“Default (D) rating is assigned to borrowers in default or those that are likely to default soon. In certain cases, where the likelihood of a default is high in the near term, a rating of ‘D’ is assigned even prior to actual default,” said Karthik Srinivasan, group head, financial sector ratings, ICRA.
“NPA recognition by banks is governed by the RBI’s guidelines, whereby a borrower upon non-payment of dues for more than 90 days is classified as an NPA. Hence, in most of the cases, accounts that are declared NPAs by banks are already classified as defaults by the rating agencies much earlier than banks classifying them as NPAs,” he added.
“However, the ‘D’ rating is assigned on the basis of information rating agencies receive from corporates and banks. Although banks or corporates have no such compulsion to divulge such information to rating agencies. In such cases, the agencies peg their rating on the information they are in possession of,” said an executive with a rating agency.
Another point of contention is that Sebi’s earlier proposal will affect the capital adequacy ratio of banks. “Once a company makes such a disclosure, credit rating agencies will have to downgrade the company’s rating to default. Once credit rating agencies attribute the default rating, the risk attached to the loan goes up and it affects the capital adequacy ratio of the bank. In other words, banks will be forced to arrange more capital for day-to-day business,” said a banker.
“The rationale behind collaboration with rating agencies is to have a clear status on the nature of the default, categories of loan (short medium or long term), and the basis on which the company delayed or defaulted on payments to banks,” said Sandeep Parekh, founder, Finsec Law Advisor.
Banks allowed companies to pay interest after the due date, and there should be some provision to state if a default was technical, he added.
"The proposal for default disclosures to the market is indeed a great service to investors. Rating agencies are capable of advising Sebi at what point of time the disclosure should be made in the case of a default,” said Prithvi Haldea, founder and chairman, Prime Database.
Besides, the market regulator also plans to give up to a month’s time to companies for disclosing loan defaults and explain the nature of the default. Under the revised directives, Sebi may increase the “delta D” or date of default to 30 days and may give additional time to companies to make disclosures.
The default disclosure norm was hailed by many as a game-changing move that would have helped banks, which are saddled with bad loans of over Rs 10 lakh crore.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.