Criteria for Rating of Securitized Transactions
24th March 2018 (Version 3)

Executive Summary

In the context of modern financial markets, the burden of risk management is no longer limited to the investing/lending entity; rather it has become a joint responsibility of the issuer of the instrument and the lender. This shift in the risk management attitude is a necessary precursor of efficient capital markets which characteristically offer a greater extent of risk management via sharing of risks between market participants.

Structured obligations (also called Credit Enhancement Mechanisms and Structured Payment Mechanisms), by definition, are legal structures that enhance stability in the stream of cash flows for the holder of a financial instrument independent of the overall cash accruals in the issuer's core operations. In other words, structured obligations (SO), enable issuers to create financial instruments with relatively safer risk profiles in comparison to their standalone credit quality.

Apart from being quintessential tools for risk management, SOs enable such entities to raise funds from a larger cross section of investors and lenders including NBFCs, banks, mutual funds and individual investors.

Unlike the rating of bank facilities, SO ratings are a measure of instrument-specific risk and thus are a function of both, the fundamental credit quality of the issuer and strength of the structure itself. Against this background, there are three broad categories of credit enhancement mechanisms that an issuer can establish:

  • Mechanisms based on Securitization of Assets
  • Mechanisms backed by a strict delineation of Future Cash Flows
  • Mechanisms backed by External Credit Enhancements

Mechanisms based on Securitisation of Assets

Securitisation of assets entails the originator transferring the loan/asset to a Special Purpose Vehicle (SPV). The SPV would raise funds from the investor by issuing Pass Through Certificates (PTC), having credit enhancements extended by the originator. The payments to the investor happen from the cash flow generated by this asset owned by the SPV. Alternatively, the investor and borrower can opt for a separate arrangement called direct assignment of method wherein the underlying assets are directly assigned to the investor, with no need of an SPV. Securitisation of assets is popular primarily for transactions in which the underlying assets comprise residential and commercial mortgages, vehicle financing, gold loans, LAP (Loan Against Property), construction equipment loan, personal loans among others. This section covers Acuité's approach to rating Asset backed Securities (ABS) and Mortgage backed Securities (MBS).

In order to understand the risks associated with a securitisation transaction, it is important to first familiarize oneself with the nature of such a transaction.

Key Steps in Securitisation Risk Associated/ Factors Analysed
From its overall portfolio, the originator demarcates a pool of assets (loans) that it wishes to securitise. Overall Portfolio Risk
The originator then sells this underlying asset pool to a separate SPV (Trust managed by a Trustee). This sale is typically made while ensuring that all risks and rewards associated with the particular asset is transferred to the SPV, thus delineating the performance of the asset pool from the changes in the credit profile of the originator. Legal Risk
The SPV raises funds from investors by issuing them Pass through Certificates (PTC). These funds are in turn paid to the originator as consideration for sale of assets to SPV Transaction Structure
The servicer is then responsible for ensuring timely collection of receivables and depositing the same in a designated Trust and Retention Account (TRA). In several securitisation transactions, the originator can also act as a servicer. Servicer Risk
This cash flow generated from the underlying asset pool is deposited in the TRA. It subsequently flows to the investor as interest and principal components of the PTC issuances. Credit Risk
The originator may provide additional credit enhancements to cover any shortfall in collections from the underlying pool and ensure that payments to the investor are in full and in a timely manner.

Acuité evaluates individual risk elements acting at each stage of the securitisation transaction and the interplay among them.


Overall Portfolio Risk

Analysing the various practices and policies followed by the originator of the asset becomes important before ascertaining the overall health of the portfolio. Acuité analyses the robustness and soundness of the policies adopted by the originator for the entire gamut of lending activities, including lead generation, underwriting and credit policies, post disbursal monitoring of assets and collection efficiency. Acuité also gives due importance to the quality of MIS maintained by the originator and its risk management systems. Further, Acuité analyses the target market in which the originator operates, its geographical focus, and risk appetite. The delinquency rates and track record of managing portfolio of assets from which the asset pool has been carved out is also important to understand the portfolio risk associated with the originator.

Acuité analyses the characteristics of the originator's portfolio to understand delinquency risk, prepayment risk and collection efficiency. While doing this analysis, Acuité evaluates the entire portfolio of the originator, where new loans keep getting added while older loans are closed. Such analysis wherein newly disbursed loans get added regularly is called dynamic portfolio analysis.

