Risk weights of 100 or 150% apply when ECAI rating actions are devoid of the lenders’ details: RBI

Updated on November 17, 2023

RBI on Thursday (November 17, 2023) increased risk weights on consumer credit exposure of banks, and NBFCs to 125% from 100%. Measures announced to contain the risk emanating from a sharp rise in unsecured loans – mostly personal loans and credit cards. It has been also decided to increase the risk weights on Credit Card exposures by 25 percentage points to 150% for SCBs and 125% for NBFCs. Learn more

In a review of Prudential Norms regarding Risk Weights for Exposures to corporates and NBFCs, the Reserve Bank of India on Monday said that “It is observed that the Press Releases (PRs) issued by ECAIs on rating actions are often devoid of the lenders’ details. The absence of such information may result in banks applying the derived risk weights for unrated exposures, without satisfying themselves regarding adherence to prescribed conditions. This may, consequentially, lead to the potentially lower provision of capital as well as underpricing of risks”.

In order to address the above information asymmetry, the Reserve Bank had advised the External Credit Assessment Institutions (ECAIs) vide letter dated June 4, 2021, to disclose the name of the banks and the corresponding credit facilities rated by them in the PRs issued on rating actions by August 31, 2021, after obtaining requisite consent from the borrowers.

“However, on a review, it has been observed that the above disclosures are not available in a large number of PRs issued by ECAIs owing to the absence of requisite consent by the borrowers to the ECAIs,” said RBI in its letter dated June 4, 2021.

Given the foregoing, the banking regulator today advised that a bank loan rating without the above disclosure by the ECAI shall not be eligible for being reckoned for capital computation by banks. Banks shall treat such exposures as unrated and assign applicable risk weights in terms of paragraph 5.8.1 of the Master Circular ibid read with amendments carried out from time to time, it said.

The above instructions shall be effective from March 31, 2023, RBI said.

Reserve bank has given an illustration of a bank loan that shall not be eligible for being reckoned for capital computation by banks which are as under.

 “Illustratively, a scenario may be assumed, where a borrower has availed credit facilities from Banks A, B, and C, and external rating from an ECAI is obtained only in respect of the credit facility extended by Bank A. If the ECAI has disclosed the name of Bank A and the corresponding credit facility rated by it, then Bank A can reckon the said rating for risk-weighting purposes. Banks B and C are permitted to derive risk weights for their respective unrated credit facilities subject to conditions stated in paragraph 6.8.1 (i) of Master Circular ibid, as permitted hitherto. In the event of ECAI not making the above disclosure, none of the banks shall reckon the said rating and therefore shall apply risk weights of 100 percent or 150 percent as applicable in terms of extant instructions”.

In terms of the Master Circular on Basel III capital regulations dated April 1, 2022, RBI permitted banks to derive risk weights for their unrated exposures based on the ratings available for a specific rated debt subject to the conditions specified that the bank’s facility ranks pari passu or senior to the specific rated debt in all respects and the maturity of the unassessed claim is not later than the maturity of the rated claim.

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