CRISIL's criteria for rating fixed deposit programmes

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CRISIL’s criteria for rating fixed deposit programmes

December 2019

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Somasekhar Vemuri

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Ramesh Karunakaran Director – Rating Criteria and Product Development

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Associate Director – Rating Criteria and Product Development

Wazeem M A

Manager – Rating Criteria and Product Development

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Senior Executive – Rating Criteria and Product Development

For feedback and queries, write to us at [email protected]

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Executive summary

CRISIL rates fixed deposit (FD) programmes floated by banks, deposit-taking non-banking finance companies (NBFCs), and corporates in the non-financial sector. FDs allow companies to diversify their funding source. Under an FD programme, an issuer accepts varying amounts of deposits for different tenors from multiple investors. Hence, the deposits are highly granular, with their maturities staggered across time horizons. Also, a considerable portion of FDs are renewed on maturity. FD repayments, therefore, tend to exert less pressure on the issuer’s liquidity. CRISIL employs a dedicated rating scale for FDs, and the rating of an issuer’s FD programme is derived from its long-term credit rating. The rating takes into account factors such as the issuer’s liquidity, the programme’s granularity, staggered maturity profile, and the renewal rate.

Scope of criteria

This article¹ explains CRISIL’s criteria for rating FD programmes floated by companies. It outlines the mapping framework used to derive the FD rating from the long-term credit rating of the issuer. This framework is only applicable to FD programmes with contracted maturity of more than a year. Banks may float FD programmes with contracted maturity of less than a year. Such programmes, however, are rated on CRISIL’s short-term credit rating scale based on its ‘Criteria for rating short-term debt’ available on www.crisil.com. These ratings are also derived from the issuer’s long-term credit rating. CRISIL employs different criteria for assessing the issuer’s long-term credit rating, depending on the sector in which the company operates. These criteria can be accessed at www.crisil.com.

Rating scale

CRISIL rates FD programmes with contracted maturity of more than a year on a 14-point rating scale (FAAA to FD).

Short-term FD programmes — with contracted maturity less than one year — offered by banks are rated on CRISIL’s short-term credit rating scale (CRISIL A1+ to CRISIL D). For more details on CRISIL’s rating scales, please refer to https://www.crisil.com/ratings/credit-rating-scale.html.

Methodology

FDs are floated as programmes and place low demand on the liquidity of the issuer owing to their inherent granularity, staggered maturity profile, and high renewal rates. There is a strong linkage between the rating on an issuer’s FD programme and its long-term credit rating, as the long-term rating, which reflects the fundamental credit quality of the issuer, also factors in the issuer’s funding sources (including FDs), debt repayment profile, and liquidity. Hence, CRISIL derives an issuer’s FD rating from its long-term rating based on the mapping framework outlined in Table 1.

1 This article is being republished following a periodic review of criteria in November 2019. For accessing the previous version of the document, kindly follow the link below:

https://www.crisil.com/content/dam/crisil/criteria_methodology/criteria-

research/archive/CRISIL%20criteria%20for%20rating%20fixed%20deposit%20programmes.pdf

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Table 1: Mapping between long-term credit and FD ratings

Long-term credit rating FD rating

For banks For non-bank entities

CRISIL AAA FAAA FAAA

CRISIL AA+ FAAA FAAA

CRISIL AA FAAA FAA+

CRISIL AA- FAA+ FAA

CRISIL A+ FAA FAA-

CRISIL A FAA- FA+

CRISIL A- FA+ FA

CRISIL BBB+ FA FA-

CRISIL BBB FA- FA-

CRISIL BBB- FA- FA-

CRISIL BB+ FB+ FB+

CRISIL BB FB+ FB+

CRISIL BB- FB+ FB+

CRISIL B+ FB+ FB+

CRISIL B FB FB

CRISIL B- FB- FB-

CRISIL C+ FC+ FC+

CRISIL C FC FC

CRISIL C- FC- FC-

CRISIL D FD FD

FD ratings for issuers in the investment grade are usually higher than the corresponding long-term rating. This is to account for the lower demand that FDs place on the issuer’s liquidity owing to the programme nature with granular deposits of varying maturities, a high proportion of which are renewed on maturity. However, long-term ratings of issuers in the speculative grade are not mapped to a higher FD rating because of the usually tight liquidity position of such issuers.

The mapping for banks is generally higher than the corresponding mapping for non-banks because banks have better access to systemic liquidity than non-banks, in the form of access to call money markets and the Reserve Bank of India’s (RBI) liquidity adjustment facility. The presence of such external liquidity support, the RBI’s oversight over

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banks and deposit guarantee up to a certain quantum provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC) give confidence to depositors and prevent a run on deposits in case of a downgrade of the long-term rating of the bank. Moreover, banks enjoy systemic support with demonstrated track record of the regulator stepping in and preventing banks from failing.

On the other hand, NBFCs and corporates in the non-financial sector that do not benefit from substantial external liquidity support as banks do, may be subject to higher repayment pressure in case of a rating downgrade.

The mapping framework factors in the usually high granularity and renewal rates of FD programmes, and the liquidity profile of the issuer. However, CRISIL may deviate from the mapping framework if it believes the issuer has exceptional (strained) liquidity or the FD programme has exceptionally high (low) granularity or renewal rates.

Conclusion

CRISIL rates FD programmes of issuers on a dedicated 14-point scale. Ratings are derived from the long-term credit ratings of issuers based on a mapping framework. This framework takes into consideration lower demand that FDs place on the liquidity of the issuer owing to the granularity of deposits, and their staggered maturity profile and high renewal rates. The mapping for banks is generally higher than for non-banks considering the superior access banks have to systemic liquidity, the RBI’s oversight over banks, and the presence of deposit insurance.

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