Whereas the framework is geared toward bettering score self-discipline, it might have unintended penalties, together with greater borrowing prices, notably for smaller corporations.
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The ECL guideline units strict default thresholds throughout score classes, that are linked to banks’ capital necessities. If a score company breaches these thresholds, lenders should assign greater danger weights to all debtors in that class, rising borrowing prices though the rankings themselves stay unchanged.
To align danger weights with score efficiency, the RBI has launched an noticed default price (ODR) criterion, which tracks historic defaults inside every score class. If a score company’s default price exceeds the prescribed benchmark, banks should apply greater danger weights equivalent to a notch decrease score grade for all corporations in that class.
For instance, the ODR benchmark for BB-rated corporations is 0.40-1%, whereas for BBB-rated corporations it’s 0.20-0.40%. Most small- and mid-sized corporations fall into these two classes.
An evaluation of score information exhibits all seven score businesses have breached the ODR within the BB class, implying that danger weights for small and medium-sized corporations might rise regardless of no change of their particular person credit score profiles.
Bankers mentioned that whereas the ECL framework had initially decreased danger weights for BB-rated loans to 100%, these advantages might not accrue to debtors in that class as a consequence of breaches in ODR thresholds. As an alternative, banks must assign a 150% danger weight to all BB-rated debtors. Lenders usually cross on the upper capital prices to debtors.
The difficulty was mentioned with the RBI at a current assembly. The RBI didn’t reply to ET’s queries whereas senior officers at score businesses declined to touch upon the file.
The framework requires businesses to make use of a four-year historic dataset from April 2023 to March 2027, a interval marked by disruptions linked to international conflicts and provide chain shocks.
On the assembly, score businesses urged the RBI to think about a extra potential method, arguing that reliance on backward-looking information might distort danger assessments.
Business individuals mentioned the framework, in its present type, might immediate debtors to shift to bigger businesses, reinforcing market dominance by established gamers and weakening competitors. Businesses have additionally flagged inconsistencies between RBI and market regulator SEBI’s benchmarks, which might result in differing therapy of the identical borrower throughout loans and bonds.
