CRISIL Bank Loan RatingCRISIL Bank Loan Rating

Agenda

• About us

• Bank Loan Ratings Concepts

• Differences Between Bank Loan Rating and SME RatingRating

• Benefits of a Bank Loan Rating

• CRISIL’s Rating Scale

• CRISIL’s Rating Process

• CRISIL’s Rating Methodology

• Why CRISIL?

About us

• India’s first and largest rating agency

– Incorporated in 1987

• 70% penetration in the domestic bond market

• Market share of more than 53% in the bank loan rating market

• CRISIL understands SMEs in India

– First mainstream rating agency in India to set up SME / SSI ratings– First mainstream rating agency in India to set up SME / SSI ratings

– Market leader with the highest number of outstanding SME ratings; rated more than

20,000 SMEs

CRISIL’s integrated range of capabilities, through its 3000-strong talent pool, includes

– Research on India’s economy, industries and companies (CRISIL Research)

– Global investment research, analytics & knowledge processing (IREVNA)

– Fund evaluation services and risk solutions for mutual funds (CRISIL FundServices)

– Risk management and Infrastructure advisory services (CRIS)

What is a Bank Loan Rating ?

• Bank loan rating is essentially a credit ratingwhich CRISIL will assign to various facilitiesprovided by the banks, such as– Working capital demand loans

– Cash credit– Cash credit

– Project loans

– Loans for general corporate purposes, and

– Non-fund based facilities

• Bank loan rating is an unbiased and independentopinion on borrower’s ability and willingness oftimely payments of interest and principal on thefacilities being rated

Bank Loan Ratings - ConceptsWhat is a rating ?

Current opinion on the credit quality of

the debt in terms of issuers’ ability and

inclination to meet debt obligations in a

timely manner

What a rating is not ?

General purpose evaluation of issuer

Audit of the issuing company

One time assessment of credit

Issue specific evaluation

Useful in differentiating credit quality

worthiness of the issuer valid over the

future life of the security

A recommendation to purchase, sell or

hold a security

BLR vis-à-vis SME & NSIC RatingsSME or SSI Ratings

Not accepted under Basel-II

Bank Loan Rating

Accepted under Basel-II

ISSUER (Company) Rating ISSUE specific (Facility) Rating

Applicable to: Small and Medium Enterprises

irrespective of the size of bank exposure.

Applicable to: Corporate Borrowers (Small/

Medium/ Large) with exposure determined by

bank.

Validity – 1 year

SURVEILLANCE – Not mandatory

Validity – Tenure of the rated facility

SURVEILLANCE – Regulatory requirement of SURVEILLANCE – Not mandatory SURVEILLANCE – Regulatory requirement of

continuous monitoring

SME Rating Scale: ‘SME1’ to ‘SME8’

NSIC SSI Rating Scale: ‘SE 1A’ to ‘SE 5C’

Use of Rating Outlook: Not Applicable

Long Term Rating Scale : ‘CRISIL AAA’ to ‘CRISIL D’

Short Term Rating Scale: ‘CRISIL A1+’ to ‘CRISIL D’

Use of Rating Outlook: Applicable

No distinction between long term and short term

ratings.

Benefits of a Bank Loan Rating

• Risk-based pricing on your bank loans – lowerborrowing costs for competent entities

• Access to alternate avenues of funding

• Enhance visibility for your company in theinvestment communityinvestment community

• Quicker processing of loans & enhancements

• Provide an independent view of your company’sstrengths and weaknesses through the detailedrating report

• Avoid penal interests on unrated bank loans

Bank Loan Rating Scale• CRISIL will rate the bank facilities on its long term and short term rating

scale based on the tenure of the facility and the guidance provided by RBI

Long term rating scale Short term rating scale

Term loans (> 1 year) Short term loans (< 1 yr)

FCNR (B ) loans Packing credit

Cash Credit (book debts) Bill discounting

Cash Credit (stocks) Letter of Credit

WCDL Bank guarantee

Bank Loan Rating Scales Short term rating scale

Rating Scale Rating Definition

CRISIL A1+

CRISIL A1

Very Strong Safety

CRISIL A2+

CRISIL A2

Strong Safety

CRISIL A3+

CRISIL A3

Adequate Safety

CRISIL A4+

CRISIL A4

Minimal Safety

Long term rating scale

Rating Scale Rating Definition Rating Outlook

CRISIL AAA Highest Safety Stable

Negative

CRISIL AA +

CRISIL AA

CRISIL AA -

High Safety Positive

Stable

Negative

CRISIL A +

CRISIL A

CRISIL A -

Adequate Safety Positive

Stable

Negative

CRISIL BBB + Moderate Safety Positive

CRISIL D Default

CRISIL BBB +

CRISIL BBB

CRISIL BBB –

Moderate Safety Positive

Stable

Negative

CRISIL BB +

CRISIL BB

CRISIL BB -

Inadequate Safety Positive

Stable

Negative

CRISIL B+

CRISIL B

CRISIL B-

High Risk Positive

Stable

Negative

CRISIL C +

CRISIL C

CRISIL C -

Substantial Risk

CRISIL D Default

Bank Loan

Rating ProcessRating Process

Written

request for

rating

Commence

information

review

Management

InteractionEvaluation

Bank Loan Rating Process

Rating

committee

Assign rating

(option for

appeal)

