CREDIT RISK-O-METERS AND THE PROBLEM OF “SIMPLIFIED” RISK: CAN A SINGLE RISK INDICATOR ADEQUATELY PROTECT DEBT INVESTORS?

ABSTRACT

As retail investors have been entering the debt market in India, it has become a priority to address the issue of credit risk communications. Though the credit ratings have in the past been used as an easy means of evaluating the credit-worthiness of a debt security, the alphanumeric designation of the ratings may not be easily understood by all investors. To counter this, the Securities and Exchange Board of India (SEBI) has released a consultation paper dated 13 August 2026 on bringing in a new requirement of disclosure of Credit Risk-o-Meter for debt securities. The idea would be to convert credit ratings into six “standardized” credit rating categories ranging from the lowest credit risk to the highest to very high risk of default.

The question which remains is whether such transparency of credit risk would also lead investors to think they know the overall risk of the investment. This article analyses and explores that tension. It champions the idea as being helpful and should not be rejected simply because the idea makes the information available in a simpler way. But the indicator shouldn’t be used as an alternative to a comprehensive evaluation of the debt security. Based on this, the author suggests a multi-layer disclosure model, which is structured in such a way that the Credit Risk-o-Meter is complemented by the credit rating and proportionate disclosure of material risks that the indicator cannot be disclosed.

1. INTRODUCTION

A corporate bond may seem easy to look at from the outside. Individuals invest in a business, earn interest and receive repayment of the initial investment. Making the real investment choice is not so easy. The credit rating of the issuer could be very good, but the bond may not be saleable. Its market value can be impacted by price movements in interest rates. It can be placed in the repayment order, which can lead the investor to suffer losses. The conditions of the instrument might have risks that are not apparent from the return that is offered.

That’s the reason why disclosures are important. But it’s not just about having information available, it’s about having information that is useful.

The credit rating is a prominent part of the Indian regulatory framework of debt securities[1]. But a rating like AAA, AA or BBB does not necessarily provide an investor unfamiliar with the rating system with much information. To solve this issue, SEBI has come up with its proposed Credit Risk-o-Meter.

On 13 August 2026, SEBI proposed to categorise credit ratings granted to debt securities into six broad categories – “lowest credit risk” to “high to very high risk of default”[2]. It would be reflected in offer documents, private placement memorandum and ads, and the websites and mobile apps of Online Bond Platform Providers. It’s a good concept. Just displaying the rating may mean little to an investor if they don’t know the difference between AA+ and A- rating. It’s much easier to get a handle on a description like “very low credit risk”. I’m not sure it’s a bad thing to have an objective. The bigger challenge is what do you do after simplifying the information?

A Credit Risk-o-Meter is not a complete indicator of the risk of an investment. It is specifically restricted to informing investors of the credit risk of the debt security. It takes the rating of the underlying credit and assigns it to a wider category. It is important because credit risk is just one facet of a debt security’s risk. Some other risks are also identified in SEBI’s investor material such as liquidity risks, interest-rate risks and call risk[3].

The simpler a risk communication becomes to comprehend, the simpler it will also be to look away from it.

There’s some empirical support to this concern. Likewise, deHaan, Li and Watts discovered that the retail investor in the U.S. corporate bond market heavily depended on credit ratings as a screening tool and then narrowed their focus down to a particular bond in a credit rating band. Their research linked this with purchases made prior to ‘downgrades’ and ‘defaults’ and subsequent underperformance[4]. The results cannot be just viewed as an indicator of the retail investors’ behaviour in India. Nonetheless, they pose an interesting question for SEBI: can the use of a more readily accessible, more transparent rating increase the reliance on a rating, which is already a shortcut for investors?

2. THE CREDIT RISK-O-METER: WHAT SEBI IS ACTUALLY PROPOSING

Credit Risk-o-Meter should not be used as a substitute for credit ratings. It’s a further layer added onto their top. SEBI has proposed to classify the existing ratings into six different broad categories. AAA would represent “lowest credit risk” while AA+, AA and AA- would represent “very low credit risk” and A+, A and A- would represent “low credit risk”. BBB+, BBB and BBB- would represent “moderate credit risk”, BB+, BB and BB- would represent “moderate risk of default” and ratings from B to D would represent “high to very high risk of default”[5].

