Credit rating agencies will now be required to provide ratings based on expected losses for projects and associated instruments in the infrastructure sector, with market regulator Sebi putting in place a new framework.
The watchdog introduced the expected loss-based scoring which is divided into a scale of seven levels, 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 as a first step, Sebi said in a circular on Friday.
The smallest 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 life of the instruments, while those rated “EL 7” will show the highest expected loss.
Sebi said that all 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 asked to align their rating scales with the rating scales prescribed by the guidelines of the respective financial sector regulatory authority or authority in terms of rating agencies, or in the absence of rating agencies, to follow rating scales. prescribed by Sebi.
In cases where a rating scale has not been prescribed by a regulator or financial sector authority, rating agencies will only use the rating scales prescribed by the Sebi from time to time.
“Credit rating agencies must ensure compliance with the requirements of this Circular by March 31, 2022 and also submit the compliance status of this Circular to their Board of Directors.
“In addition, rating agencies are advised to confirm this circular’s compliance with SEBI by April 15, 2022,” Sebi said.
The provision of the circular relating to the standardization of rating scales will be effective as of April 1, 2022.