Financial Sector Ratings
For Long Term Instruments
| Ratings |
Interpretation |
| ACUITE AAA |
Highest Safety, Lowest Credit Risk |
| ACUITE AA |
High Safety, Very Low Credit Risk |
| ACUITE A |
Adequate Safety, Low Credit Risk |
| ACUITE BBB |
Moderate Safety, Moderate Credit Risk |
| ACUITE BB |
Moderate Risk, Moderate Risk of Default |
| ACUITE B |
High Risk, High Risk of Default |
| ACUITE C |
Very High Risk, Very High Risk of Default |
| ACUITE D |
Default / Expected to be in Default soon |
Acuité may apply '+' (plus) or '-' (minus) signs for ratings from 'ACUITE AA' to 'ACUITE C' to reflect comparative standing within the category.
Acuité may assign rating outlooks for ratings from 'ACUITE AAA' to 'ACUITE B'.A rating outlook indicates the direction in which a rating may move over a medium-term horizon of one to two years. A rating outlook can be 'Positive', 'Stable' or 'Negative'. A 'Positive' or 'Negative' rating outlook is not necessarily a precursor of a rating change. Ratings on Ratings Watch will not carry outlooks.
For Short Term Instrument
| Ratings |
Interpretation |
| ACUITE A1 |
Very Strong degree of Safety, Lowest Credit Risk |
| ACUITE A2 |
Strong degree of Safety, Low Credit Risk |
| ACUITE A3 |
Moderate degree of Safety, Higher Credit Risk as compared to instruments rated in the two higher categories |
| ACUITE A4 |
Minimal degree of Safety, Very High Credit Risk |
| ACUITE D |
Default / Expected to be in Default on Maturity |
Acuité may apply '+' (plus) sign for ratings from 'ACUITE A1' to 'ACUITE A4' to reflect comparative standing within the category
For ratings under watch, Acuité assigns the suffix 'RW' to the rating symbol. Rating Watch may indicate positive, negative or developing implications for the assigned rating. A rating is placed on watch in case the credit quality of the issuer/issue is affected by specific events, the impact of which cannot be entirely assessed at that point in time. However, a listing under rating watch does not imply that a rating will necessarily change. Acuité may also revise ratings without first placing the rating on watch.
Fee Structure For Bank Loan Ratings
Acuité Ratings charges fees from clients who seek ratings for their various borrowings.
This disclosure is made pursuant to Reserve Bank of India's communication (dated April 26, 2013, reference no. DBOD.BP.No./5385/21.06.007/2012-13), advising accredited credit rating agencies (CRAs) to disclose the nature of their compensation arrangements and fee structure for bank loan / facility ratings on their websites.
The rating fees in all cases are discussed and finalized by a separate business development team who is not involved in the analytical or the rating committee process in any manner. The rating fee has no bearing on the rating assigned, or on the processes, analytical or otherwise. The analysts associated with the process are neither responsible for business development nor do they engage in any discussion over fees with existing or prospective rating clients.
The standard fee structure comprises an initial rating fee (IRF) at the time of the initial rating exercise and an annual surveillance fee (ASF) subsequently for such time as the rating remains outstanding. Fee structures are documented in fee schedules which are communicated and finalized before initiating the rating assignment(s).
The standard fee structure adopted by Acuité for capital market debt instruments (covering Bonds, NCDs, Commercial Paper, Securitisation transactions) and fixed deposit programmes is as follows:
a. IRF - 0.10% of the rated amount subject to a minimum of Rs. 100,000/-.
b. ASF - 0.03% of the rated amount per annum subject to a minimum of Rs.50,000/-.
The standard fee structure adopted by Acuité for bank loan facilities is as follows:
a. IRF - 0.04% of the rated amount subject to a minimum of Rs. 40,000/-.
b. ASF - 0.025% of the rated amount per annum subject to a minimum of Rs.35,000/-.
The fees are payable in advance i.e. before the commencement of the rating exercise. All fees are exclusive of GST and other applicable taxes. Any out of pocket expenses incurred by Acuité for management meetings or plant visits are separately reimbursable by the clients.
While the fee structure represents the minimum chargeable to the clients, the actual fee amounts are determined by several factors including, but not limited to, the principal amount of the bank loan / facility that is rated, number of group entities (if any), the complexity of the assignment etc.
Note:
As per Acuité's policy, fees are accepted from its clients towards rating assignments, ONLY by way of a Pay Order / Bank Draft / Cheque (payable at par) / Electronic transfer (NEFT/RTGS) favouring "Acuité Ratings & Research Limited". Acuité does not accept CASH payments from the clients for any reason whatsoever.
Acuité accepts fees towards 'initial rating fee', 'renewal rating fee', 'surveillance fee', and 'enhancement fee' only for providing rating services to its clients. Acuité does not charge a client for any rating action (such as reaffirmation of rating, upgrade of rating, downgrade of rating). There is no linkage whatsoever between the rating assigned to an instrument and the fee paid to Acuité.
Acuité does not provide any rating advisory services. In Acuité, all ratings are assigned by the 'Rating Committee' only and not by any individual. Employees or representatives of Acuité are strictly prohibited from assuring or even indicating a probable rating on a standalone basis or in connection with any existing rating given by other rating agencies.
