- What is CRISIL?
- What is CRISIL rating?
- CRISIL’s Rating Scales
- Parameters used by CRISIL to rate mutual funds
- What do ratings imply about a mutual fund?
- How do ratings help in making investment decisions?
- Who does the CRISIL rating cater to?
- What is the difference between a credit rating and credit score?
- How do CRISIL ratings affect depositors?
- Frequently Asked Questions
Credit Rating Information Services of India Limited (CRISIL) is India’s first rating agency. It rated a wide range of financial instruments, companies, entities, and organizations. CRISIL ratings act as a guide to investors, borrowers, lenders, and market intermediaries. They cover a wide range of sectors including infrastructure, finance, energy, automobile and media. In this article, we have covered in detail about CRISIL and its ratings.
What is CRISIL?
Credit Rating Information Services of India Limited (CRISIL) is India’s first credit rating agency. CRISIL was incorporated in 1987. ICICI Ltd, UTI and other financial institutions are the promoters of CRISIL. CRISIL is the leading global analytics company. It provides services such as ratings, research, data, solutions, and analytics. CRISIL has a strong global footprint and has more than 1,00,000 happy customers. The company delivers actionable insights, independent opinions and efficient solutions to its customers. Also, S&P Global Inc. holds the majority stake in the company.
Furthermore, the core values of CRISIL are integrity, excellence, accountability, teamwork, and respect.
CRISIL’s clientele ranges from large corporations to micro, small and medium companies, top global financial institutions and investors. The company also works with the government and policymakers in the infrastructure sector in India and other emerging markets.
What is CRISIL rating?
A credit rating of an instrument represents the rating agency’s opinion on the repayment of the obligation on time. CRISIL rating provides a superior differentiation among the issuers or issues within the country by using the country’s government bond rating as a benchmark. Hence, CRISIL ratings are relative to the sovereign rating of the Government of India. Also, these have the highest ratings of ‘AAA’.
CRISIL’s credit rating shows its current opinion on the probability of default of an instrument. In other words, the ratings indicate the probability of an investor not receiving the interest and principal payment on time. CRISIL uses alphanumeric scale to denote its rating. For example, CRISIL AAA, CRISIL AA, CRISIL A1, CRISIL A2, etc.
Credit ratings are a relative measure of default probability. However, they are not a guarantee against default. Also, credit rating does not guarantee a 100% of payment of principal and interest amount. However, there is a definitive non-zero probability of default for instruments with the highest ratings.
The credit ratings are assigned upon analyzing the business and financial risk associated with the firm and its management.
CRISIL’s Rating Scales
Following are the categories under which CRISIL assigns credits ratings:
Long term ratings are for long term instruments such as debentures, bonds, bank loans, other debt securities and fund based facilities. The maturity of these instruments is greater than one year. The long term ratings are assigned on a 20 point scale from ‘CRISIL AAA’ to ‘CRISIL B’.
Short term ratings are for short term instruments such as a certificate of deposits, commercial paper, short term debentures, etc. The maturity for these instruments is one year or less. The short term ratings are assigned on a 9 point scale from ‘CRISIL A1’ to ‘CRISIL A4’ and ‘CRISIL D’ (denoting default).
CRISIL assigns dual ratings to some debt instruments that have a maturity of more than one year. Also, these instruments have a put option that is exercisable within one year from the date of issue. The dual ratings are on both long term and short term scale. The first component of the dual rating is the long term rating. The long term rating indicates the likelihood of timely payments of the principal and interest during the life of the instrument.
On the other hand, the second component is the short term rating scale. This indicates the likelihood of payment when the put option is exercised. ‘CRISIL AA+’, ‘CRISIL A1+’ are some of the examples of dual ratings.
Structured Obligation Ratings (SO)
CRISIL rates short term and long term structured finance instruments. The ratings for these instruments have a suffix ‘SO’. The rating of ‘SO’ is assigned to the only asset backed transactions or securitized transactions. An instrument with a maturity greater than one year has the long term ratings. These ratings range from ‘CRISIL AAA (SO)’ to ‘CRISIL D (SO)’. On the other hand, instruments with a maturity of one year or less have the short term ratings. The short term ratings range from ‘CRISIL A1 (SO)’ to CRISIL D (SO)’.
