Lenders selling loans to ARCs against SRs fear that the rating companies that will handle the brickwork business may lower the ratings on some SRs. This, in effect, would require lenders to make higher provisions. SEBI said that Brickwork neither followed the procedure nor took proper precautions. Brickwork Ratings is considering taking legal recourse against the SEBI directive.
ARCs receive stressed loans from banks and finance companies and usually make payments in cash and SR. ARC encashes the SR when it recovers money from defaulting borrowers. If the ARC fails to recover the money at the end of the eighth year, the lenders should write off the shortfall. In these eight years, SRs should be Mark to Market (MTM) based on their rating. The rating assigned to SR is based on the probability of recovery. In fact, they also indicate the provisions that lenders have to make on SRs. ARCs declare the Net Asset Value (NAV) of the SR based on the rating.
A senior ARC official said, “In view of the concern raised by the regulator about brickwork, the new rating agency may give a lower rating to justify itself.”
One of the shortcomings pointed out by SEBI was the delay in recognition of the omission Bhushan Steel And Gayatri Projects, “Since the ratings are not made public, it is not possible to assess the market share and the quality of the rating to the SR,” said a lender.
The outstanding SR as on March 31, 2021 was ₹42,266 crore as on the latest available date disclosed by the Reserve Bank of India in its Trends and Progress Report for FY 2021. A senior official of a large ARC said that in the last 18 months, the outstanding would have crossed SR 60,000 crore as several finance companies have sold loans against SRs to ARCs in recent months.
Interestingly, the management fee that ARCs charge to lenders who receive SRs for sale of bad loans is linked to the rating assigned to the SR. The higher the rating, the higher the fee. The SR is rated every June and December for MTM purposes.
Although Brickworth has been given six months as per the SEBI directive, all ARCs will be shifted to another agency for the next round of ratings to be held in December.
“In the previous inspection report, the Reserve Bank of India directed ARC to rotate rating agencies and reduce the concentration of business in a single rating company,” said an industry executive privy to the development.
Another person said, “Although RBI did not specifically name Brickwork Ratings in the context of low concentration, it was implied because they had the lion’s share.”