The Hindu Business Line : Rating agencies, banks differ over loan defaults

For rating agencies, delay of even one day in repayment is a ‘default’, but banks will not up their ante before 90 days, after the expiry of the due date.

Priya Nair

Mumbai, April 13 Bank loan rating, as per Basel II norms, is proving to be a bone of contention between rating agencies and banks. While credit rating agencies do not brook even a day’s delay in loan repayment, it is normal practise for banks to give companies the long rope of 90 days after the expiry of the due date when it comes to recognising a default.

The issue has come to the fore with Basel II norms on capital adequacy for banks kicking in from April 1. Under these norms, all corporates with borrowing of more than Rs 10 crore must be rated.

Rating agencies and banks appear to have different yardsticks in determining bank loan default. For rating agencies, delay of even one day in repayment is a ‘default’, but banks will not up their ante before 90 days, after the expiry of the due date. A loan becomes a non-performing asset only 90 days after the due date, as per the guidelines set by the Reserve Bank of India.

This has led to some confusion over the ratings of bank loans, as corporates and banks feel that rating agencies are taking too stringent a stand, said a senior official from a rating agency who did not want to be quoted.

The direct impact of a lower rating for a bank loan is that it affects the corporate’s ability to raise fresh capital. It also impacts banks as they have to provide for more capital for a borrower with lower rating and this in turn would mean having to charge a higher interest rate from that borrower, he said.

Risk weight

As per RBI guidelines, from April 1, 2009 onwards all fresh sanctions or renewals in respect of unrated corporates that have bank loans of more than Rs 50 crore, will attract a risk weight of 150 per cent. This would push up capital costs for banks.

On the other hand, exposures to corporates that have quality ratings would entail much lower risk weights, between 20 and 100 per cent, depending on the rating. This would result in ‘capital relief’ for banks.

“It is a procedural issue. The bank and the corporates feel that the account is a good one, even if repayment is delayed a bit and there is no need to treat it as an abnormality. But for rating agencies even a slight delay is a cause of worry,” the official said.

Some rating agencies are learnt to have taken up the issue with the Reserve Bank of India.

A senior official from a private sector bank, in charge of corporate credit, described it is an evolving issue as rating of corporate loans is a new phenomena. “A bank would see a delayed repayment merely as a temporary delay and not a default. A bank would be guided by the overall payment record of the corporate. But a rating agency has to follow its formulae and be guided by their principles while issuing ratings,” he said.

More Stories on : Non-Performing Assets | Credit Rating

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page