It’s definitely better when it comes to lightening the load on a retail investor. The new system will eliminate the need for the investor to learn what each rating class corresponds to, and will convey this general rating directly.

The present proposal goes further by integrating the indicator into digital distribution. SEBI suggests that OBPPs prominently showcase it on the concerned security page before an investor enters into the transaction. This is significant since the disclosure is not just one of many in a long document. It may be one of the first elements that an investor looks at when they consider a bond[6].

SEBI also proposes to adopt the lowest rating in case there are multiple ratings from credit rating agencies for the same security, and maintains all the ratings. This seems to be taking an arm’s-length approach once more. The risk indicator will not show only the positive assessment if there is one agency that does a better assessment than another agency. Meanwhile, the conflict between the agencies can provide some valuable information.

But that limitation is crucial as it gives us an idea of what the Credit Risk-o-Meter is – and what it is not. It’s a streamlined message regarding one type of risk. It’s not a complete statement of the security or the investment.

3. FROM CREDIT RATING TO RISK INDICATOR: WHAT IS GAINED AND WHAT MAY BE LOST?

Information compression is already a thing: a credit rating. A rating agency takes a wide variety of data into account when assessing an issuer and their obligations and then delivers the rating in a standardised format, such as a symbol. Investors never get to view the whole analytical process. They get to the end of the story. It’s not necessarily bad. In financial markets there is bound to be some level of simplification. A retail investor shouldn’t be expected to perform the kind of analysis that a professional credit-rating agency does when buying a bond! The regulatory system, therefore, requires some kind of shorthand.

The worry is how to deal with the situation when the shorthand becomes the most important data that the investor recalls[7].

That shortcut might be made easier with the Credit Risk-o-Meter. It is important to have some knowledge of the rating system with “AA+”. The term “very low credit risk” does not. That is the entire idea of the proposal. But that simplicity that makes the investor understand what the signal is could also make the signal more convincing. It isn’t the accuracy of the Credit Risk-o-Meter that’s the concern. The actual criticism is that it can be correct for the purpose it was intended but still leave out the market’s point of view.

This should continue to be the backbone of the rule-making process.

4. SIMPLIFICATION, VISUAL SALIENCE AND RETAIL INVESTOR BEHAVIOUR

Retail investors don’t necessarily digest all the information that is available. They might use cues that they know, are easy to identify, or are easy to compare. Such a shortcut could be easier with the help of the Credit Risk-o-Meter. It is important to have some knowledge of the rating system with “AA+”. But “very low credit risk” does not. The entire idea of the proposal. But that simplicity that makes the investor understand what the signal is could also make the signal more convincing.

This is especially important if the indicator is presented immediately prior to the investment option on an online site. Before reading detailed information about the bond, an investor may have some information on the risk category. The first impression then may provide a foundation for the rest of the information. The importance of presentation on behaviour is also relevant. Studies examining financial disclosure have revealed that visual aspects of the disclosure can impact investor expectations and investment decisions[8]. Therefore, the presentation of the information has to be coupled to the regulatory design to a certain extent.

There is also a risk that disagreement between rating agencies is abated to a single visual category. While the proposed use by SEBI seems eminently reasonable, it does not preclude the disagreement itself. A difference between ratings from one agency to another (AA versus A) could be worthy of investigation[9]. It is important the investor does not have to opt for one from the warning and the detailed information. Both of these should be clearly seen.

In my opinion, a strengthening of the proposal is needed there. The Credit Risk-o-Meter should get investors thinking about the credit risk, but should not be used to “finish” the thought at the meter.

5. IS THE PROPOSED FRAMEWORK SUFFICIENT FOR INVESTOR PROTECTION?

The answer is dependent on what we hope to achieve with the Credit Risk-o-Meter. If it is intended to make it easier to understand credit ratings, it is a good reform. It cannot by design do the job of communicating the full risk of a debt security if it is expected to do that job.

Thus, the roles of credit risk and general investment risk is central. A bond can have a low probability of default and still have exposure to liquidity risk, interest-rate risk and/or structural risk. This is recognized by SEBI itself. The link of indicator to credit risk is explained in its proposal and other risks are duly addressed separately. Such disclaimers as proposed are therefore necessary. I don’t believe that disclaimers are sufficient though.

