The Hindu Business Line : Banks not happy with pace of corporate loan ratings

Mumbai, Feb. 28 As banks gear up to face the new capital allocation norms under Basel II, Indian corporates are also readying themselves by getting their bank loans and cash credit facilities rated.

While there has been an increase in this activity in the last three to four months, bankers are not happy with the pace and wish it could be faster.

There is a considerable amount of activity for bank loan rating and lot of corporates have been showing keenness, said Mr Ananda Bhowmick, Director, Fitch Ratings. “Those corporates who did not have a rating earlier are now approaching rating agencies. Those corporates that had capital market ratings are now getting their bank loans rated,” he said.

According to Ms Vibha Batra, Co-Head, Financial Sector Ratings, ICRA, the queries for bank loan ratings from corporates started in May-June 2007, but the mandates from such corporates have picked up now.

Despite the increase, a large number of corporates are yet to be rated.

“Corporates in general had some reluctance earlier because they were not sure of the benefits they would get. Moreover, for smaller corporates rating was a new concept. We have been doing a lot of seminars, meetings and workshops to familiarise such corporates with the concept of rating and the process involved. Now, most banks have also tied-up with rating agencies and in the second quarter of this fiscal, started working towards creating awareness among their customers,” Ms Batra said.

Risk weightages

Under Basel II, the risk weightages are different for long-term and short-term ratings. For instance, if a corporate is rated on long-term scale at LA+ and at A1+ for its short-term debt, applicable risk weightages would be 50 per cent and 20 percent respectively.

Therefore, it is advantageous for corporates to get both ratings separately, Ms Batra pointed out.

Once Basel norms are implemented, banks can use bank loan ratings to determine risk weights on their loan exposures in line with the guidelines for implementation of the new capital adequacy framework.

The ratings will be assigned on both long-term and short-term rating scales, similar to ratings assigned to debentures and commercial paper respectively. The criteria for assigning bank loan ratings will be similar to those applied for ratings on bonds and debentures.

Under Basel norms, any corporate loan over Rs 50 crore, which is unrated, will carry a risk weight of 150 per cent, which means banks will have to provide more capital. As against this, a corporate with ‘AAA’ rating will have a risk weight of only 20 per cent.

From April 1, there will be a huge negative implication, for banks, from the point of view of capital, said a senior official from a public sector bank.

“The only thing we can do is to increase the price of the borrowing. We are in the transitional phase and we can only hope that sooner or later all the corporates will get themselves rated,” he said.

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