The Reserve Bank of India's new framework for external credit assessment institutions could tighten credit access for micro, small and medium enterprises while increasing pressure on smaller credit rating agencies, according to industry experts.
The rules, effective April 1, 2027, introduce stricter capital requirements linked to borrower ratings and the historical default performance of rating agencies. Experts said the framework could push banks towards ratings issued by larger agencies such as CRISIL, ICRA and CARE Ratings, while making it harder for smaller agencies and lower-rated borrowers to access credit.
The framework also introduces a stricter approach towards borrowers classified as "Issuer Not Cooperating", or INC, referring to companies that stop sharing financial information with rating agencies. Earlier, such ratings would lapse. Under the new rules, banks must assign higher risk weights to loans flagged as INC for more than six months, increasing borrowing costs for such companies.
The changes come as India aligns its banking regulations with the Basel III reforms finalised after the 2008 global financial crisis, which exposed weaknesses in how banks measured risk and how rating agencies assessed credit quality.
MSME Impact
India has more than 63 million MSMEs, which contribute nearly 30% of gross domestic product and are the country's second-largest source of employment after agriculture. Many rely on smaller rating agencies because they are too small or regional to attract larger agencies.
Abizer Diwanji, a financial sector expert, said the changes could hurt smaller businesses.
"The onus shifts fully from banks to agencies. While CRAs will become more cautious, MSMEs will be strongly hit," Diwanji said.
The RBI framework links bank capital requirements not only to borrower ratings but also to the historical default performance of rating agencies. The regulator will monitor each agency's rolling one-year observed default rate. If defaults in a rating category breach a threshold, banks will need to hold more capital against loans rated by that agency.
Experts said this could create a disadvantage for smaller agencies such as Brickwork Ratings, Infomerics Ratings, Acuite Ratings and Acer Ratings, which typically rate mid-sized firms and MSMEs.
"The lower-rung CRAs are at a disadvantage. RBI must review the skewed mechanism, though the suggestions were made to improve the credit system," Diwanji said.
Rating Disparity
The framework measures defaults by the number of borrowers rather than the value of defaults. Industry participants said this creates a structural imbalance because smaller agencies rate a larger number of smaller and more vulnerable borrowers.
A delayed payment by a small manufacturer carries the same weight in observed default rate calculations as the collapse of a large corporate borrower. Experts said this could push issuers towards larger agencies and reduce competition in the sector.
The issue gained attention after the collapse of Infrastructure Leasing & Financial Services in 2018. The company defaulted on debt obligations of around Rs 91,000 crore despite carrying top-tier ratings from agencies including ICRA, CARE and India Ratings.
A forensic audit by Grant Thornton found that rating agency officials had received favours and gifts from IL&FS management. The Securities and Exchange Board of India later fined ICRA, CARE and India Ratings for lapses.
Basel Alignment
The RBI rules stem from the Basel III reforms published in December 2017 after years of global regulatory discussions following the financial crisis. The reforms aimed to reduce inconsistencies in risk-weighted asset calculations across banks.
India's implementation timeline is faster than some developed markets. The United States is still consulting on parts of its Basel Endgame proposal, while India finalised its framework in April 2026 with implementation due from April 2027.
Experts said smaller agencies are seeking more time to adapt and want the methodology revised to measure defaults by value and context rather than raw numbers.
Market concentration is already high in the ratings industry. CRISIL, a subsidiary of S&P Global, holds more than 60% market share, while ICRA is majority-owned by Moody's. Experts said the new observed default rate mechanism could further reduce competition among rating agencies.
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