It’s one thing to let an investor know that a certain indicator is not perfect, and it’s another to make that clear when the investor is making his investment decision. A minor visual disclaimer in another place cannot always make up for the power of a single large, simple and reassuring visual disclaimer.

Unsecured perpetual bonds are a good example of such a concept. A special warning is suggested by SEBI as the structural risks are not necessarily captured by the Credit Risk-o-Meter. This indicates that the regulator already recognises that there are instruments which need more contextualisation[10].

Such a framework should be followed for the wider scheme of work. Not all risk factors should be represented by their own symbol. This will make the system cumbersome again. The characteristics of the material that can significantly impact the investor’s exposure should not be lost in one credit-risk category.

This is also true for more than one rating. The lowest rating will be a safe bet, but investors should still have the ability to view the underlying ratings without having to wade through a lot of text. The difference in the ratings can be important as a piece of information, rather than just a reflection of reliability.

6. TOWARDS A LAYERED APPROACH TO DEBT-RISK DISCLOSURE

I would not recommend abandoning the Credit Risk-o-Meter. That would solve the wrong problem.

The better solution is to make it the first layer of a broader disclosure system.

The first layer would be the Credit Risk-o-Meter itself. It should remain simple and immediately understandable.

The second layer should be the actual credit rating. Where multiple agencies have rated the security, all ratings should remain clearly accessible, even if the lowest rating determines the visual indicator.

The third layer should identify material risks that the meter does not capture. This need not become another complicated rating system. Simple flags could identify features such as unsecured status, subordination, perpetual maturity or significant liquidity concerns where relevant to the particular instrument.

The fourth layer should provide access to the detailed disclosure documents for investors who want to go further.

This would create a sensible progression:

WHAT IS THE CREDIT-RISK LEVEL?

↓

WHAT IS THE ACTUAL RATING?

↓

WHAT OTHER IMPORTANT RISKS DOES THIS SECURITY CARRY?

↓

WHERE CAN I READ THE DETAILED INFORMATION?

That is, in my view, a better balance than expecting one indicator to do everything.

The digital nature of the proposed framework makes such an approach possible. Since SEBI already proposes displaying the Credit Risk-o-Meter prominently on Online Bond Platform Providers, the same interface can provide the underlying information without requiring investors to search for it.

SEBI should also consider reviewing the framework after implementation. The important question will not simply be whether platforms display the meter correctly. It will be whether investors understand what it means. If evidence later shows that investors interpret “low credit risk” as “low overall investment risk”, the design will need to be reconsidered.

The purpose of disclosure should ultimately be to help investors make informed decisions, not merely to satisfy a formal disclosure requirement.

7. CONCLUSION

The proposed Credit Risk-o-Meter by SEBI is solving a problem that is real. Credit ratings are helpful but may not be easily understood by all retail investors because of the format in which they are presented. There is therefore a good argument for greater transparency and clarity regarding credit risk.

The point at which things get really wrong is when simplicity becomes “completeness”.

A Credit Risk-o-Meter can provide an investor with an important piece of information about a bond. It cannot provide the investor with everything that is significant. Credit risk is different from the overall risk of an investment, and SEBI’s own definition acknowledges this difference.

It should be retained, in my opinion, but its role should be carefully circumscribed. It must help the investor’s risk assessment process, but not become an absolute decision on the investment. The underlying rating, variation among rating agencies and material non-credit risks should remain visible so that investors are not led to the first easy answer.

The Credit Risk-o-Meter is not the only lesson here. Financial regulation is the case in point: complex information is hard to understand, but over-simplification can make it as hard to understand as its complexity. The solution is not to go for complexity or simplicity, but for a balance between the two.

The challenge for SEBI, thus, is not just to put credit risk in a bright spot. The idea is to make sure that, in doing so, it doesn’t make the investment easier to make than it really is.

If an investor is presented with a good risk indicator, then he/she should ask the next question. It should not lead the investor to think that there is no subsequent question.

