If credit rating companies publish credit ratings without disclosing the identity of the bank or banks from which the loan is obtained, banks will need to set aside more capital for the credit facilities they offer to borrowers.
The Reserve Bank of India announced that as it tightens the noose on credit rating firm disclosure requirements for ratings, banks will be required to treat such credit facilities as unrated and assign applicable risk weights.
Simply put, if a borrower obtains credit from three banks (A, B, and C) and the external rating business does not disclose this information, none of the banks can calculate the given rating and must instead adhere to higher risk weighting standards (100% or 150%, as appropriate).
If the borrower takes out loans from Banks A, B, and C, but a rating is only issued for the credit facility provided by Bank A, then Bank A may take that rating into account when calculating the risk associated with the loans. Risk weights may be derived for the respective unrated credit facilities of Banks B and C. However, the main stipulation is that the rating agency must reveal Bank A’s name.
According to the RBI, the new, stricter regulations will take effect on March 31, 2023.
The RBI noted that because borrowers frequently do not provide the necessary consent, such disclosures by lending providers are frequently not made.
“Therefore, it is proposed that bank loan ratings without the aforementioned declaration by the ECAI (external credit assessment institutions) not be considered when banks compute capital. Such exposures must be treated by banks as unrated, and appropriate risk weights must be assigned “explained RBI.
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