  1. Delinquency Risk

    To analyse the overdue position in a given portfolio, Acuité bifurcates each underlying loan among several buckets like 'On Time payment', '30+ DPD', '60+ DPD', till '180+DPD'. This bifurcation of individual loans acts as a starting point of the dynamic portfolio analysis. Acuité calculates the bucket wise delinquency rate. The outstanding value of loans as on date in each bucket is divided by the total portfolio outstanding as on that date. Acuité evaluates the trend in this delinquency rate over a period of time. However, in cases of rapidly expanding portfolios, this delinquency ratio may understate the delinquency risk. Thus, it may be prudent to consider lagged delinquency rates as well. Here, a historical (lagged) value of the outstanding portfolio is taken. Typically, the historical value of 6-12 months' of the outstanding portfolio is taken depending on the asset class, seasoning, and original tenure among others. While analysing the performance of a portfolio over a period of time, it is also important to make sense of the movement in the delinquency transition rates for a portfolio.

  2. Prepayment Rate

    Acuité analyses the monthly historical prepayment rates for the portfolio, along with the expected interest rate and income level movements. Acuité also compares these prepayment rates with the benchmark rates for the same asset class.

  3. Legal Risk

    Analysis of legal risks associated with securitisation transactions is important to ensure that interest of investors is protected at times when credit quality of the originator deteriorates significantly. Essentially, the analysis revolves around the de-linking of the underlying asset pool and credit enhancement to the pool from the credit quality of the issuer. Thus, in case the originator files for bankruptcy, the performance of the asset pool and its respective credit enhancement will remain unaffected with investors receiving their payments in a timely manner.

    For this de-linking to uphold in the court of law, it is essential that the sale of assets from originator to SPV is free of any recourse and that all risks and rewards associated with the asset is transferred from the originator to the SPV. Acuité analyses not just the specific terms and conditions of the asset transfer agreement, but also other documents including the rights and obligations of all involved. Acuité also seeks third-party independent legal opinion to learn about the legal risks involved in a securitisation transaction.

    While assessing the legal risk of a given securitisation transaction, Acuité also takes into account the competence and experience of the designated trustee in performing its duties and responsibilities.

  4. Transaction structure

    Acuité also analyses the transaction structure to determine the inherent protection against shortfall in cash flows to PTC investors. The two primary structural features built into the transaction that provides implicit credit enhancements are:

    1. PAR v/s Premium Structure

      Transactions wherein investors pay the outstanding principal of the underlying asset as a consideration towards the issue of the PTC is called a PAR structure, i.e. PTCs are said to be issued at PAR. In this structure, typically the yield from the underlying asset pool is higher than the yield payable to PTC holders. Thus there will be excess interest spread (EIS) accumulated from cash flows generated by the underlying pool. This EIS would be wholly or partly available to meet any shortfall in funds generated from the underlying assets thus providing an internal credit enhancement. Balance, if any, in the EIS account at the end of the PTC tenure is typically transferred back to the originator.

      In Premium structures on the other hand, investors pay a premium over and above the outstanding principal of the underlying asset pool. Here, the cash flows generated by the underlying pool go to PTC investors and thus, no internal credit enhancement by way of EIS is available for investors.

    2. Waterfall Mechanism

      A well-defined, legally enforceable waterfall mechanism involves slicing the entire PTC issuances into various layers or tranches, with one typically being senior and one or more subordinated tranches. The objective here is to relatively insulate the senior tranche from the delinquency and prepayment risks in the pool. Here, the first right of cash flows generated by the pool is with senior tranche investors with residual funds flowing to subordinates.

  5. Servicer Risk

    Since cash flow generation from the pool of underlying assets is primarily dependent on the performance of the servicer itself, analysing the profile of the servicer becomes important. The servicer's ability to adopt and adhere to policies and processes with highest level of efficiency and competence related to follow-up, collection, maintenance of MIS and operational risk mitigation become critical. For long tenure PTCs, the servicer's solvency risk becomes critical. Thus, Acuité also analyses the financial risk profile of the servicer, quality of its management and its track record. For servicers having relatively weaker credit profiles, stronger forms of credit enhancements may be mandated.

  6. Credit Risk

    The ability of the underlying asset pool to generate adequate and timely cash flows is analysed in this section. While analysing the credit risk in a securitisation transaction, Acuité evaluates the impact of several factors like characteristics of asset class, pool risk, macro-economic risk, interest risk and pre-payment risk.

    1. Asset Class:

      The end use of the underlying loans/assets is analysed to understand the inherent risk in the securitisation transaction. For instance, Acuité believes that a pool consisting of residential home loans would be significantly safer than that of credit card receivables.

