SEBI Allows CRAs to Use Expected Loss-Based Ratings for Municipal Bonds [Read Circular]

The Securities and Exchange Board of India (SEBI) has issued a new circular dated May 15, 2025, allowing Credit Rating Agencies (CRAs) to use an Expected Loss (EL)-based rating scale for rating Municipal Bonds issued to fund infrastructure projects. This new circular is applicable with immediate effect.

Key highlights

SEBI has permitted CRAs to assign EL-based ratings to municipal bonds, in addition to the standardised credit rating scale already in use. The EL rating framework provides investors with more detailed insights into not just the probability of default but also the likely extent of loss in the event of default.

This change applies specifically to bonds issued by Urban Local Bodies (ULBs) or municipalities that are used to fund infrastructure development, such as roads, water systems, sanitation, and other urban amenities.

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Background

According to SEBI’s Master Circular for CRAs dated May 16, 2024, EL ratings can already be used for infrastructure-related projects.

Following discussions with market stakeholders, including SEBI’s Corporate Bonds and Securitisation Advisory Committee (CoBoSAC), it was felt that:

• EL-based ratings offer better insight into the recovery potential of bonds.
• Municipal bonds are often tied to infrastructure projects, where recovery outcomes can vary significantly depending on the project’s success.

By introducing EL ratings alongside Probability of Default (PD) ratings, SEBI aims to present a more complete picture of risk for investors.

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The circular is addressed to:

• All Credit Rating Agencies (CRAs)
• Debenture Trustees
• Issuers of Non-Convertible Securities, Municipal Bonds, Security Receipts, and Securitized Debt Instruments
• Recognized Stock Exchanges
• Depositories registered with SEBI

Impact: Municipal bonds are becoming an increasingly important tool for cities and local governments in India to raise funds for:

• Roads and transportation
• Water and sanitation projects
• Smart city initiatives

As these markets grow, investors need more precise and project-specific assessments of risk. The EL rating framework helps by assessing not just the chance of default, but also how much loss an investor could suffer if a default happens.

To Read the full text of the Circular CLICK HERE

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