Publish

rating

Ongoing

surveillance

Total duration for assigning a rating is 3 to 4 weeks from date of

receipt of complete information

Bank Loan

Rating MethodologyRating Methodology

CRISIL’s Rating Methodology Credit Risk assessment comprises

• Business Risk Analysis

- Industry Risk

- Market Position

- Operating Efficiency

• Financial Risk Analysis

- Existing and Future Financial profile

- Cash Flow adequacy and Financial Flexibility

• Management Risk Analysis

• Project Risk Analysis (for green-field or brown-field projects)

Business Risk Analysis – step I

Industry Risk Assessment

• Demand-Supply scenario

• Competitive scenario

• Entry Barriers

• Cyclical/ seasonal factors• Cyclical/ seasonal factors

• Input price risks

• Technology risk

• Government Policies

Business Risk Analysis – step IIMarket Position Assessment

• Company specific analysis to understand its current strengths and competitive advantage in the market

• Assessment of Revenue generation capability

- Market size and segments addressed

- Market Share and trends

- Product range and customer diversity/ concentration

• Competitive advantages

- Brands, product quality

- Strength of distribution network and its geographical reach

- Long term contracts for product off take/ marketing arrangements

- Regulation

Business Risk Analysis – step IIIOperating Efficiency Assessment

• Cost Structure: Low cost mfrs. have an edge

- Technology used

- Capacity utilization

- Regular upkeep/ modernization of facilities

• Input related risk

- Access, cost of key inputs

- Level of Integration

- Assured, quality supply of critical utilities- Assured, quality supply of critical utilities

- Labour relations – union

• Location/ Geographical factors

• Supply Chain efficiencies

• Environmental Issues

Financial Risk Analysis• Accounting Quality

- Over/ understatement of profits

- Income recognition method

- Off balance sheet items

• Past and Future Financial track record

- Past performance analyzed for trends in capital structure (debt-equity), debt

protection measures (interest coverage & Cash DSCR) & liquidity (current

ratio)

- Profitability trends primarily in operating, net margins and RoCE (indicating

asset side performance) - provides a tool to measure cash generation

- Trends in Company’s funding mix philosophy – phasing of capex programmes

- Future performance based on industry trends, company’s own operations

and future plans

Financial Risk Analysis (contd.)

• Cash flow adequacy and financial flexibility

- Assess the adequacy of cash flows, expected funding to meet future planned

fund requirements

- Comparison of sources and uses of funds

- Ability to raise alternative financing e.g. Equity, Quasi equity

- Financial support from group/ promoters and its past track record

- Availability of unencumbered liquid assets- Availability of unencumbered liquid assets

Management Risk Analysis• Competence

• Integrity

• Risk appetite

• Governance practices

• Investment policies and track record

• Financial policies

Project Risk AnalysisProject Evaluation

• Project size

• Implementation risk

• Funding risk

• Technology risk

• Track record in timely completion

• Cost overruns

Why CRISIL?

• Trusted by more than 50 per cent of borrowers - Market leader withmore than 53 per cent market share in Bank Loan Ratings

• Direct presence in 65 major industrial centres across India tohandhold first time rating clients into rating process

• Largest and most experienced team of rating analysts (Experiencedteam of 205 Rating Analysts and 45 Data Specialists)team of 205 Rating Analysts and 45 Data Specialists)

• Robust surveillance mechanism for timely rating actions – ZERO per cent default probability for CRISIL ‘AAA’ rating

• Enhanced visibility of rating through updates on CRISIL website andpress releases

• Qualified team of Industry analysts and economists contribute to alarge knowledge base

Far-reaching initiatives for educating & developing the markets

• Dedicated team for outreach initiatives

• Regular publication & dissemination ofcommentaries, opinion pieces and discussionpapers

• Discussion forums for issuers and investors• Discussion forums for issuers and investors

• Seminars & presentations for bankers

• Knowledge partner for foremost awards in thecountry– Emerging India Awards for SMEs

– Mutual Fund Awards

– Real Estate Awards

Robust systems and processes ensure consistency in ratings

• Team of 200 dedicated

people

• Dedicated Relationship

Management team for client

servicing

• Presence in 65 major

industrial centers

• Solicited ratings

• Strong team of 205 analysts &

45 data specialists

• Timely completion of

assignments

• Maintain ‘analytical rigour’

• Detailed due-diligence of

information received

• Rating Rationales issued within

• Regular client interaction

• Continuous monitoring and

surveillance of ratings

• Defined surveillance

process in place

• Dedicated team following-

up on timely debt

repayment letters

Business

Development

Rating

Operations

Rating

Surveillance

• Timely execution of

mandates

• Has ‘no vote’ in an entity’s

rating

• Rating Rationales issued within

24 hrs of acceptance

• Detailed Credit Rating Report

is issued within a week after

press release

• Monitoring quarterly results

and other key performance

parameters

• Dedicated Criteria and Product Development Team engaged

in evolving &

updating criteria

• Regular Industry Updates provided by a strong 108-member

Team of Industry experts

• Regular Economic updates provided by 10-member team of

Economists

CRISIL’s Sales Network

�200 strong business development team

on the ground

�Access to 65 major industrial centres

�Less than 4 hours away from any client

anywhere

CRISIL Limited