Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing the extension of the expected loss (EL) – based rating scale to municipal bonds. The proposal comes under the reaisation that expected loss ratings, along with the standard rating scale or probability of default (PD) rating, can better reflect the recovery prospects of municipal bonds.
Consequently, it has been recommended that credit rating agencies (CRAs), in addition to the standard rating scale, also adopt the EL-based rating scale for municipal bond evaluations. Currently, CRAs utilise EL ratings for projects and instruments associated with the infrastructure sector along with standard rating scales.