Bank Loan Ratings (Basel II)

A bank loan rating indicates the degree of risk regarding timely payment of the bank facility being rated; the facility includes principal and interest, if any, on the principal. CRISIL commenced rating bank loans post the Reserve Bank of India's guidelines on capital adequacy for banks, in 2007. The Basel II guidelines, as they are called, require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs), such as CRISIL. Basel II is a recommendatory framework for banking supervision, issued by the Basel Committee on Banking Supervision in June 2004. The objective of Basel II is to bring about international convergence of capital measurement and standards in the banking system. The revised framework for capital adequacy has been effective from March 31, 2008, for all Indian banks with an operational presence outside India (12 public sector banks and five private sector banks) and for all foreign banks operating in India. It has been applicable to all other commercial banks (except local area banks and regional rural banks) from March 31, 2009. CRISIL rates the maximum number of companies for their bank loans in India. It has, so far, assigned ratings to the bank facilities of more than 8383 entities as on December 31, 2011, representing over 50 per cent of all the companies which have their bank loans rated in India; CRISIL has rated bank facilities of all types: term loans, project loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities, such as letters of credit and bank guarantees. CRISIL bank loan ratings cover companies of all sizes with bank facilities ranging from Rs.50 million to Rs.500 billion. The break-up of ratings according to size of bank facilities is given below

CRISIL's

bank

loan

coverage

is

pan-Indian,

as

can

be

seen

below:

Some of the highlights of CRISIL's bank loan rating operations, underlining its superior capabilities as a rating agency of choice, are as follows:

A direct presence in 65 major industrial centres across India to handhold first-time rating clients The largest and most experienced team of rating analysts A qualified team of industry analysts and economists that contributes to a large knowledge base State-of-the-art automated workflow with dedicated support-services teams Regular presentations and interaction with industry associations, regulators, and decision makers

Company Name

Instrument Category

Rating Assigned

3S Infrastructure 3i Infotech Limited 3i Infotech Limited 3i Infotech Limited A B Chem (India) A B Chem (India) A B Chem (India) A B Chem (India) A B Chem (India)

Term Loan Facilities Cash Credit Limit Term Loan Facilities Short-Term Loan Term Loan Facilities Proposed Long-Term Bank Facility Cash Credit Limit Proposed Short Term Bank Facility Letter of Credit Limit

CRISIL B CRISIL D CRISIL D CRISIL D CRISIL BB CRISIL BB CRISIL BB CRISIL A4+ CRISIL A4+

A detailed flow chart of CRISIL's rating process is as below:

Bank Loan Ratings (Basel II) - FAQs by Banks 1. Is credit rating of loans mandatory under RBI guidelines? Credit rating is not mandatory. However, it is in the interest of banks to have ratings on their corporate exposures from an external credit rating agency, such as CRISIL. The banks could save capital, depending on the credit profile of their corporate exposures. 2. Should a bank get all its loans rated by a bank loan rating agency? Yes, it is desirable that all the loan accounts are rated by an external credit rating agency. 3. What could be the extent of saving on capital that a bank would get if its assets were rated? If a bank has high-quality assets (for example, if the majority of its assets are in the 'AAA' and 'AA' categories) it will save capital because of low credit risk; the difference is apparent in the illustration below.

Illustration of capital-saving potential by banks on a loan of Rs.1000 Million Rating Basel I Risk weight Capital required 1 (rs. mn) AAA AA A BBB BB and below
1

Basel II Risk weight Capital required Capital saved (rs. mn) 20% 30% 50% 100% 150%
as loan amount x risk

100% 100% 100% 100% 100%

required is

90 90 90 90 90
computed

18 27 45 90 135
weight x 9

72 63 45 0 (45)
per cent.

Capital

4. In case of consortium lending, does the borrower need to take a separate rating for each facility with each banker? Yes, the borrower will need separate ratings for each facility with each banker. 5. Does CRISIL rate working capital facilities extended by the bank on its short-term scale or on its long-term scale? Long-term loans or facilities (with original contracted maturities of one year or more) and cash credit facilities are rated on CRISIL's long-term rating scale. Short-term facilities (with original contracted maturities of one year or less) are rated on CRISIL's short-term rating scale. 6. Who rates foreign currency facilities extended by domestic banks?

Bank facilities extended to resident corporate entities, irrespective of the currency of exposure, are rated by domestic rating agencies, such as CRISIL. On the other hand, bank facilities extended to non-resident corporate entities are rated by global rating agencies, such as Standard & Poor's. 7. If a company's non-convertible debentures are rated, can the same rating be used by banks for all exposures to the company? The rating applicable to the existing debt instrument of a borrower may be applied to the bank's unrated claims for capital relief only in case of the following cases:

The bank's claim ranks pari passu with, or is senior to, the specific rated debt in all respects. The bank's claim has a maturity that is not later than the maturity of the rated claim.

In case of short-term exposures, the risk weight to be used for the unrated claim will be one category higher than the risk weight for the rated claim. 8. Does CRISIL map the internal ratings of the bank with CRISIL's ratings? As per the guidelines, banks can only use ratings from external credit rating agencies to calculate the capital required against credit risk. Hence, mapping of ratings will not be really helpful to banks under the standardised approach. 9. Is CRISIL capable of handling rating requests from many corporate entities at the same time? Yes, CRISIL is fully equipped to handle large volumes of ratings. Presently, CRISIL has:

A direct presence in 65 major industrial centres across India to handhold first-time rating clients The largest and most experienced team of rating analysts (175 analysts and 75 data specialists) A qualified team of industry analysts and economists that contributes to a large knowledge base (expert team of 100 plus industry analysts) A state-of-the-art automated workflow, with dedicated support-services teams Increased frequency of rating committee meetings to handle increased volume of rating assignments

10. How long does it take to complete a loan rating assignment? From the day it receives a written request for a bank loan rating, along with all information required for the analysis, CRISIL takes three to four weeks to complete the exercise of assigning a bank loan rating. 11. Will the bank loan rating be released to the public? Yes, the rating will be made public once the borrower accepts the rating in writing. All accepted ratings are made public by CRISIL through rating rationales, which are uploaded onto CRISIL's website, and monthly bulletins. The rating will remain in the public domain until the rated loans or facilities are repaid in full or extinguished. 12. Who pays for the ratings?

Rating fees are usually paid by the borrower, since the request for a rating is made by the borrower. CRISIL requires the borrower to sign a rating mandate, and make the payment towards the applicable rating fee. However, CRISIL can enter into specific arrangements for obtaining its fee from banks. In all cases, the mandate for carrying out the rating exercise has to be signed by the borrower before the rating exercise can be initiated. 13. Does CRISIL rate the entire portfolio of a bank? Yes, CRISIL can rate the entire portfolio of a bank. A bank can also sign a memorandum of understanding (MoU) with CRISIL, whereby all borrowers who approach the bank for a rating will be rated on priority by CRISIL. However, each borrower will have to mandate CRISIL separately for carrying out the rating exercise.

14. How does the bank benefit from signing an MoU with CRISIL? A bank can benefit from quick turnaround times and efficient monitoring of progress, given CRISIL's ability to dedicate resources, and function as a single point of contact for the bank.