    2. Pool Risk:

      Acuité believes that static pool analysis is crucial to forecast the estimated loss in the securitised pool. Static pool refers to a collection of loans to which no new loans are added. The underlying loans from the portfolio are clubbed together based on their time of origination to form discrete pools. Loans having originated during a certain time period (3-6 months) are clubbed in one static pool. Similarly several static pools are taken into consideration so as to compare their performance during multiple time periods. Acuité also includes past securitised pools in its static pool analysis. Acuité then analyses the delinquency curve for each static pool to understand delinquency trends with reference to seasoning of loans as well as to compare delinquency risks that may have originated during different time periods. Similarly, Acuité also analyses prepayment curves, recovery curves and collection efficiency for various static pools.

      Additionally, Acuité also evaluates the following parameters while analysing the quality of the pool:

      • Current delinquency levels in the pool
      • Loan to Value Ratio (LTV) - Lower LTV ratio indicates better future performance of the pool
      • Geographic Distribution
      • Seasoning of Pool - Higher the seasoning, lower the risk
      • Borrower profile and concentration levels
      • Installment to Income Ratio - Analyses the repayment ability of the underlying borrowers - higher the ratio, higher the pool risk
      • Original tenure of the loan - Higher the original tenure loans extended to the underlying borrowers, higher is the pool risk
      If pool risk is significantly different from the portfolio risk of the originator, it could mean cherry-picking while carving out the pool. The risk profile of the pool when compared against portfolio risk could be either better or worse. Thus, Acuité adequately factors in the same while assessing credit risk for securitisation transaction.

    3. Macro-Economic Risk

      The ability of the underlying asset pool to generate adequate, stable and timely cash flows is also influenced to a large extent by the overall economic environment prevailing in the country or the geography in which the asset class is largely concentrated. Any significant but unforeseen volatility in the macro economic scenario can influence the value of collaterals of the underlying assets, thus influencing the credit risk associated with the pool. Income levels of the underlying borrowers and interest rates to be paid are certain key variables that impact the ability of the underlying asset pool to generate stable cash flows. Acuité factors in the expected economic conditions over the tenure of the asset pool to incorporate the likely impact of the same on the credit profile of the underlying assets.

    4. Interest rate Risks and Pre-Payment risks

      Interest rate risks primarily arise due to mismatch in the interest rate benchmarks for the underlying pool of assets and investors. For instance, in structures wherein loans in the pool are linked to floating rates and payouts to investors are on fixed interest rates, cash flows from the pool may be inadequate in a falling interest rate regime. While analysing the credit risk in a structure, Acuité takes into consideration the expected movement in interest rates, the cushion between cash flows being generated by the pool and payout to investors.

      In cases where in the pool is linked to floating interest rates, movement in benchmark interest rates also impact the expected prepayments in the pool. Prepayment risk arises when investors receive funds earlier than expected, thus exposing them to risk of re-investing these funds at lower yields. Typically, decreasing interest rates and increasing income levels lead to higher prepayments in pools based on retail loans. While analysing prepayment risk for a given transaction, Acuité analyses the expected movements in interest rates and income levels with historical prepayment patterns for a given asset class.

  7. Explicit/External credit enhancements
    Based on the risk profile of the underlying pool and the transaction structure, the originator may employ additional credit enhancements (external) in the form of debt service reserve accounts (DSRA) and/or corporate guarantee. Acuité analyses the extent and quality of this additional support and its legal enforceability. Acuité also analyses the legal structure to check whether cash collateral is available to investors even if the originator goes bankrupt. To be considered as an effective credit enhancement, Acuité believes that these enhancements should provide the required funds before due date so that payments too are made to investors on or before due dates.

Mechanisms backed by a strict delineation of Future Cash Flow

In such mechanisms, the investors/holders of the instrument have the primary claim on a stream of cash flows from a particular project or any other asset. The funds are first required to be placed in a separate account, typically a Trust and Retention Account (TRA) and only after meeting the debt repayment obligations can the residual cash flow from the project/asset be utilised by the issuer for its firm's operations (reinvestment or declaring dividends). This mechanism is generally used in project financing (like infrastructure and real estate projects) and in cases wherein the borrower identifies specific assets - the cash flow from which shall be utilised to fulfill its debt obligations. Some examples of future cash flow securitisation are Toll collection receivables, rent receivables, receivables from sale of power to name a few.

