Sebi mulls rating of municipal bonds on expected loss-based rating scale

Markets regulator Sebi is looking to extend the 'expected loss-based rating scale' for the rating of municipal bonds. This would be in addition to the standardised rating scale.

At present, credit rating agencies use expected loss-based ratings for projects and instruments, which are associated with the infrastructure sector, in addition to the standardised rating scales.

"It is felt that EL ratings, when used along with standardised 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," Sebi said in its consultation paper.


Accordingly, it has been proposed that CRAs may, in addition to the standardised rating scale, extend the EL-based rating scale for rating municipal bonds.

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.

The Securities and Exchange Board of India (Sebi) sought public comments by April 18 on the proposal.