credit rating agencies: Sebi introduces expected loss-based rating scale for credit rating agencies

New Delhi: Credit rating agencies will now be required to provide expected loss-based ratings for projects and instruments associated with the infrastructure sector, with markets regulator Sebi putting in place a new framework. The watchdog has introduced the expected loss-based rating that is divided into a scale of seven levels, spanning from lowest to highest expected loss.

The new scale will be used by the credit rating agencies for ratings of projects or instruments associated with infrastructure sector to begin with, Sebi said in a circular on Friday.

Lowest 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 on 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 indicate highest expected loss.

Sebi said all the provisions in the latest circular except those pertaining to standardisation of rating scales, will be applicable with “immediate effect” for Credit Rating Agencies (CRAs).

In order to standardise the usage of rating scales, CRAs have been asked to align their rating scales with the rating scales prescribed under the guidelines of respective financial sector regulator or authority in terms of CRA Regulations, or in absence of the same, follow rating scales prescribed by Sebi.

In cases where a rating scale has not been prescribed by a financial sector regulator or authority, CRAs will only use rating scales prescribed by the Sebi from time to time.

“The CRAs shall ensure compliance with the requirements of this circular, latest by March 31, 2022 and also place the compliance status of this circular before their Board of Directors.

“Further, the CRAs are advised to confirm compliance of this circular to SEBI latest by April 15, 2022,” Sebi said.

The provision in the circular related to standardisation of rating scales will be effective from April 1, 2022.