Ratings upgrade: Standard procedures to detect default for accurate guidance

Uniform procedures to track defaults along with increased disclosures on liquidity factors will aid credit rating agencies to provide grater insights into companies, industry insiders said.

Such measures, as prescribed by SEBI, are deemed significant, as in recent cases CRAs have somewhat failed to recognise defaults by the NBFC sector. A

The securities market regulator in its latest guidelines has mandated 'Standard Operating Procedure' for timely recognition of default, 'Probability of Default' and 'Computation of Cumulative Default Rates' for the industry.

"The guidelines prescribe uniform benchmarks for default rate for each rating category. At a later date, these benchmarks may be evaluated vis-a-vis actual default rates of a CRA," T.N. Arun Kumar, Executive Director, Care Ratings told IANS.

"CRAs would have to fine-tune their rating methodologies in case of deviation from benchmarks. The guidelines also prescribe disclosure of many aspects of the credit so that investors are better informed."

SEBI has introduced the "Probability of Default" (PD) benchmarks which will enable investors to discern the performance of a CRA vis-A-vis a standardised scale.

The CRAs have been mandated to prepare and disclose standardised and uniform PD benchmarks in consultation with SEBI for each rating category for the period of "one year, two-year and three-year cumulative default rates, both for short-run and long-run."

On its part, CRISIL said: "We believe these will provide greater insights into the ratings of the companies and also help all stakeholders to evaluate performance of CRAs on the basis of a more robust methodology."

"The initiative to ask CRAs to put out the standard operating procedures for monitoring and recognising defaults is a welcome step which may remove the current inconsistencies across CRAs and hence reflect true default status."

According to ICRA: "SEBI's enhanced disclosure guidelines for rating agencies are a positive step for the industry as a whole and beneficial to all debt market stakeholders."IANS