayments by IL&FS.
- Further,this step is likely to aid investors and lenders to get an idea about the probability of default by a company, enabling them to take the right decision before the situation turns grim.
- A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to pay back their interests and loan amount on time and the probability of them defaulting.
- Credit rating agencies in India came into existence in late 1980s.Some of the credit rating agencies registered under SEBI are:(a)CRISIL (b)ICRA (c)CARE and (d)Fitch India.