Credit ratings assigned to future flow securitisation transactions are influenced by three primary factors:

  1. Issuer specific risks

    In case of plain securitisation transactions such as ABS, the ability of the underlying pool to generate cash flows is not linked to that of the issuer's while in cash flows securitisation transaction, this link exists. In short, for future cash flow securitisation, there exists no sale of asset or bankruptcy remoteness and the credit profile of the instrument is linked to the profile of the Issuer. The investors have a claim on future receivables only and thus the issuer's ability to generate these are evaluated.

  2. Counterparty risk

    In order to determine the stability in expected future receivables, it is important to understand the credit risk profile of the counterparty expected to make these payments to the issuer. This risk is analysed only for those transactions, wherein cash flows are expected to be generated from a few large counterparties. For instance, in securitisation of future power sale receivables, there are typically one or two large entities, who have entered into power purchase arrangements with the power producer (issuer). In case of any delay in payment of dues by these entities, the credit profile of the instrument will undergo significant deterioration.

  3. Legal and structure risk

    Evaluating the strength of the structure to understand the level of protection it offers investors becomes an important part of the credit analysis for future flow transactions. Acuité evaluates the efficacy of the trust deed, any assured off take agreements that lend stability to future receivables, the structured payment mechanism (SPM) that ensures that funds are available before the due date to service investors and the tripartite agreement between the issuer, the counterparty and the trustee. Acuité also checks if the efficiency of the escrow mechanism, the timely deposit of receivables in the designated escrow account, and the rights and ability of the trustee to monitor and control this account to ensure investor protection is of the highest order.

    Just as in the case of securitisation transactions, in future flow securitisation, the credit rating of the instrument can be improved on the basis of external credit enhancements such as corporate guarantees and DSRA accounts, provided they ensure timely servicing of debt.

Mechanisms backed by External Credit Enhancements

In the above two mechanisms, there were either a separate pool of underlying assets responsible for generating cash flows for debt servicing, or specific demarcation of future cash flows of an entity, for debt servicing. External credit enhancements were also possible, and in some cases required for these two mechanisms. However, in cases wherein separate demarcation of cash flow streams is absent for investors and debt servicing is to be done from the comingled funds of an entity, but there exists a well-defined, documented, legally enforceable, pre-default, external, credit enhancement mechanism, Acuité assigns a structured obligation (SO) rating to such instruments. In order that such a credit enhancement mechanism be considered by Acuité, the enhancement should necessarily be a pre-default event and thus should be articulated in a well-defined, enforceable structured payment mechanism (SPM)

  1. SPM backed by corporate and/or government guarantees

    In such mechanisms, there exists an external entity (typically a corporate entity or a government) that undertakes to fulfill the debt repayment obligations on behalf of the issuer of the instrument in case the necessary funds are not made available before the due date.

    SPM backed by Corporate or Government Guarantee
    1. a. Understanding the nature of the guarantee
      • Acuité evaluates the guarantee deed to ascertain if the guarantee is unconditional and irrevocable
      • The guarantee should be valid for the entire tenure of the instrument and should also cover the interest and principal part of the instrument
      • Acuité evaluates the operational risks associated with timely availability of funds for debt servicing upon invocation of the guarantee. Here Acuité analyses:
        1. Acuité evaluates the operational risks associated with timely availability of funds for debt servicing upon invocation of the guarantee. Here Acuité analyses:
        2. Regulatory obstacles that stop the guarantor from making payments once the guarantee is invoked
      • Acuité may seek legal opinion from an independent law firm to ensure that the above conditions are satisfied.
    2. Evaluating the ability of the guaranteeing entity to arrange for the required funds in case of invocation of the guarantee -
      • This involves evaluating the guaranteeing entity's liquidity risk profile, ability to generate cash flows and mobilise resources in a timely manner;
      • To this end, Acuité arrives at the standalone credit rating of the guaranteeing entity.
      • In case of unconditional and irrevocable structures, the rating of the structured obligation is mapped to that of the guaranteeing entity, provided the timeliness of cash flow is reasonable (explained in the below section).
    3. Evaluating timeliness of cash flows

      In such SPMs, Acuité believes that the timeline with respect to the enforcement of the structure becomes even more important. To this effect, Acuité believes that the strict definition of the following dates is indispensable for the structure to be optimal:
      1. Date and condition of invocation of the guarantee
      2. Date by which the funds shall be made available in an escrow account by the guaranteeing entity
      3. Date by which the Credit Rating Agency shall be informed in case of inability of the guaranteeing entity to make the necessary funds available

Acuité believes that these dates should be before the upcoming due dates, (T minus x) structures, with the forthcoming due dates defined as T. The typical preferred dates for the above conditions, to ensure timely availability of funds to investors, will vary depending upon the ease with which the guarantor can make the funds available. The prime consideration here is the operational ease with which the guarantor can make the funds available for investors after invocation of the guarantee. For instance, SPM backed by a guarantee from a bank in the form of a stand by line of credit (SBLC) would typically require less time to ensure fund availability to an investor after guarantee invocation, as compared to a state government guarantee.

