Banking News

External Credit Rating Agencies: Do you know why banks need their reports?

RBI has identified External Credit rating agencies in India which can be entrusted with external credit assignment. Based on ratings assigned by recognized Credit rating agencies banks who are in possession of such rating may assert risk weight of their assets. This is in line with the provisions of the revised structure of risk weight envisaged by RBI.For the purpose of declaration of capital adequacy, banks may use the ratings assigned by any one of the following domestic credit agencies.

a) Credit Analysis and Research Limited(CARE);
b) CRISIL Limited;
c) FITCH India;
d) ICRA Limited;
e) Brickwork Ratings India Pvt. Limited (Brickwork)

Reserve Bank of India also permitted banks in India to use ratings of following international credit rating agencies for their claims for capital adequacy purpose.

a. Fitch;
b. Moody’s; and
c. Standard & Poor’s

Application of External Ratings

Banks have the options to select credit rating agencies of their choice for both risk weighting and risk management purposes. However Banks do not have permission from RBI to “cherry pick” the assessments provided by different credit rating agencies. If a bank decides to employ the ratings of particular credit rating agencies, for a known type of claim, it can use the ratings of those credit rating agencies. Nevertheless, some of these claims may be rated by other chosen credit rating agencies whose ratings the bank has decided not to use. But banks are not permitted to use one agency’s rating for one corporate bond, and at the same time using another agency’s rating for another exposure to the same counter-party. Anyway it is allowed, when the respective exposures are rated by one of the selected credit rating agencies, whose ratings the bank has decided to use. External assessments for one entity within a corporate group cannot be used to risk weight other entities within the same group.

It is obligatory on the part of banks to disclose the names of the credit rating agencies that they use for the risk weighting of their assets. Risk Weight Mapping of Long Term Ratings of the chosen Domestic Rating Agencies are as under.

Risk Weight Mapping of Short Term Ratings of the Domestic Rating AgenciesWhere “+” or “-” notation is attached to the rating, the corresponding main rating category risk weight should be used. For example, A+ or A- would be considered to be in the A rating category.

Where “+” or “-” notation is attached to the rating, the corresponding main rating category risk weight should be used for A2 and below, unless specified otherwise. For example, A2+ or A2- would be considered to be in the A2 rating category and assigned 50 per cent risk weight.

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