Bank Loan Ratings (Basel II) - FAQs by Corporates

What is a bank loan rating? Why has it become relevant?

  A bank loan rating indicates the degree of risk with regard to timely payment of the bank facility being rated. The facility includes principal and interest, if any, on the principal.

RBI issued guidelines on capital adequacy for banks in 2007. The guidelines require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs), such as CRISIL.
2. What is Basel II?
  Basel II is a recommendatory framework for banking supervision, issued by the Basel Committee on Banking Supervision in June 2004. The objective of Basel II is to bring about international convergence of capital measurement and standards in the banking system. Based on the Basel II framework, RBI issued guidelines on the new capital adequacy framework to banks operating in India, in April 2007.
3. When do Basel II norms come into effect?
  The revised framework for capital adequacy has been effective from March 31, 2008, for all Indian banks with an operational presence outside India (12 public sector banks and five private sector banks) and for all foreign banks operating in India. It has been applicable to all other commercial banks (except local area banks and regional rural banks) from March 31, 2009.

Credit rating is not mandatory under Basel II. But banks are likely save capital if they get their loan portfolios rated. If a bank chooses to keep some of its loans unrated, it may have to provide a risk weight of 100 per cent for credit risk on such unrated loans.
4. Is a credit rating required before a company can get a loan sanctioned or renew its working capital facilities?
  A credit rating is not a prerequisite for a loan sanction or for renewal of working capital facilities. However, a bank could insist on rating the loan/facility before sanction/renewal, as it would help the bank save on capital, and provide it with additional inputs to decide on the terms of the loan.
5. What are the types of facilities rated by CRISIL?
  CRISIL rates all types of bank loans and working capital facilities. These include project loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities, such as letters of credit and bank guarantees.
6. Does CRISIL rate every bank facility separately?
  CRISIL assigns ratings to each facility separately. The validity of each rating is linked to the tenure of the rated facility.
7. What is CRISIL's rating scale for bank loan ratings?
  CRISIL rates long-term loans or facilities (with original contracted maturities of one year or more) and cash credit facilities (as required by the RBI guidelines) on its 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. Please refer to the annexure for details of CRISIL's long-term and short-term rating scales.
8. In case of consortium lending, does the borrower need to take a separate rating for each banker?
  Yes, a company that has borrowed from a consortium of lenders needs to get the entire loan amount or facility rated by CRISIL.
9. Should a company also get its non-fund-based limits rated by CRISIL?
  Yes, under the new framework, banks have to provide capital on both fund-based and non-fund-based exposures.
10. What about foreign currency loans and external commercial borrowings (ECBs)? Does CRISIL also rate these?
  Yes, according to the new framework, risk weights on banks' exposure to resident corporate entities, irrespective of the currency of exposure, are calculated based on ratings assigned by domestic rating agencies, such as CRISIL. Accordingly, CRISIL assigns bank loan ratings for foreign currency loans taken by resident corporate entities from Indian banks or foreign banks based in India.
11. If a company's non-convertible debentures are rated, can the same rating be used by banks for all exposures to the company?
  In case of companies with an outstanding NCD/commercial paper rating, the rating applicable to that debt may be applied to the bank's unrated claims for capital relief only if:
  • 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.
12. How long does CRISIL take to rate a bank loan?
  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.
13. Does a corporate entity have the option of not accepting the rating assigned by CRISIL?
  The corporate entity has the option to accept or not accept the rating assigned by CRISIL.
14. If the corporate entity does not accept the rating, will CRISIL share the rating with the bank?
  Only after the corporate entity accepts the bank loan rating, it will be publicly released and shared with the bank.
Bank Loan Ratings Agencies in India - CRISIL