Credit Enhancement Ratings (CE)
CRISIL rates all short term and long term instruments backed by explicit credit enhancement that is external. However, the rated instrument is not bankruptcy remote from the issuer/originator. For such instruments, CRISIL assigns a ‘CE’ suffix. An instrument with a maturity greater than one year has the long term ratings. These ratings range from ‘CRISIL AAA (CE)’ to ‘CRISIL D (CE)’. On the other hand, instruments with a maturity of one year or less have the short term ratings. The short term ratings range from ‘CRISIL A1 (CE)’ to CRISIL D (CE)’.
Fixed Deposit (FD)
CRISIL rates fixed deposits of banks, financial institutions, and corporates. The FD ratings are assigned on a 14 point scale and are prefixed by F. The rating range between ‘FAAA’ to ‘FD’.
Financial Strength Ratings
Financial strength ratings are assigned to insurance companies. CRISIL ratings range from ‘AAA’ to ‘D’.
Corporate Credit Ratings
CRISIL’s corporate credit ratings range from ‘CCR AAA’ to ‘CCR D’ and ‘CCR SD’ (indicates selective default).
|Long Term Rating Scale||Short Term Rating Scale||Structured Finance Rating Scale Long Term SO Instruments||Structured Finance Rating Scale Short Term SO Instruments||Credit Enhancement Rating Scale Long Term CE Instruments||Credit Enhancement Rating Scale Short Term CE Instruments||Corporate Credit Rating Scale||Fixed Deposit Rating Scale||Financial Strength Rating Scale|
|CRISIL AAA||CRISIL A1||AAA (SO)||A1 (SO)||CRISIL AAA (CE)||CRISIL A1 (CE)||CCR AAA||FAAA||AAA|
|CRISIL AA||CRISIL A2||AA (SO)||A2 (SO)||CRISIL AA (CE)||CRISIL A2 (CE)||CCR AA||FAAA||AA|
|CRISIL A||CRISIL A3||A (SO)||A3 (SO)||CRISIL A (CE)||CRISIL A3 (CE)||CCR A||FAAA||A|
|CRISIL BBB||CRISIL A4||BBB (SO)||A4 (SO)||CRISIL BBB (CE)||CRISIL A4 (CE)||CCR BBB||FB||BBB|
|CRISIL BB||CRISIL D||BB (SO)||D (SO)||CRISIL BB (CE)||CRISIL D (CE)||CCR BB||FC||BB|
|CRISIL B||B (SO)||CRISIL B (CE)||CCR B||FD||B|
|CRISIL C||C (SO)||CRISIL C (CE)||CCR C||C|
|CRISIL D||D (SO)||CRISIL D (CE)||CCR D||D|
Parameters used by CRISIL to rate mutual funds
CRISIL Mutual Fund Ranking (CMFR) was launched in June 2000. Based on best global practices, it is highly acceptable among asset management companies, intermediaries, and investors. CMFR rates equity funds, debt funds, and hybrid funds.
CRISIL Mutual Fund Ranking (CMFR) follows the relative ranking of mutual funds in a peer group. To be eligible for CMFR, mutual funds have to meet the following criteria:
- Only open ended mutual funds will be ranked. Ranking for direct and regular plans is separate.
- NAV history of three years is mandatory for equity, hybrid, gilt, dynamic, medium to long and medium duration funds.
- A NAV history of one year is needed for arbitrage, banking & PSU, corporate bond, credit risk and other short duration funds, including liquid funds.
- The AUM cut off criteria for equity funds is INR 10 Cr, for debt and hybrid funds is INR 50 Cr, and for debt funds below one year is INR 250 Cr.
- The funds should’ve disclosed the portfolio completely for all three months in the last quarter.
CRISIL evaluates mutual funds on the basis of Net Asset Value (NAV) and portfolio based attributes including risk adjusted measures, liquidity, asset quality and concentration of assets. Following are the parameters CRISIL uses to evaluate mutual funds.
