Banks open to exploring a pact on sharing default info with rating firms

Mumbai: After every blow up in the financial markets, credit rating agencies (CRAs), often the whipping boys in a fiasco, complain how they have been kept in the dark by lenders and financial institutions holding back sensitive facts. Will this ever change? Hints are that it finally may.

For the first time, leading banks have said they are willing to explore an arrangement for sharing some information on corporate defaults with rating companies.

At a meeting last week, officials of some of the large state-owned and private sector banks told CRAs that they are open to the idea and would await the agencies to suggest a format for sharing information, a person familiar with the discussion told ET.

Today, rating firms are mostly clueless when companies default on loans, and only come to know about a non-payment months later, just before a loan is tagged as non-performing asset (NPA). Banks, tied down by obligations of client confidentiality, do not disclose the information.

This deepens the information asymmetry in the financial markets (between banks and CRAs); it also gives rise to divergence in ratings and commentaries on a company between two CRAs – with one firm catching a whiff of the default and factoring in the stress in its update on the borrower while another CRA remaining unaware of the development.

“Such information gaps and divergence in ratings can be confusing. More and more people in the industry think this must change. The format for information sharing can be designed in a way that it would be possible to disclose a default without the bank breaching client confidentiality. For instance, there cannot be any automatic process to share data as soon as an account turns SMA0 or SMA1, but there can be an arrangement where banks would respond when a rating agency approaches it with some query. It can be on a need-to-know basis,” said another person. Here, a CRA may come to know about a missed payment from other sources: cash-flow analysis, analyst call, and news reports, stock or bond price, market intelligence, and inputs from other creditors.

SMAs are ‘special mention accounts’ with a loan categorised as SMA0 soon after a default and SMA1 standing for loan accounts with payment overdue for 30 days. A loan is classified as NPA when payment is overdue for 90 days.

At present, banks are under no obligation to disclose a default and rarely, if ever, respond to queries from rating agencies. However, after multiple representations to lenders and the Reserve Bank of India (RBI), the banking industry seems to be finally veering around to the view that some mechanism on information sharing is required.

“Once banks agree to a certain format (on information sharing proposed by rating agencies), the industry body can nudge all banks to have a mechanism in place,” said another person.

At the meeting, called to ensure that CRAs and banks engage more frequently and in a more structured manner, rating companies reminded banks about the large number of borrowers who still do not share data with CRAs. Of the 40,000 companies rated in the country, almost half of them do not cooperate with CRAs which end up grading them as ‘INC’ (issuer non-cooperation rating) based on information available in the public domain. Given a choice CRAs would like to discontinue rating these companies after 18 to 24 months to save time and resources. However, discontinuance of such ratings requires regulatory approval, and RBI is yet to relent.

A nod from the central bank would also standardise any procedure for default data by banks once the format is finalised by CRAs. Till now, RBI has turned down pleas on blanket information sharing. Rating firms hope there will be a way out this time.