New Framework to Enhance Risk Assessment for Urban Infrastructure Financing
New Delhi, May 15—The Securities and Exchange Board of India (Sebi) has announced the extension of the 'expected loss-based rating scale' (EL Ratings) to municipal bonds. This move aims to improve the risk assessment and transparency in infrastructure financing by urban local bodies.As per a circular issued by the regulator on Thursday, this revised rating approach will be used in addition to the standardised rating scale. The change is effective immediately.
Previously, credit rating agencies (CRAs) used expected loss-based ratings primarily for infrastructure-related projects and instruments. With the latest directive, municipal bonds—often issued to fund urban infrastructure—will also fall under this framework.
Sebi noted that using EL Ratings alongside the traditional probability of default (PD) rating would offer a clearer picture of the recovery potential associated with municipal bonds.
The EL-based rating framework incorporates both the likelihood of default and the loss-given default (LGD), offering a more comprehensive measure of the overall risk for bond investors.
Last month, Sebi had floated a consultation paper seeking public comments on extending this framework to municipal bonds. With the feedback now considered, the regulator has moved forward with implementation.
The decision is expected to support investor confidence and enable municipalities to access funds more efficiently for infrastructure development.