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SEBI introduced enhanced disclosure guidelines for credit rating agencies

The markets regulatorSecurities and Exchange Board of India (SEBI)introduced enhanced disclosure guidelines for credit rating agencies (CRA). SEBI asked the rating companies to disclose the probability of default for the issuers they rate, troubled by the raters’ track record of detecting defaults or near-defaults.

Reason for the move:
Since the global financial crisis in 2008, the credibility of the rating agencies has been eroding because of the conflict of interest that arises from the fact that they are paid by the issuers to rate their securities and for their failure to downgrade troubled firms until they are on the verge of bankruptcy.
The recent Infrastructure Leasing and Financial Services Ltd’s (IL&FS) liquidity crisis among non-bank lenders in India has focused attention again on credit rating agencies.

The guidelines:
The rating companies must create an uniform probability of default benchmark for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for the short term and long term.
They should use marginal default methodology to arrive at default rates. The methodology should be revised. This can bring the rating companies in line with global best practices and increased disclosures for liquidity and rating sensitivity factors.
SEBI defined the terms that the companies should use to describe the liquidity position of issuer, that is, strong, adequate, stretched and poor.
Tracking the probability of default is a step towards aligning Indian rules with global standards. The Probability of default is the likelihood of a default over a particular period. 

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