Bank Loan Ratings (Basel II) - FAQs by Banks
1. Is credit rating of loans mandatory under RBI guidelines?
  Credit rating is not mandatory. However, it is in the interest of banks to have ratings on their corporate exposures from an external credit rating agency, such as CRISIL. The banks could save capital, depending on the credit profile of their corporate exposures.
   
2. Should a bank get all its loans rated by a bank loan rating agency?
  Yes, it is desirable that all the loan accounts are rated by an external credit rating agency.
   
3. What could be the extent of saving on capital that a bank would get if its assets were rated?
  If a bank has high-quality assets (for example, if the majority of its assets are in the 'AAA' and 'AA' categories) it will save capital because of low credit risk; the difference is apparent in the illustration below.
   
 
Illustration of capital-saving potential by banks on a loan of Rs.1000 Million
Rating Basel I Basel II
  Risk weight Capital required 1 Risk weight Capital required Capital saved
    (rs. mn)     (rs. mn)
AAA 100% 90 20% 18 72
AA 100% 90 30% 27 63
A 100% 90 50% 45 45
BBB 100% 90 100% 90 0
BB and below 100% 90 150% 135 (45)
  1 Capital required is computed as loan amount x risk weight x 9 per cent.
   
4. In case of consortium lending, does the borrower need to take a separate rating for each facility with each banker?
  Yes, the borrower will need separate ratings for each facility with each banker.
   
5. Does CRISIL rate working capital facilities extended by the bank on its short-term scale or on its long-term scale?
  Long-term loans or facilities (with original contracted maturities of one year or more) and cash credit facilities are rated on CRISIL's long-term rating scale. Short-term facilities (with original contracted maturities of one year or less) are rated on CRISIL's short-term rating scale.
   
6. Who rates foreign currency facilities extended by domestic banks?
  Bank facilities extended to resident corporate entities, irrespective of the currency of exposure, are rated by domestic rating agencies, such as CRISIL. On the other hand, bank facilities extended to non-resident corporate entities are rated by global rating agencies, such as Standard & Poor's.
   
7. If a company's non-convertible debentures are rated, can the same rating be used by banks for all exposures to the company?
  The rating applicable to the existing debt instrument of a borrower may be applied to the bank's unrated claims for capital relief only in case of the following cases:
  • The bank's claim ranks pari passu with, or is senior to, the specific rated debt in all respects.
  • The bank's claim has a maturity that is not later than the maturity of the rated claim.
  • In case of short-term exposures, the risk weight to be used for the unrated claim will be one category higher than the risk weight for the rated claim.
8. Does CRISIL map the internal ratings of the bank with CRISIL's ratings?
  As per the guidelines, banks can only use ratings from external credit rating agencies to calculate the capital required against credit risk. Hence, mapping of ratings will not be really helpful to banks under the standardised approach.
   
9. Is CRISIL capable of handling rating requests from many corporate entities at the same time?
  Yes, CRISIL is fully equipped to handle large volumes of ratings. Presently, CRISIL has:
  • A direct presence in 65 major industrial centres across India to handhold first-time rating clients
  • The largest and most experienced team of rating analysts (175 analysts and 75 data specialists)
  • A qualified team of industry analysts and economists that contributes to a large knowledge base (expert team of 100 plus industry analysts)
  • A state-of-the-art automated workflow, with dedicated support-services teams
  • Increased frequency of rating committee meetings to handle increased volume of rating assignments
10. How long does it take to complete a loan rating assignment?
  From the day it receives a written request for a bank loan rating, along with all information required for the analysis, CRISIL takes three to four weeks to complete the exercise of assigning a bank loan rating.
   
11. Will the bank loan rating be released to the public?
  Yes, the rating will be made public once the borrower accepts the rating in writing. All accepted ratings are made public by CRISIL through rating rationales, which are uploaded onto CRISIL's website, and monthly bulletins. The rating will remain in the public domain until the rated loans or facilities are repaid in full or extinguished.
   
12. Who pays for the ratings?
  Rating fees are usually paid by the borrower, since the request for a rating is made by the borrower. CRISIL requires the borrower to sign a rating mandate, and make the payment towards the applicable rating fee. However, CRISIL can enter into specific arrangements for obtaining its fee from banks. In all cases, the mandate for carrying out the rating exercise has to be signed by the borrower before the rating exercise can be initiated.
   
13. Does CRISIL rate the entire portfolio of a bank?
  Yes, CRISIL can rate the entire portfolio of a bank. A bank can also sign a memorandum of understanding (MoU) with CRISIL, whereby all borrowers who approach the bank for a rating will be rated on priority by CRISIL. However, each borrower will have to mandate CRISIL separately for carrying out the rating exercise.
   
14. How does the bank benefit from signing an MoU with CRISIL?
  A bank can benefit from quick turnaround times and efficient monitoring of progress, given CRISIL's ability to dedicate resources, and function as a single point of contact for the bank.
 
Bank Loan Ratings Agencies in India - CRISIL