RBI moves to distance self from bank deposit ratings

The Reserve Bank of India (RBI) is distancing itself from bank deposit ratings. In recent days, the central bank instructed the credit rating industry not to mention RBI as the regulator of the rated instrument in their rating reports on bank deposits, said two sources familiar with the matter. This directive, issued by RBI, could potentially force credit rating companies to cease issuing ratings for bank deposits.

This is the first time RBI has taken such a step. The reason behind this directive is not clear, as RBI has not explicitly stated its stance. Credit rating agencies (CRAs) have sought guidance from SEBI on this matter. The RBI's directive may be driven by concerns over potential bank deposit flight and instability following a sudden downgrade of a bank.

Factors like capital adequacy, asset quality, management strength, earnings performance, liquidity position, and sensitivity to interest and foreign exchange rate movements are considered while rating bank deposits. A downgrade due to factors like reduced capital, increased NPAs, or CEO exit following financial irregularities can lead to depositor withdrawals, potentially destabilizing a bank.

While retail depositors are generally unconcerned about ratings, PSUs, state-run entities, and many corporates consider ratings before depositing surplus funds. RBI's directive aims to clarify which regulatory authority oversees the underlying instrument, helping investors and market participants understand the redressal mechanism applicable to an instrument.

The Depositor Insurance and Credit Guarantee Corporation (DICGC) currently insures bank deposits up to ₹5 lakh per depositor per bank.