Sebi introduces expected loss-based ratings for municipal bonds, aiming to provide a more comprehensive risk assessment and align with infrastructure project ratings.
This would be in addition to the standardised rating scale, according to a circular issued by Sebi.
Before this, credit rating agencies used expected loss-based ratings for projects and instruments, which were associated with the infrastructure sector, in addition to the standardised rating scales.
“It is felt that EL Ratings, when used along with standardized rating scale/ Probability of Default(PD) Rating, can better reflect the recovery prospects of municipal bonds. Further, urban local bodies/ municipalities issue bonds primarily for the creation/development of infrastructure.
“Therefore, it has been decided that CRAs may, in addition to the standardised rating scale, extend the EL-based Rating Scale forrating of Municipal Bonds which are issued for financing infrastructure assets,” Sebi said.
The circular will be applicable with immediate effect, it added.
The EL-based rating framework is a combination of the probability of default and the loss-given default (LGD). It aims to provide a measure of risk in the municipal bonds. Last month, Sebi came out with a proposal in this regard and sought public comments on the same.