Banks will have to treat such credit facilities unrated and assign applicable risk weights, the Reserve Bank of India said, as it tightens the noose around rating disclosure norms by credit rating firms.
To put it simply, if a borrower avails credit facilities from three banks — A, B and C and the external rating firm does not make such disclosure, none of the banks can reckon the said rating, and therefore has to follow higher risk weights norms — 100% or 150% as applicable.
If the borrower takes a loan from Bank A, B and C and a rating is obtained only in respect of the credit facility extended by Bank A, then Bank A can reckon the said rating for risk weighting purpose. Banks B and C are permitted to derive risk weights for their respective unrated credit facilities. However, the primary condition is that the rating firm has to disclose the name of Bank A.
The tightened norms will come into effect from March 31, 2023, the RBI said.
The RBI observed that such disclosures by credit companies are often not done owing to the absence of requisite consent by the borrowers.
“It is, therefore, advised that a bank loan rating without the above disclosure by the ECAI (external credit assessment institutions) shall not be eligible for being reckoned for capital computation by banks. Banks shall treat such exposures as unrated and assign applicable risk weights,” RBI said.