SPM backed by liquid collaterals:

In such structures, liquid asset collateral is created out of the funds being raised. This asset may be in the form of a Fixed Deposit or any other highly secured and liquid instrument and is typically placed in a Debt Service Reserve Account (DSRA). The balance in the DSRA is expected to be maintained till the maturity of the security. In case the issuer is unable to arrange for funds to meet its debt repayment obligations, funds in the DSRA account may be utilised to service the issuer's debt obligations on or before the due date.

SPMs Backed by DSRA

In case of a Structured Payment Mechanism (SPM) based on the creation of a DSRA, i.e. backed by liquid asset collateral like FD, or G-sec bonds, the quantum of funds in the TRA and the DSRA are to be evaluated in line with the total amount of debt to be serviced on each due date. To this end, Acuité computes the cover maintained by the DSRA and the TRA.

DSRA Cover = Amount of Funds to be placed in DSRA / Maximum Principal + Interest to be paid

Typically, a higher cover is representative of a high degree of safety. However, Acuité also understands that funds placed in the DSRA are often associated with high opportunity costs and thus adversely affect the Internal Rate of Return of the Project being financed and/or increase the effective cost of borrowing by increasing the hurdle rate for the issuer. Thus, issuers need to find the correct trade-off between the cost of credit enhancements and benefits of the same.

Although the strength of credit enhancement is proportional to the quantum of DSRA maintained, there is an implicit cap on the extent of notch-up (typically 2-3 notches) an entity can receive due to this mechanism. This is because the credit enhancement in such mechanisms continue to be critically dependent on the issuer's standalone credit risk profile, as any depletions in the DSRA account would necessarily have to be funded out of the cash flows generated by the issuer from operations itself.

Timeliness of the Cash Flow

In case of such SPMs, Acuité's objective is to ensure that there exists sufficient time for the enforcement and fulfillment of all obligations under the mechanism. SPM should clearly define the date by which the issuer needs to make adequate funds available for interest and/or principal payments to investors. Failing to do this, the SPM should also explicitly mention that the DSRA maintained by the issuer with the trustee needs to be liquidated, to ensure adequate funds are available in the TRA account well before the upcoming due date.

The DSRA should be typically maintained in the form of highly liquid and marketable instruments such as FDs with nationalised banks and G-secs. In case of any alternate forms of DSRA maintained by the issuer, for instance AAA rated corporate bonds, the SPM should ensure adequate time gap exists between the trustee commencing the proceedings to liquidate DSRA and the upcoming due date for interest and/or principal payments to bond holders.

Acuité also evaluates the legal enforceability of the SPM, by studying the trust deed and bond agreement. For SPM to be considered as credit enhancement, Acuité believes that there should be no recourse or control of the issuer over these funds, and that the trustee should exercise total control over the DSRA account, to ensure timely payment to investors.

In cases where there are no corporate guarantees/or DSRA arrangements Acuité may still examine the structure from the standpoint of the counterparty and the criticality of the arrangement to the counterparty's operations. In cases where the arrangement is deemed to be critical to the counterparty's operations, Acuité may treat the debt as if it has been contracted by the counterparty and may assign a rating equivalent to or near the counterparty's rating. The key aspects to be reckoned here would be the intent of the counterparty's management in supporting the timely servicing of the debt obligations and the criticality of the arrangement to the counterparty's operations. Such ratings will also be suffixed with (SO).


The increasing trend in offering security coverage in the form of shares/ liquid investments has prompted a need for looking at such structures differently as opposed to structures based on a security of movable/ immovable assets. Generally a rating is indicative of a probability of default and is generally unaffected by the collateral coverage. However, in cases of structures backed by liquid collateral, a right type of structure can mitigate the likelihood of default.