Mean return and volatility
Mean return is the average daily return of the mutual fund during the analysis period. Volatility is the standard deviation of the returns during the same time period. The period of the analysis is three years and one year for equity and debt funds, respectively. The analysis period is broken down into four overlapping periods. It is 36, 27, 18 and 9 months for a three year analysis period. And it is 12, 9, 6 and 3 months for one year period. Also, a progressive weight is assigned to each period starting from the longest period. The weights are 32.5%, 27.5%, 22.5%, 17.5%.
This parameter is unique to equity funds. Active return is used for large cap, large and mid-cap, multi-cap, mid-cap, focused and value/contra instead of mean return.
This parameter measures the risk arising out of improper diversification. For equity funds, both company and industry diversification is measured. For debt funds, an individual issuer specific limit is assigned as per the credit rating of the issuer. Also, the company concentration is analyzed based on this limit. This also analyses exposure to cash and its equivalents.
Exposure to sensitive sectors
This parameter is for debt funds. CRISIL computes Industry Risk Score (IRS) which analyses the exposure of the portfolio to sensitive sectors. IRS shows the risk associated with industries. It indicates the influence of different variables of the industry on the debt repayment capacity of the companies in a sector over a period of 3-4 years.
Liquidity analysis measures the ease with which the portfolio can be converted into cash. Lower the score, better is the liquidity. In the case of equities, the liquidity is measured in the number of days it takes to convert the portfolio into cash. Corporate debt liquidity is measured by computing the fund’s exposure to each of the categories, namely, liquid, semi-liquid, and illiquid. Gilt liquidity is measured by the number of days it takes to liquidate the portfolio based on a few factors. Some of them are volumes and the number of securities in the portfolio.
Asset quality assesses the probability of default in case of debt funds. It measures the likelihood for a debt obligation to be defaulted by an issuer.
It measures the interest rate risk of a portfolio. Lower the value, the better. Also, it considers Macaulay duration for all debt funds except for liquid to measure the risk.
Count of negative returns
To assess arbitrage funds, count of negative returns is used. It captures downside risk in a portfolio.
What do ratings imply about a mutual fund?
CRISIL Mutual Fund Ranking (CMFR) adopts best global practice to rank mutual funds. It was launched in 2000. Since then it has gained high importance and acceptance among asset management companies, intermediaries, and investors.
CMFR covers different categories across debt, equity and hybrid asset classes. They consider key parameters such as asset concentration, asset quality, risk adjusted returns, and liquidity. Therefore, these ratings provide a single point analysis of mutual funds.
CRISIL assigns ranks on a scale 1 to 5. Mutual fund Rank 1 indicates very good performance. In a peer group, the top 10% of funds get the CRISIL Fund Rank 1. The next 20% as CRISIL Fund Rank 2. Therefore, funds with CRISIL Rank 1 are considered to be good funds that may have the capability to generate significant returns. Hence, investors looking at mutual funds investments can consider CRISIL ratings while making investment decisions.
CRISIL ratings are on the basis of different time frames, for example, three years, five years or ten years. Combination of the timelines gives a measure of the risk adjusted performance of the fund. Upon calculating the ratings, CRISIL assigns stars to the funds as per their respective percentiles.
The ratings are a composite measure of both risk and return. These help investors to judge the fund’s ability to generate returns.
How do ratings help in making investment decisions?
CRISIL ratings are very elaborate and highly reliable. They study and check every parameter possible before publishing a rating for a mutual fund. However, these ratings do not guarantee returns and make no pinpoint towards a fund with more return potential.
The credit rating of an issuer gives an idea about their credibility. Hence the ratings help investors in making investment decisions. A high credit rating implies a secure investment avenue. The default risk or bankruptcy risk is minimum. Ratings also help investors to choose or shortlist investments from a pool of financial instruments.
Furthermore, CRISIL updates the ratings frequently. This helps investors with little or no knowledge and time to study the markets and make investment decisions. The frequent update in ratings also helps investors in deciding whether to hold or sell an investment.
