Off-late, the interest rate has started moving north, and thus investors are scouting for corporate deposits that provide the best interest rate and come with the highest degree of safety.
But how you do get the safety of such deposits?
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For this you have, rating agencies like CRISIL, ICRA, and CARE Ratings to provide an unbiased opinion on the creditworthiness of companies offering the scheme.
The rating step is essential as these deposits are not secured, and there have been instances, in the past, where the issuer was unable to service the interest on time and also failed on the principal repayment.
Also, you must have come across the new that says –
CRISIL rated XYZ company’s fixed deposit at CRISIL FAA. Post announcement, the share price of the stock gets impacted depending on the market expectation.
Have you ever thought what happened, what is rating, what is CRISIL and why its rating impacts the price of a stock?
In this blog, we seek to provide you with answers to all such questions.
Let us set the context right by starting with CRISIL and its operations along with rating scale.
In this article
- What is CRISIL?
- What Is CRISIL rate?
- Is CRISIL’s Rating Limited to Certain Sectors?
- Role of CRISIL
- How Does CRISIL’s Rating Impact Depositor?
- How to Understand the Rating?
- Significance of Rating
- Interest Rate and CRISIL Rating
- Why CRISIL Ratings?
- The Interest Rate on FD and CRISIL’s Rating
- Mahindra and Mahindra Finance
What is CRISIL?
Established in 1987, CRISIL is India’s first credit rating agency that was promoted by the erstwhile ICICI Ltd along with UTI and other financial institutions.
The service offerings particularly ratings catered to investors, lenders, issuers, market intermediaries and regulators.
In simple language, CRISIL provides information that is required by the varied set of investors to assess the feasibility of credit repayment.
What Is CRISIL rate?
CRISIL is a full-service rating agency, and thus its rating service includes a wide array of debt instruments.
These include a certificate of deposit, bank loans, commercial paper, non-convertible debentures, asset-backed securities, mortgage-backed securities, bonds, fixed deposits, etc.
Is CRISIL’s Rating Limited to Certain Sectors?
No, CRISIL rating covers all manufacturing companies, and service companies including banks, non-banking finance companies.
Companies can be public sector undertakings, state-government owned companies, private companies, public limited companies, partnerships, proprietorship, mutual funds, microfinance institutions, urban local bodies, etc.
Role of CRISIL
CRISIL ratings play an invaluable role in assisting issuers and borrowers. The company seeks to bridge the hap between the borrowers and funds while also providing an alternative to funding.
Also, CRISIL’s rating offers the cost of capital benefit to the issuer.
How Does CRISIL’s Rating Impact Depositor?
Investor and lenders rely heavily on CRISIL’s rating before their internal evaluation is completed and before they can arrive at a conclusion.
CRISIL’s rating, in general, is considered as a benchmark for pricing and trading of debt instruments. Also, the ratings provide the regulator’s insights while measuring and managing the credit risk with the lending activity.
Lastly, the ratings also useful in determining an entity’s capital adequacy (phenomena prevalent in the banking sector).
How to Understand the Rating?
The regulator (Securities and Exchange Board of India) has done a great job in ensuring that all the Credit Rating Agencies (CRA) provide a rating on the same scale.
This universal scale helps in more straightforward and more rationale benchmarking.
While rating a fixed deposit, CRISIL follows the following rating system-
In addition, CRISIL may add (+) or (-) symbol (for example, CRISIL FAA+) to the rating category mentioned above (applicable only for FAAA to FC).
This symbol indicates the position of a company within the rating category.
Significance of Rating
Rating helps in determining a company’s or a bank’s credibility.
CRISIL rating is generally the first thing that investors’ look before investing in any instrument. Ratings assure concerning the timely servicing of the entity’s financial obligations which defines their credibility.
The ratings, thus, enables an investor to differentiate between high credit risk organizations from low credit risk organizations.
For example, HDFC Bank is rated at FAAA by CRISIL, and it indicates high creditworthiness of the bank and low risk involved with the deposits.
Interest Rate and CRISIL Rating
There is a relation between the interest rate offered and CRISIL rating. Institutions offering a higher rate is primarily due to low creditworthiness and thus have high risk/low ratings.
Therefore, an institution with a low rating such as CRISIL FC or CRISIL FB will typically offer a very high-interest rate to avail fund as the risk involved will be high.
Why CRISIL Ratings?
Investors rely on CRISIL’s ratings because the company provides unbiased and accurate opinion on which an investor can count on for decision making.
The company implements analytical rigor and utilizes its proprietary framework to arrive at the financial health of any company. This process helps investors get a clear picture concerning a company’s strengths and weaknesses.
Lastly, the independent company ensures that the right information is disseminated to the investor at the right time so that actions may be taken accordingly.
The Interest Rate on FD and CRISIL’s Rating
The interest rate offered by banks is also a factor many another factor.
Therefore, there is no direct relation between CRISIL’s rating and interest rate offered on fixed deposit. However, the rating undoubtedly provides a sense of the degree of safety and interest rate range that can be expected.
Source: Bajaj Finserv
Let us now talk about a few examples of CRISIL FD rating.
Mahindra and Mahindra Finance
The Mahindra and Mahindra Finance Fixed Deposit has a Crisil rating of ‘FAAA’ which is the highest rating possible.
It, thus, indicates the highest degree of safety with the capital to be invested and minimal risk associated. The company offers an interest rate of 8.75 percent on its 33-month and 40-month deposits.
Other fixed deposit ratings by CRISIL in the FAAA category are – Bajaj Finserv Limited, Kerala Transport Development Finance Corporation, PNB Housing Finance Limited, HDFC Limited, Gruh Finance Limited.
Disclaimer: The views expressed in this post are that of the author and not those of Grow