Missed Loan Pay­ment? Rat­ing Co can Down­grade Your Firm to Junk

Sebi asks credit raters to down­grade im­me­di­ately though banks give NPA-tag only af­ter 90 days

The Economic Times - - Finance & Commodities -

At­madip Ray & Joel Re­bello

Kolkata | Mum­bai: Bor­row­ers who rou­tinely de­lay re­pay­ment of monthly loan in­stal­ments will find it dif­fi­cult to do so as the Se­cu­ri­ties & Ex­change Board of In­dia has asked rat­ing com­pa­nies to down­grade any com­pany to ‘junk’ if it misses its re­pay­ment.

Top bankers of­ten rue the fact that many com­pa­nies pay dues just a few days be­fore the 90-day dead­line to re­tain stan­dard as­set clas­si­fi­ca­tion on their loans. A non-per­form­ing as­set clas­si­fi­ca­tion lim­its a bor­rower’s abil­ity to raise fur­ther cap­i­tal and is also seen as a rep­u­ta­tion risk.

“It is quite preva­lent among some de­ceit­ful bor­row­ers. The new rule may put a stop to this prac­tice, at least for those com­pa­nies which are rated,” a bank ex­ec­u­tive said.

Sebi has put the onus on deben­ture trustees, rat­ing com­pa­nies and the com­pa­nies them­selves to let the world know if there is a de­fault on pay­ment. Rat­ing com­pa­nies are told to down­grade rat­ing im­me­di­ately on non-re­pay­ment, even as banks fol­low­ing RBI’s as- set clas­si­fi­ca­tion norm would not term them as NPA be­fore 90 days.

“Sebi’s guid­ance would nar­row the in­for­ma­tion asym­me­try that ex­isted in the sys­tem,” said Gur­preet Ch­hat­wal, pres­i­dent at Crisil Rat­ings. “There may be short­term dis­rup­tion, if any, but in the long run, it would be strongly credit pos­i­tive for the mar­ket. It will bring more dis­ci­pline and trans­parency in credit mar­kets.”

A State Bank of In­dia ex­ec­u­tive said though banks would still go by the 90-day clas­si­fi­ca­tion rule, the new di­rec­tion would raise risk weigh­tage on com­pa­nies to be down­graded and that would have to be priced in the loans. “Com­pa­nies can no longer take it easy be­cause a de­fault of even a day will mean walls will start to close,” said Kun­tal Sur, risk & reg­u­la­tory leader, PwC.

“For banks, it means that risk of pro­vi­sions ris­ing is higher, which will also in­crease the bur­den on them.”

“This, now, means that rat­ing agen­cies have to be more alert on de­faults. This should be seen in the con­text of var­i­ous mea­sures against de­faults like the new bank­ruptcy code,” Sur said.

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