In the light of new guidelines from the Reserve Bank of India (RBI) and the discrepancies that have appeared in the opinions of the two financial market watchdogs, credit rating firms have requested the assistance of their principal regulator, Sebi. The central bank has stated that “diluted and non-prudent support structures” such as letter of comfort, letter of support, undertaking, and other covers such as promise of shares cannot be used to assign ratings to loans to a company.
Such assistance from the parent or promoters allows businesses to lower their borrowing costs; the higher the credit rating, the lower the interest rate on debt.
Even for seemingly more enforceable backing like corporate guarantees (as opposed to letters of comfort), RBI said such structures can only be utilised to improve rating if lenders must use the guarantee within a specific time frame.
“The RBI’s orders concern bank loan ratings,” a senior banker explained. “However, all of these supports can be utilised to elevate rating for non-convertible debentures as long as the standalone rating (without support) is simultaneously provided,” according to Sebi’s existing order.