The Securities and Exchange Board of India (SEBI) on Monday allowed credit rating agencies (CRAs) to relax temporarily their norms for recognition of default on rated instruments. This follows liquidity pressures faced by companies after the 21-day lockdown imposed by the government to control the Covid-19 pandemic.

The SEBI circular takes into account the moratorium (between March 1 and May 31, 2020) on loan repayment instalments permitted by the Reserve Bank of India (RBI). On March 27, 2020, RBI announced a slew of measures to improve system wide liquidity apart from the 3-month moratorium on payment of instalment of loans.

Consequently, CRISIL may not recognise missed payments as defaults if they occurred because of temporary operational challenges caused by the lockdown. The exercise of this discretion will be a function of CRISIL’s analytical judgement and specific feedback from lenders and investors.

The relaxation will be applicable to all instruments rated by CRISIL including term loans, working capital term loans, debentures, fixed deposits, commercial papers, and working capital facilities.

Says Subodh Rai, Senior Director, CRISIL Ratings, “The move by SEBI and the RBI will ease the operational challenge faced by borrowers in the immediate term. CRISIL will factor the moratorium, if any, subject to the relevant bank’s policy and investor’s inclination to allow moratorium.”

Typically, in cases of re-schedulement or re-structuring, CRISIL looks at prior formal sanction of the revised terms of debt before deciding whether an instance is one of default or not. But given the unprecedented operational challenges at present, CRISIL would factor the inclination of lenders and investors to restructure or re-schedule than wait for a formal document that grants such approval.

CRISIL will disclose any information of missed payments on its rated instrument during the moratorium and the reasons for not downgrading an instrument to default in all its relevant press releases.

Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “While CRISIL may not consider a default for any missed payment after factoring in the perspective of lenders, we will continue to take appropriate rating action which would reflect the resilience of the company to withstand cash flow pressures arising out of the lockdown.”

Once the moratorium is over, CRISIL will revert to its normative default recognition policy on revised payment schedules approved by banks and investors.