8. BIBLIOGRAPHY

ARTICLES

1. Blankespoor E, deHaan E and Marinovic I, ‘Disclosure Processing Costs, Investors’ Information Choice, and Equity Market Outcomes: A Review’ (2020) 70 J Acct Econ 101344 https://doi.org/10.1016/j.jacceco.2020.101344
2. deHaan E, Li J and Watts EM, ‘Retail Bond Investors and Credit Ratings’ (2023) 76 J Acct Econ 101587 https://doi.org/10.1016/j.jacceco.2023.101587
3. Griffin JM, Nickerson J and Tang DY, ‘Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings’ (2013) 26 Rev Fin Stud 2270 https://doi.org/10.1093/rfs/hht036
4. Hillenbrand A and Schmelzer A, ‘Beyond Information: Disclosure, Distracted Attention, and Investor Behavior’ (2017) 16 J Behav Experimental Fin 14 https://doi.org/10.1016/j.jbef.2017.08.002
5. White LJ, ‘Markets: The Credit Rating Agencies’ (2010) 24 J Econ Persp 211 https://doi.org/10.1257/jep.24.2.211

INSTITUTIONAL SOURCES

1. Securities and Exchange Board of India, ‘Consultation Paper on the Mandatory Adoption of a Credit Risk-o-Meter as an Additional Disclosure Mechanism for Debt Securities’ (13 August 2026) https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-the-mandatory-adoption-of-a-credit-risk-o-meter-as-an-additional-disclosure-mechanism-for-debt-securities_103613.html accessed 6 September 2026
2. Securities and Exchange Board of India, ‘Understanding Bonds’ (SEBI Investor) https://investor.sebi.gov.in/hindi/understanding_bonds.html accessed 6 September 2026

[1] Lawrence J White, ‘Markets: The Credit Rating Agencies’ (2010) 24 J Econ Persp 211 https://doi.org/10.1257/jep.24.2.211

[2] Securities and Exchange Board of India, ‘Consultation Paper on the Mandatory Adoption of a Credit Risk-o-Meter as an Additional Disclosure Mechanism for Debt Securities’ (13 August 2026) https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-the-mandatory-adoption-of-a-credit-risk-o-meter-as-an-additional-disclosure-mechanism-for-debt-securities_103613.html  accessed 6 September 2026 

[3] Securities and Exchange Board of India, ‘Understanding Bonds’ (SEBI Investor) https://investor.sebi.gov.in/hindi/understanding_bonds.html  accessed 6 September 2026

[4] Ed deHaan, Jiacui Li and Edward M Watts, ‘Retail Bond Investors and Credit Ratings’ (2023) 76 J Acct Econ 101587 https://doi.org/10.1016/j.jacceco.2023.101587

[5] Securities and Exchange Board of India, ‘Consultation Paper on the Mandatory Adoption of a Credit Risk-o-Meter as an Additional Disclosure Mechanism for Debt Securities’ (13 August 2026) https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-the-mandatory-adoption-of-a-credit-risk-o-meter-as-an-additional-disclosure-mechanism-for-debt-securities_103613.html  accessed 6 September 2026

[6] Securities and Exchange Board of India, ‘Consultation Paper on the Mandatory Adoption of a Credit Risk-o-Meter as an Additional Disclosure Mechanism for Debt Securities’ (13 August 2026) https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-the-mandatory-adoption-of-a-credit-risk-o-meter-as-an-additional-disclosure-mechanism-for-debt-securities_103613.html  accessed 6 September 2026

[7] Elizabeth Blankespoor, Ed deHaan and Iván Marinovic, ‘Disclosure Processing Costs, Investors’ Information Choice, and Equity Market Outcomes: A Review’ (2020) 70 J Acct Econ 101344 https://doi.org/10.1016/j.jacceco.2020.101344

[8] Adrian Hillenbrand and André Schmelzer, ‘Beyond Information: Disclosure, Distracted Attention, and Investor Behavior’ (2017) 16 J Behav Experimental Fin 14 https://doi.org/10.1016/j.jbef.2017.08.002

[9] John M Griffin, Jordan Nickerson and Dragon Yongjun Tang, ‘Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings’ (2013) 26 Rev Fin Stud 2270 https://doi.org/10.1093/rfs/hht036

[10] Securities and Exchange Board of India, ‘Consultation Paper on the Mandatory Adoption of a Credit Risk-o-Meter as an Additional Disclosure Mechanism for Debt Securities’ (13 August 2026) https://www.sebi.gov.in/reports-and-statistics/reports/aug-2026/consultation-paper-on-the-mandatory-adoption-of-a-credit-risk-o-meter-as-an-additional-disclosure-mechanism-for-debt-securities_103613.html  accessed 6 September 2026