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
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.