High ratings imply that the instrument has a good credibility and has the capacity to perform well. Therefore, investors can consider ratings as one of the criteria while shortlisting the funds to an investment.
Finally, CRISIL’s unbiased ratings have aided many investors in making investment decisions.
Who does the CRISIL rating cater to?
CRISIL offers a wide range of services to a wide range of sectors. They include rating securities and companies, SME solutions, Indian research, global research, global analytics, infra advisory and BI and risk management services. Also, the sectors they cover are finance, energy, automobile, industrial and consumption products, infrastructure, IT, media, telecom, travel, health, retail and others.
They serve lenders, borrowers, investors, and market intermediaries by covering a wide range of sectors, including state governments and urban local bodies.
The instruments that CRISIL rates include bank loans, mutual funds, long term debt instruments like NCDs and preference shares, short term instruments like CPs, short term NCDs and fixed deposits.
The financial sector entities they rate include banking and non banking financial institutions, securities firms and housing finance companies.
Additionally, it rates securitization transactions through the pass through certificate (PTC) route and structured obligation transactions.
What is the difference between a credit rating and credit score?
Often, credit rating and credit score are used interchangeably. However, these two terms do not have the same meaning.
Credit rating determines the creditworthiness of a company or business. However, it does not apply to individuals. The ratings give an understanding about the company’s ability to repay its debts. Additionally, the ratings are denoted in alphabetically symbols like AAA, AA, A, B, etc. Moreover, these ratings are based on corporate financial instruments. Therefore, higher ratings imply a low probability of default. AAA is considered as a good rating while anything below BB is considered as a bad credit rating.
On the other hand, a credit score is a number that the credit bureau calculates. A credit score is given to an individual on the basis of their credit information report. The bureau evaluates credit history and repayment behaviour of an individual. Also, the credit score number ranges between 300 to 900. This score is essential while applying for a loan or credit card. The company evaluates the individual’s credit score before approving a loan or credit card.
How do CRISIL ratings affect depositors?
CRISIL rates a wide range of financial instruments, including fixed deposits. Generally, the criteria for any investor in a fixed deposit would be a high interest rate. Mostly, the government does not back FDs. Hence, depositors’ investments are subject to market risk.
CRISIL ratings of different financial institutions and fixed deposits will help depositors to choose the FDs with adequate safety and attractive interest rates. CRISIL fixed deposit ratings are FAAA, FAA, FA, FB, FC, FD and NM. Also, FAAA is the highest rating and FD is the lowest rating.
Frequently Asked Questions
Yes, CRISIL ratings are reliable. CRISIL was launched in India in 1987, and since then they have emerged as a leader. They rate the entire gamut of financial instruments and cater to big corporates as well as SMEs. They have set business standards and have developed several best practices. CRISIL ratings serve a wide range of investors, lenders, borrowers, intermediaries and regulators.
CRSIL uses best global practices to rank mutual funds. CRISIL Mutual Fund Ranking (CMFR) is available on their website under the tab ‘Mutual Fund Ranking’. They rank equity, debt and hybrid mutual funds. There is a separate ranking for both direct and regular funds. Also, CRISIL rates only open ended mutual funds. The ranking is on a scale of 1 to 5. With one indicating very good performance.
CRISIL ranks fixed deposits, and the rating for fixed deposits starts with the letter ‘F’. FAAA or F Triple-A, indicates that the degree of safety of timely payment of interest and principal is very strong. Also, this is the highest rating for fixed deposits. FAAA rating is followed by FAA, FA, FB, FC, FD and NM (not meaningful).
Securities and Exchange Board of India (SEBI) regulates the rating agencies in India. SEBI has the sole right to regulate and authorize credit rating agencies. The rating system in India under the SEBI Regulations, 1999 of the SEBI Act, 1992.
No, a good rating doesn’t guarantee repayment. Also, Credit ratings only imply the degree of risk by taking into consideration various other factors that might lead to a default of payment. Furthermore, credit rating is only an indication of the risk involved in each financial instrument. It is a caution to investors and acts as a guide before they invest.