Rating Transition & Default Study - FY18:
Acuité Ratings & Research Ltd.

Credit Ratio (CR) is the ratio of the number of upgrades to the number of downgrades in the given period. As we can see in the graph below, there has been a significant uptrend in the credit ratio to 1.9 times in FY 18 from 1.0 time in the previous year i.e. FY17.

Graph 1-2: Credit Ratio

This has been primarily driven by the improvement in the operational and financial performance of the rated small and mid-sized companies post the impact of demonetization and the implementation of GST. MSMEs in particular which had seen an impact on their business due to demonetization in 2016-17 and impact on liquidity due to GST, showed good signs of recovery in the background of stronger domestic demand particularly in the second half of FY18. The modified credit ratio (MCR) which reflects the ratio of rated quantum in upgrades to the rated quantum in downgrades is relatively more volatile given the current portfolio size and lower average ticket size vis-à-vis the larger CRAs. MCR has inched up from 1.5 times in FY17 to 2.9 times in FY18. This trend is consistent with the outlook on the Indian economy, higher public investments and the resultant demand growth driven by higher consumption.

Table 1: Default Rate:

  FY18 FY17
  Defaults No of Companies Default Defaults No of Companies Default
AAA 0 0 NA 0 0 NA
AA 0 10 0.0% 0 5 0.0%
A 0 28 0.0% 0 14 0.0%
BBB 2 118 1.7% 3 90 3.3%
BB 6 271 2.2% 11 222 5.0%
B 20 231 8.7% 26 166 15.7%
C 0 7 0.0% 6 10 60.0%
Total 28 665 4.2% 46 546 8.4%

SMERA’s default rates have seen a significant improvement in 2017-18. There has been only two investment grade default in FY18 as compared to three in FY17. Further, there have been only 6 defaults from the BB category as compared to 11 in the previous year. The overall default rate has come down appreciably to 4.2% as compared to 8.4% in the previous year and compares well with the large CRAs. SMERA expects its overall default rate to come down further with a steady expansion of the rating portfolio.

Graph-3: Gini Coefficient (GC):

Gini coefficient (GC) is a reflection of the distribution of defaults from the various rating categories. Larger the proportion of defaults from the lower rated categories, the closer will be the ratio to the ideal figure i.e. 1.0. SMERA’s one- year Gini coefficient has seen a healthy increase to 0.55 in FY18 as compared to 0.46 in FY17. While this is fairly consistent with that of the larger CRAs, we believe that there is a scope of improvement in the GC and with the adoption of tighter monitoring mechanisms in the rating processes of SMERA, the latter is expected to show an improving trend.


Table 2: One Year-Transition Matrix FY2018:

AA 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
A 0.0% 0.0% 92.9% 7.1% 0.0% 0.0% 0.0% 0.0%
BBB 0.0% 0.0% 2.5% 90.7% 5.1% 0.0% 0.0% 1.7%
BB 0.0% 0.0% 0.0% 7.7% 87.1% 3.0% 0.0% 2.2%
B 0.0% 0.0% 0.0% 0.0% 9.5% 81.8% 0.0% 8.7%
C 0.0% 0.0% 0.0% 0.0% 0.0% 28.6% 71.4% 0.0%

SMERA’s stability ratios in the investment grade categories is fairly high and compares to the best in the industry. High stability ratio in A/BBB category reflects a healthy rating performance.

Among the 703 ratings reviewed by SMERA during FY18 (excluding the non-cooperative clients), 69% or 485 ratings were reaffirmed while there were rating changes in the balance cases. The distribution of the rating changes in FY18 is given in the graph below:

Graph-4: Rating Change Distribution in FY18:

The proportion of multi-notch rating changes is 9% (63 cases) among the total rating changes (218 cases) during FY18. However, almost all such multi-notch changes are in the non-investment category.

Graph-5: Overall Rating Distribution in FY18:

There is no significant change in the rating distribution of SMERA in FY18. However, with the increasing penetration of Acuité Ratings into larger and better credit quality clients, the proportion of outstanding ratings in BBB category and above has gradually increased from 14.0% on March 31, 2016 to 15.4% on March 31, 2017 and further to 23.7% as on March 31, 2018.

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Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

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