Fixed Deposit
10th October 2019 (Version 3)

Fixed Deposits: As an Instrument

The term Fixed Deposit refers to a certificate of deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Fixed Deposit usually cannot be withdrawn prior to its maturity or they can be withdrawn only with advanced notice and/or by paying a penalty. Currently, deposits can be accepted by the following types of entities viz., (i) Banks (ii) Non-banking Financial Companies registered with RBI (referred to as NBFC-D); and (iii) Non-banking, non-financial companies.

Fixed Deposits: Credit Rating Parameters

Acuité believes that credit rating parameters to rate fixed deposits will depend on the inherent credit quality of the issuer. In other words, the criteria used to rate manufacturing/financial entities or respective industry specific criteria will be used for evaluation. Accordingly, the credit rating parameters will be linked to business, financial and management risk profiles.

Risk factors that may impact Credit Rating:

Business Risk: Credit rating analysis begins with an assessment of the company's environment. Acuité analyses the dynamics of business with respect to the industry in which the company operates, to determine the degree of operating risk that a company faces. The factors assessed include industry risk, competitive profile, market position and operating efficiency of the enterprise.

Management Risk: Management risk takes into account the ability of the leader to guide, explore opportunities, develop, execute plans and react to market changes. Acuité considers the risk appetite, integrity and competence of the management, and evaluates its corporate governance principles.

Financial Risk: Financial risk analysis determines how the business manages the available funds, the risks it faces and the factors employed to mitigate the same. The balance sheet, income statement, sources and uses of funds statement and financial projections provide essential information about the company's initial and ongoing repayment capacity. Quantitative analysis of revenues, profit margins, income and cash flow, leverage, liquidity and capitalization help identify trends and anomalies that could affect the borrower's performance. While benchmarks vary greatly by industry, several analytical adjustments are required to calculate ratios for an individual company.

Analysis of audited financials entail reviewing accounting quality to determine whether ratios and statistics derived from financial statements can be used accurately to measure a company's performance and position relative to its peer group.

Additional Factors Considered

Along with the revolving nature of the FDs, large number of investors and smaller repayment amounts make this instrument different from the mainstream debt instruments. Accordingly, due emphasis has to be accorded to factors such as risk management systems surrounding the raising and repayment of FDs. For instance, stronger risk management policies such as using account transfer for FD (as against Cash and PDCs) go a long way in ensuring issuer ability and willingness to service instruments in a timely manner. The historical track record of raising and repayment of FDs and the extent of reliance on this type of instrument in the overall funding mix are also evaluated. Acuité may consider a differentiation between a rating for a Fixed Deposit vis a vis the ratings on the other plain vanilla debt instruments of the same borrower. The reasons are twofold. Firstly, borrowings under fixed deposit programme are granular in nature and maturities of the fixed deposits are spread across different points of time. Secondly, it is pertinent to note that while certain fixed deposits fall due for payment, the borrowing company could also be simultaneously accepting fresh deposits/ renewing existing deposits. The net impact on the borrower’s cash flow is significantly moderated.

Acuité's Rating scale for Fixed Deposits

  Symbols

  Rating Definition

'Acuité FAAA'
("F Triple A") Highest Safety

Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk

'Acuité FAA'
("F Double A")
High Safety

Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk

'Acuité FA'
("F Single A”)
Adequate Safety

Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk

Acuité FBBB
("F Triple B”)
Moderate Safety

Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk

Acuité FBB
("F Double B”)
Moderate Risk

Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations

'Acuité FB'
Inadequate Safety

Instruments with this rating are considered to have high risk of default regarding timely servicing of financial  obligations

'Acuité FC'
High Risk

Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations

'Acuité FD'
Default

Instruments with this rating are in default or are expected to be in default soon

Note: Acuité may apply '+' (plus) or '-' (minus) signs to its ratings from Acuité FAA to Acuité FC category to indicate their relative standing within the category.

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