The Securities and Exchange Board of India (Sebi) has prescribed guidelines to strengthen the disclosures made by credit rating agencies to enhance the rating standards.
SEBI has asked credit rating agencies(CRAs) to start disclosing a probability of default(PD) benchmark for the companies rated by them.
Probability of default(PD) is a financial term describing the likelihood of a default over a particular time horizon.It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations.
SEBI has also directed CRAs to disclose sensitive factors that could potentially impact the rating of the instruments which include financials and sector specific information.
SEBI’s directive comes in the backdrop of ILFS crisis where rating agencies had given AAA rating to IL&FS at a time when the firm was in dire financial conditions.
As a result,investors and lenders didn’t get financial status of the company at the right time which eventually led to defaults on repayments by IL&FS.
Further,this step is likely to aid investors and lenders to get an idea about the probability of default by a company, enabling them to take the right decision before the situation turns grim.
A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to pay back their interests and loan amount on time and the probability of them defaulting.
Credit rating agencies in India came into existence in late 1980s.Some of the credit rating agencies registered under SEBI are:(a)CRISIL (b)ICRA (c)CARE and (d)Fitch India.