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One could see a tightening of methodologies by rating agencies going forward, says CARE Ratings

Updated : June 14, 2019 10:55 AM IST

The Securities and Exchange Board of India (Sebi) has tightened disclosure norms for credit rating agencies following multiple instances of debt defaults. TN Arun Kumar, the executive director at CARE Ratings, spoke to CNBC-TV18 about the development.

“The main takeaway would be benchmark specification by each credit rating agency (CRA). Nowhere in the world the regulator has specified benchmarks rating agency should prescribe for its own ratings. So it is the first Sebi is introducing this, the idea is that we have been disclosing the cumulative default rates (CDRs) all the while but they have not been put one against the other,” Kumar said on Friday.

“So now there is going to be an evaluation of this benchmarks. Of course, the evaluation parameters will not be mentioned but the first phase would be to calculate the benchmarks in a statistical way, display the benchmarks and ultimately you will be evaluated. Ultimately all the rating agencies will have the same benchmarks,” he added.

When asked how these new norms would impact the issuers and holders of the current debt instruments, he said, “We don’t know the full impact of this because each rating agency is supposed to come with the benchmarks by December 2019. So they are supposed to do some statistical test for their past default rates, do it in a particular way. They have changed the methodology of calculation of these default rates.”

"They are supposed to come out with these benchmarks by way of some statistical analysis of the past and post that if there is any deviation, the rating methodologies will have to be fine-tuned so that the default rates are not too much away from the benchmark or do not exceed the specified thresholds. Therefore, one could see a tightening of methodologies going forward," said Kumar.
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