Against this backdrop, Acuité assesses such structures in a different manner as opposed to plain vanilla borrowings. Such structures are very common in case of borrowings by investment vehicles of promoters. It has been observed that generally promoters of listed companies prefer to hold their investments in their listed companies through a clutch of privately held companies. Typically these private companies have moderate revenue streams mainly by way of dividends on the shares/ interest on investments. Such companies are structured as vehicles for promoter holding and typically do not have any other operations; their net worth and any debt requirements are for investments in promoter group companies. In the absence of any operations, these companies do not have any source of sustainable cash flow, they often must go in for refinancing of their debts/ infusion of funds by promoters. Hence refinancing ability/ financial flexibility is critical in evaluating such companies. Their financial flexibility is directly linked to the market valuation of their investment portfolio.

Acuité 's approach to evaluation of such issuers is based on the standalone credit profile of the issuer which would then be notched up for the structure. The extent of notching up will depend on two broad platforms (i) Strength of the Structure (ii) Nature and Quantum of liquid collateral

Strength of Structure

Timelines for funding the account are generally spelt out in the financing document in terms of T-n days (where T is the due date). Typically, n ranges between 3-5 days in most of the cases, since it provides adequate time to the lender/ debenture trustee to initiate the process for selling the securities and ensuring that the funds are received in the account on the due date.

Secondly tolerance for any dilution in security coverage is also a critical factor in evaluation of such structures. In case of structures backed by pledge of equity shares, if the security coverage falls below the minimum acceptable coverage stipulated in the term sheet, then an immediate top up must be arranged. Acuité believes that for such structures, any tolerance below 1.25 for two consecutive trading days will render the structure infructuous. Needless to say, monitoring the asset coverage on a daily basis and initiating action for topping up wherever necessary is crucial in such structures. Hence Acuité will examine the financing documents for these clauses.

Nature & Quantum of Liquid Collateral

As mentioned earlier, any coverage below 1.25x (in case of equity shares) shall not be reckoned for the notch up. Besides the quantum of coverage, Acuité also examines the following aspects while arriving at a notching up

1) Financial performance of the companies whose shares are being offered as collateral

2) Volatility in the share prices

3) Diversification in the security coverage

4) Diversity of Investor base - Presence of marquee investors

5) Quantum of unencumbered promoter holding vis a vis encumbered promoter holding

6) Daily Volumes on the counter - To assess the ability of the market to absorb


These ratings will be suffixed with the letters SO in brackets to distinguish them from the standalone credit ratings of the issuer.


External Credit Enhancements based on Guarantees issued by Banks /Financial Institutions

In respect of debt obligations (credit facilities availed from banks/ Capital market instruments) backed by Bank Guarantees/ Standby Letters of Credit from Banks/ Financial Institutions, the ratings will be linked to the credit quality of the Guaranteeing /SBLC issuing Bank. The ratings assigned to such credit facilities will be suffixed with the words (SO) i.e Structured Obligation, to indicate that these ratings do not reflect the standalone credit quality of the borrower/issuer and are based on certain forms of credit enhancement.

Acuité observes that Bank guarantees/SBLCs are issued by banks as per pre-defined standardized formats and are usually post default in nature i.e the lender can invoke the guarantee /SBLC only after the occurrence of default. Besides, there are no predefined timelines for invocation or payment by guaranteeing bank after invocation. Hence their utility as a 'default' mitigation mechanism is limited. Notwithstanding these limitations of a bank guarantee, it needs to be recognised that a credit facility / capital market instrument supported by a bank guarantee is considered as an exposure on the guaranteeing bank. The risk weightage assigned to such exposures is also lower than other regular exposures since the rating of the guaranteeing bank is considered for the capital adequacy. The issuance of a guarantee is a part of a normal course of business for a bank and the bank has to set aside capital to meet this off-balance sheet exposure. Any failure /inability to honour the obligations under the guarantee / commitments can potentially impact the bank's credit worthiness and impair its trust and credibility from an external standpoint. Since the implications of a default under a guarantee / SBLC are severe, a bank will ensure that its commitments under any guarantee / SBLC are met even in the most difficult circumstances.

In such cases of Bank guarantee / SBLC backed structures, Acuité may rely on external ratings assigned by other rating agencies to these banks/ financial institutions. In case of more than one rating, Acuité will generally consider the lowest of the rating. In case of overseas banks/ institutions, Acuité will map the international rating of the bank to the domestic scale and then assign a rating based on the domestic equivalent of the bank's rating. Acuité may suitably maintain a differential of 1-2 notches to the guaranteeing bank's rating /domestic equivalent rating. It is to be noted that such ratings are based on the credit quality of the guaranteeing bank and any revision in the credit rating of the said bank will result in a revision of the SO ratings assigned for the facilities/borrowings.