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Rating agencies to disclose probability of default
Why is it in the news?
- The markets regulator SEBI directed credit rating companies to start disclosing the probability of default for the issuers they rate.
More in the news
- Background:(1) The credibility of rating agencies has been eroding since the global financial crisis in 2008.(2) It is because of the conflict of interest arising from the fact that they are paid by the issuers to rate their securities.(3) Rating agencies have also failed upon to downgrade troubled firms until they are on the verge of bankruptcy.(4) The recent defaults by IL&FS that led to a liquidity crisis among non-bank lenders in India has focused attention again on credit rating agencies.
New Directions by SEBI:
- Credit rating agencies will now have to disclose the probability of default for the instruments they rate.
- They also have to clearly state the sensitive factors that could impact the credit worthiness of the entity.
- Further, rating agencies will have to adopt a standardised terminology to:
- Disclose liquidity indicators like liquid investments.
- Access to credit and cash flows while rating an instrument.