RBI takes action against rating agencies that increase credit.

The Reserve Bank of India has cracked down on credit enhancement ratings provided by companies based on a letter of comfort . Rating agencies have been giving higher credit ratings for emerging companies that are part of larger groups .

TNNMumbai: The Reserve Bank of India has cracked down on credit enhancement ratings provided by companies based on a letter of comfort without any specific guarantee from parent or group companies.Despite the fact that credit rating agencies are regulated by market watchdog Sebi, the RBI has issued guidelines to rating agencies that are not affiliated with the central bank.According to RBI Governor Shaktikanta Das, we are only dealing with the effect of the ratings on the bank's balance sheet.We do not have any issues with credit rating agencies.

Rating agencies have been giving higher credit ratings for emerging companies that are part of larger groups, according to banking sources.These new entities do not have the budget to be creditworthy on their own, and the promoter group does not want to raise its liabilities by offering a guarantee.Despite this, they are also trying to monetize the company's name and seek better terms by way of a letter of encouragement.In order to assist the subsidiary in seeking credit or financing, a parent company may write a letter of comfort on behalf of its subsidiary.

A letter of comfort does not mean anything, according to a banker.Rating agencies are required to adhere to the RBI's board-approved framework on bank loan ratings.It says that agencies should only rely on explicit guarantees, and that parent support should be unconditional.