Credit rating agencies will now be required to provide ratings based on expected losses for projects and instruments associated with the infrastructure sector, with market regulator Sebi putting in place a new framework.
The watchdog has introduced expected loss-based scoring which is divided into a seven-tier scale, ranging from lowest to highest expected loss.
The new scale will be used by credit rating agencies for ratings of projects or instruments associated with the infrastructure sector initially, Sebi said in a circular on Friday.
Lowest Expected Loss, Very Low Expected Loss, Low Expected Loss, Moderate Expected Loss, High Expected Loss, Very High Expected Loss and Highest Expected Loss will be the seven levels of the new scale.
Instruments rated ‘EL (Expected Loss) 1’ will be considered to have the lowest expected loss over the lifetime of the instruments while those rated ‘EL 7’ will indicate the highest expected loss.
Sebi said that all the provisions of the latest circular, except those relating to the standardization of rating scales, will be applicable with “immediate effect” for credit rating agencies (CRAs).
In order to standardize the use of rating scales, rating agencies have been requested to align their rating scales with the rating scales prescribed under the guidelines of the respective regulator or financial sector authority in credit rating agencies’ regulatory terms, or in the absence thereof, follow the rating scales prescribed by Sebi.
In cases where a rating scale has not been prescribed by a financial industry regulator or authority, the rating agencies will only use the rating scales prescribed by the Sebi from time to time.
“The CNAs ensure compliance with the requirements of this circular, no later than March 31, 2022, and also submit the state of compliance with this circular to their board of directors.
“Furthermore, CRAs are advised to confirm compliance of this circular to SEBI no later than April 15, 2022,” Sebi said.
The provision of the circular relating to the standardization of rating scales will be effective from April 1, 2022.