Issuer Ratings

Independent Credit Evaluation of Residual debt as per Resolution plan

In February 2018, the Reserve Bank of India (RBI) had introduced revised framework for resolution of stressed assets. As per the circular, all lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. The framework applies to a larger universe of lenders, including NBFCs and small finance banks. The decision has been made voluntary for lenders to take defaulters to the bankruptcy court.

It has been stipulated that for the resolution plan for stressed accounts having exposure in excess of Rs.100 crore, which involve restructuring or change in ownership, the banks would have to get an independent credit evaluation (ICE) of the residual debt by an authorized Credit Rating Agency (CRA), and cases where the exposure is over Rs.500 crore, the ICE has to be done by at least two CRAs. CARE Ratings has been authorized by RBI to undertake ICE for stressed assets under the framework.

Post outbreak of COVID-19 pandemic towards the end of the financial year 2020, RBI has released regulatory measures from time to time to help businesses tide through the COVID-19 pandemic and the related liquidity stress. The most recent measure by RBI to this effect is the ‘Resolution Framework for COVID-19 related stress’ announced on August 6, 2020. As per the RBI circular, eligible borrowers are companies which are presently under stress on account of COVID-19 and which were classified as Standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. Similar to Resolution plans for stressed assets, ICE is required for the Resolution plans for COVID-19 related stress in respect of accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs.100 crore and above by any one CRA authorized by RBI under the Prudential Framework.

CARE Ratings assigns ICE ratings as per the RBI prescribed scale of RP1 to RP7, where RP1 is the highest rating and RP7 is the lowest. For a resolution plan to be considered for implementation, without reference to NCLT, RBI guidelines require a rating of RP4 or better.

For the purpose of ICE, broadly the same methodology is used as for the traditional credit rating of corporate sector. The main difference between traditional credit rating and ICE is that ICE is based on the ‘plan’ of turning around the unit which will then generate sufficient cash flow for timely servicing of the debt.

ICE of the Resolution Plan for the stressed assets is done as a one-time exercise to be used by the lenders. As such, these ratings are not reviewed subsequently.