- Independent, informed and credible opinion on credit quality covering business, financial and management strengths and weaknesses
- Ratings from Acuité will improve negotiation power with lenders with regards to loan terms, availability and its pricing
- Greater visibility among key stakeholders including bankers, investors and regulators
- Efficient and seamless rating processes that minimises turnaround time for the rating exercise (on receipt of timely information)
- Rating methodology and criteria which is objective and transparent, building in nuances for example for SMEs and specific sectors
- Informed opinion on the rated entity backed up by adequate due diligence
- Ratings ensure regulatory adherence (for ECA under Basel II norms) and make capital allocation efficient for bank exposures
- Ratings assigned and subsequent changes in such ratings (based on timely reviews) will facilitate credit decisions and risk based pricing of bank facilities
- External ratings help to inculcate financial discipline among bank borrowers
- Well-structured rating processes that doesn’t make a rating exercise burdensome to the banks' clients
- Access to Acuité’s rating expertise and knowledge across industries and different clusters or geographies
- Credible opinion on the rated entity supported by robust rating methodology, experienced rating committee and strong ratings leadership team
- Ratings to facilitate proper investment decisions and risk based pricing
- Timely and ongoing rating reviews based on material events to help in efficient portfolio monitoring and churn
- Structured payment mechanisms built in by issuers can provide credit enhancement to investors
- Availability of experienced rating analysts to address investor queries on ratings and rating rationales
- Access to Acuité’s rating expertise and knowledge across industries and different clusters or geographies
Acuité rates all types of bank facilities. Some of them are as under:
| LONG TERM INSTRUMENTS |
SHORT TERM INSTRUMENTS |
BANK FACILITIES- FUND BASED |
BANK FACILITIES- NON FUND BASED |
OTHERS |
| Bonds (Senior) |
Certificate of Deposits (CDs) |
Term Loans |
Letter of Credit |
Fixed Deposits |
| Non-Convertible Debentures (NCDs) |
Commercial Paper |
Cash Credit |
Bank Guarantee |
|
| Subordinated Bonds (Tier 2) |
Short Term Debt |
Overdraft |
Buyer's Credit |
|
| Perpetual Bonds (Tier 1) |
Short Term NCD |
Working Capital Demand Loans |
|
|
| Preference Shares |
Short Term Fixed Deposits (FDs) |
Pre-Shipment Credit |
|
|
| Infrastructure Bonds (Banks) |
|
Post-Shipment Credit |
|
|
| |
|
External Commercial Borrowing |
|
|
Acuité is gradually increasing its coverage in the financial sector with ratings on banks and non-banking financial companies (NBFCs), housing finance companies (HFCs), security brokerages among others.
Acuité has set up a separate analytical team which focuses only on financial sector ratings and research. This is helping us to build strong expertise and understanding of the financial sector which will be of great value to the clients and investors. The senior leadership in the ratings team has very extensive experience in financial sector ratings having experience of rating a large number of banks and NBFCs in their earlier roles.
Acuité employs the standard "CRAMEL" framework for rating of financial sector players. The key parameters for evaluation in the sector are capital, resource mobilisation ability, asset quality, profitability, liquidity and management. The rating criteria for the sector is provided in: http://acuite.in/view-rating-criteria-12.htm.
SENIOR AND JUNIOR DEBT INSTRUMENTS
Banks and non-banks raise a wide variety of debt instruments which include vanilla NCDs (senior debt) or capital bonds of either the Tier I or Tier II category.
The vanilla NCDs or bonds are primarily raised by NBFCs/HFCs from institutional investors typically at a cheaper rate as compared to bank loans. For most of the large non-bank lenders in the market today, NCDs are a key source of funding. While banks are permitted to raise long term resources from the market through instruments such as infrastructure bonds, they largely prefer to raise resources through either retail or wholesale deposits.
Capital (Tier I/II) bonds are primarily raised by the banking sector to strengthen capital adequacy although it also helps to mobilise long term funds and reduce asset-liability mismatches. Tier-I/II instruments under Basel III are hybrid capital instruments with loss absorption features which may lead to a notch-down in their ratings vis-à-vis the senior debt. NBFCs and HFCs also raise subordinate debt, perpetual bond or preference shares to augment their capital but the volume of such issuances are typically limited as compared to banks.
Acuité has already rated senior and subordinated debt instruments of NBFCs and has the capability to rate such instruments for banks.
SHORT TERM DEBT
Acuité rates the short term debt instruments in the financial sector which are typically:
- Certificates of Deposits (CDs) of banks
- CP/STD programme of NBFCs and HFCs (including episodic borrowings for IPO finance)
Acuité has a specific mapping of the long term rating scale to the short term scale for the financial sector. All short term ratings will have a linkage to the long term rating (may not be assigned but remain implicit) of the issuer. While the rating methodology for both long and short term ratings is largely identical, there are additional factors that are given due weightage such as the liquidity and the asset-liability mismatch (ALM) position of the borrower and the availability of back-up funding mechanisms in case of a disruption in the markets.
OTHERS (BANK LOANS & FD)
Acuité also rates the other debt categories in the financial sector, namely, bank facilities and fixed deposits (FD).
We already rate bank facilities of several NBFCs and HFCs where the methodology is largely similar to the rating of their long term senior debt.
With respect to deposits, Acuité rates the FD programme of both banks and non-banks. It is rated on both the short term and the long term scale depending on the tenure of the FDs. If its a longer term FD with contracted maturity of more than a year, then it is rated on a 15-point rating scale including modifiers (ACUITÉ FAAA to ACUITÉ FD). This is a dedicated rating scale for FDs as per the guidelines of RBI.
While the rating methodology for a FD rating will reflect the fundamental credit quality of the bank/NBFC and will be largely similar to that for a long term rating, it will closely look into aspects such as its FD repayment profile, FD renewal rate, diversity in funding sources and its liquidity position. The FD rating is mapped to the long term rating and can be higher by 1-2 notches than the latter depending on the liquidity assessment of the entity.
