New Capital Adequacy Framework (NCAF) on capital regulation – eligibility of CRISIL Ratings Limited

Today (January 27, 2021), RBI told the banks to use the ratings of the CRISIL Ratings Limited for the purpose of risk weighting their claims for New Capital Adequacy Framework (NCAF) on Basel III capital regulation purposes. The above decision taken by RBI is owing to rating business of CRISIL Limited has since been transferred to CRISIL Ratings Limited.  The new entity is a wholly owned subsidiary of CRISIL Limited in compliance with SEBI’s notification dated September 11, 2018 read with SEBI’s circular dated September 19, 2018. In terms of Prudential Guidelines on Capital Adequacy and Market Discipline [New Capital Adequacy Framework (NCAF)] – CRISIL Limited has been accredited for the purpose of risk weighting the banks’ claims for capital adequacy purposes along with other credit rating agencies (CRAs) registered with Securities and Exchange Board of India (SEBI).  Pursuant to transfer rating business the rating-risk weight mapping for the long term and short-term ratings assigned by CRISIL Ratings Limited will be the same as was in the case of CRISIL Limited and there is no change in the rating symbols earlier assigned by CRISIL Limited, the notification said.

The Basel code on capital adequacy stipulates how much capital a bank should have in place, in relation to the elements of credit risk in various types of assets in the balance sheet as well as off-balance sheet business of the banks. RBI has identified seven domestic and three international rating agencies in India which are accredited for the purpose of risk weighting the banks’ claims for capital adequacy purpose. The long term and short term ratings issued by these credit rating agencies have been mapped to the appropriate risk weights applicable as per the Standardized approach under Basel Frame work. 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.

1)Credit Analysis and Research Limited(CARE); 2) CRISIL Rating Limited; 3)  FITCH India; 4) ICRA Limited;   5) Brickwork Ratings India Pvt. Limited (Brickwork); 6) SMERA ; 7) INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS). 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

The ‘outlooks’ provided by the credit rating agencies on an entity or the country projects the probability for nonpayment of debt which may cause deterrent effects on the investment decisions of the investors on such entity/country.

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