The Hindu Business Line : Recovery ratings of NPAs soon

Mumbai, Sept. 9 Distressed or non-performing assets can now have a better market with the credit rating agencies offering to rate such assets. The rating agency will assign the rating on the basis of the possibility and extent of recovery from a defaulted or non-performing asset through its recovery rating mechanism.

With the banking system in the country flooded with more than 70,000 NPAs, there is a huge market emerging for such ratings, feel some bankers. “A third-party evaluation of an NPA will add more credibility and investors will feel more comfortable investing in such assets backed by such ratings,” said a senior bank official with a public sector bank. He felt that this would create a large secondary market for NPAs. So what is recovery rating? Recovery rating is a process of assessing the extent and possibility of recovery from a defaulted asset or NPA. “In recovery rating, what is typically assessed is the extent of recovery that is possible from defaulted assets or NPA while in case of credit rating, the degree of safety in getting back the contractual principal and interest amount in a timely manner is indicated,” said Mr Krishnan Sitaraman, Head - Fund Services & Fixed Income, Research, CRISIL.

He felt that the key benefit of the recovery rating was basically an independent third-party evaluation of the recovery prospects in defaulted assets or NPAs based on which the banks or asset re-construction companies could arrive at a valuation to their investments backed by such assets.

According to information, rating agencies have already started such rating.

RBI guidelines

The Reserve Bank of India had issued guidelines in this respect in May this year asking securitisation and reconstruction companies registered with it to declare the net asset value of the security receipts (SRs) so that Qualified Institutional Buyers (QIBs) can value their investment in SRs issued by them.

The RBI had specified in its guidelines that the rating should be based on ‘recovery risk’ as against ‘default,’ which is the basis for rating assignments in normal assets.

Rating criteria

According to senior officials, recovery rating is assessed after factoring in other obligations and not on the original debt obligation.

The factors kept in mind while assigning such ratings are: the extent of debt acquired, composition of lenders, collaterals available, security and seniority of debt, estimated cash flows, uncertainty in realising expected cash flows in initial period and business risk among others. These ratings follow a fixed rating scale though the rating agencies were unwilling to disclose the same. The different notches in the rating scale indicate the level and expectancy of recovery.

“These ratings keep changing over time based on the changes in market and economic conditions, they need to be reviewed on a regular basis,” said Mr D R Dogra, Executive Director, Care Ratings. Such ratings are usually reviewed on a half yearly basis.

He felt that the availability of information could be a constraint for such ratings. “Some of these companies have ceased to exist, some matters could be sub-judice, sometimes the clients are not very co-operative which adds to our problems,” he said.

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