3 weeks ago
SEBI Permits Expected Loss Ratings for Indian Municipal Bonds
Municipal bonds are like loans that people give to a city so it can build things like roads and parks.
The city promises to pay the money back with some extra money called interest.
But sometimes a city might not be able to pay back everything it owes.
A credit rating is like a report card that tells investors how risky a bond is.
India's market regulator, SEBI, is the referee that makes sure financial companies play fair.
SEBI has now allowed rating agencies to give municipal bonds a new kind of report card.
This new report card is called an Expected Loss rating.
It shows how much money investors might lose if the city fails to pay.
Older report cards only showed the chance that the city would not pay.
With both report cards, investors can make smarter choices before lending their money.
India's market regulator SEBI has allowed credit rating agencies to use Expected Loss ratings for municipal bonds.
Expected Loss ratings estimate the share of principal and interest investors may lose over an instrument's life due to default.
Municipal bond issuers can now be rated under both the Expected Loss scale and the existing probability of default scale.
Unlike standard ratings that signal default probability, Expected Loss ratings also factor in potential recovery value.
The change is part of SEBI's 2025-26 reforms to strengthen India's credit rating ecosystem and improve transparency.
- Who
- SEBI (Securities and Exchange Board of India), India's securities market regulator, and credit rating agencies
- What
- A new framework permitting Expected Loss ratings for municipal bonds alongside the existing probability of default rating scale
- Where
- India
- When
- Detailed in SEBI's annual report as part of its policy measures for 2025-26
- Why
- To give investors additional information on credit risk, including expected recovery value, for project-based municipal bond issuances
Key facts
- Regulator
- Securities and Exchange Board of India (SEBI)
- New rating type
- Expected Loss (EL) ratings
- Applies to
- Municipal bonds, particularly infrastructure-linked issuances
- Existing framework
- Probability of default ratings retained alongside EL ratings
- EL rating purpose
- Estimate principal and interest loss from default likelihood and severity
- Context
- Part of SEBI's 2025-26 credit rating ecosystem reforms
- Status
- Expected Loss ratings permitted in addition to, not instead of, standard ratings










