CRISIL’s Criteria For Rating Fixed Deposit Programmes

Several entities in India float FDs for the purpose of raising capital to fund different areas of their business. For doing so, they offer attractive rates of interest to customers. Given the perceived risk-free nature of FDs, investors easily part with their money in hopes of superior returns.

However, the risk level associated with FDs differs from issuer to issuer. It would not be wrong to say that no two FDs of the same tenor are alike. A company which does not have the ability to repay customers may float FDs in order to raise money but then declare bankruptcy when it is time to pay investors back. This puts investors’ money in jeopardy, and they risk losing their capital.

So how can you determine the risk level associated with an FD and asses which to invest in and which to avoid? This is where rating agencies come in.

CRISIL’s fixed deposit rating

CRISIL is India’s largest credit rating agency. Though it performs various functions, its primary business involves rating fixed income issuances like notes and bonds issued by finance and non-finance issuers in India. Its work relates to investors in fixed deposits (FDs) as well.

The company rates FD programmes issued by banks, deposit-taking non-banking finance companies (NBFCs) and corporates in the non-financial sector. The agency has a 14-point rating scale which ranges from FAAA to FD. The aforementioned rating scale is dedicated for FDs, and under it, the firm only rates those FDs which have a contracted maturity of more than a year.

It also rates short term FD programmes which have a contracted maturity of less than one year. This short term credit rating scale ranges from CRISIL A1+ to CRISIL D.

The underlying philosophy for these FD ratings is that CRISIL believes that there is a strong linkage between the rating on an issuer’s FD programme and the issuer’s own long-term credit rating. This means that the agency believes that factors which impact a company’s rating also have a bearing on financial instruments like FDs offered by them.

An issuer’s rating is a reflection of its fundamental credit quality. This has to be factored into the issuer’s funding sources like FDs, debt repayment profile, and liquidity. Other aspects of the issuer that are also factored in include the programme’s granularity, staggered maturity profile, and renewal rate.

The following table shows how the issuer’s long-term rating can impact the ratings of an FD issued by it:

MappingBetween Long-term Credit Ratings and FD Ratings

Long-termcredit rating

Fixeddeposit rating

Forbanks

Fornon-bank entities

CRISILAAA

FAAA

CRISILAA+

FAAA

CRISILAA

FAAA

FAA+

CRISILAA-

FAA+

FAA

CRISILA+

FAA

FAA-

CRISILA

FAA-

FA+

CRISILA-

FA+

CRISILBBB+

FA-

CRISILBBB

FA-

CRISILBBB-

FA-

CRISILBB+

FB+

CRISILBB

FB+

CRISILBB-

FB+

CRISILB+

FB+

CRISILB

CRISILB-

FB-

CRISILC+

FC+

CRISILC

CRISILC-

FC-

CRISILD

You would notice that an investment grade issuer’s FD ratings are generally higher than its corresponding long-term rating. This is because an FD programme from such an issuer has granular deposits of various maturities which puts less pressure on its liquidity thus making repayment smoother for the company. In contrast, lower rated issuers do not have the same leeway as even with a granular programme, their liquidity will be under pressure.Further, the table above treats bank FDs more favorably than non-bank FDs for some grades. This is because a bank generally has better access to systemic liquidity as compared to a non-bank entity. Because of this liquidity support, a bank is better equipped to deal with a downgrade in its long-term rating than any other entity.What does this mean for you?You can look at the issuer’s long-term rating and see how its FD could be rated. The higher the rating, the safer your investment. Bajaj Finance FDs have been rated FAAA/Stable by CRISIL, making them high quality instruments to invest in. Additionally, they have also been rated MAAA/Stable by ICRA. You can invest in Bajaj Finance FD with a minimum amount of INR 25,000 using an online application procedure. Comparing various FD schemes is easy with the online FD calculator.

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