Table of contents
- What is Crisil rating?
- How CRISIL arrives at ratings
- Understanding the Crisil rating scale
- How do Crisil ratings help make investment decisions?
- Crisil mutual fund rating criteria
- How CRISIL rank mutual fund schemes?
- What types of mutual fund schemes get CRISIL rankings?
- FAQ s
CRISIL (Credit Rating Information Services of India Limited) is India’s first credit rating agency. It was set up in 1987 and is headquartered in Mumbai, India. CRISIL is a global analytical company that provides ratings, data, research, analytics and solutions to the world’s leading banks and corporations.
CRISIL is mainly owned by S&P Global Inc., a leading provider of independent and transparent benchmarks, ratings, analytics, and data.
What is Crisil rating?
A CRISIL rating is an assessment of the creditworthiness of entities and their ability to meet financial obligations. It measures the probability of timely payment of principal and interest on a debt instrument.
In other words, CRISIL ratings help investors gauge the level of credit risk associated with debt instruments such as corporate bonds or bank loans. The ratings assigned by CRISIL range from ‘CRISIL AAA’ (highest degree of safety) to ‘CRISIL D’ (default).
How CRISIL arrives at ratings
CRISIL has developed robust analytical frameworks to assess credit risk. Their criteria combine both quantitative as well as qualitative factors.
Some of the key parameters that CRISIL considers are:
- Business Risk: Industry prospects, competitive position, operating efficiency, management quality, etc.
- Financial Risk: Gearing levels, profitability, debt protection metrics and capital structure
- Management Evaluation: Assessment of management capabilities through interactions
- Firm’s Financial Flexibility: Ability to withstand downturns without default
Based on the overall assessment, they assign a rating that captures the creditworthiness of an entity relative to other issuers. Their ratings are forward-looking and reflect susceptibility to future changes.
Understanding the Crisil rating scale
CRISIL uses an alphabetical rating system to grade credit instruments and entities based on their creditworthiness. The Crisil rating scale ranges from ‘CRISIL AAA’ to ‘CRISIL D’.
Investment grade ratings
CRISIL AAA to CRISIL BBB ratings indicate low to moderate credit risk. Issuers with these ratings are considered to have good financial strength and a high ability to service debt obligations. These instruments carry a lower probability of default than speculative-grade debt.
Speculative grade ratings
CRISIL BB to CRISIL C ratings indicates substantial credit risk. While not in danger of default yet, adverse business or economic conditions are likely to impair timely payment capabilities. Hence, the probability of default is higher than that of investment-grade debt.
Default grade rating
CRISIL D rating indicates entities that have defaulted on obligations or are expected to default in the near term.
To further distinguish creditworthiness within a category, CRISIL appends ‘+’ and ‘-‘ signs to rating symbols. For instance, ‘CRISIL AA+’ is ranked higher than ‘CRISIL AA’, while ‘CRISIL AA-‘ indicates ranking at the lower end of the AA category.
The granular credit risk assessments help issuers raise capital commensurate with their credit profiles. It also assists investors in making judicious risk-based investment decisions aligned to their risk appetites.
How do Crisil ratings help make investment decisions?
CRISIL ratings play a pivotal role in enabling key stakeholders to price and benchmark credit risk:
- Compare issuer credit profiles: CRISIL ratings allow investors to objectively compare the creditworthiness of issuers across sectors. For example, a CRISIL AA-rated corporate bond would typically be safer than a CRISIL BBB-rated bond. This helps investors align investments to their risk appetite.
- Gauge probability of default: The ratings help analyse the relative probability of debt repayment issues. Instruments with higher ratings have a lower likelihood of default based on the issuer’s financial strength.
- Demand better terms: Investors can demand higher returns for lending to issuers with poorer credit ratings and vice versa. Issuer ratings lead to accurate credit risk pricing.
For banks & NBFCs
- Set credit limits: Bank and NBFC lending officers extensively use CRISIL ratings to set credit limits and loan pricing for institutional borrowers.
- Optimise credit costs: Rating-linked loan pricing helps lenders charge appropriate credit margins based on the borrower’s credit profile. This helps optimise their overall cost of funds.
- Raise capital at fine rates: Corporates with higher CRISIL ratings can raise capital faster at finer rates compared to those with poorer ratings.
- Improve borrowing terms: As the credit rating improves over time, corporates can renegotiate loans and lower their interest costs.
In summary, CRISIL ratings serve as benchmarks for credit risk assessment and pricing for a wide range of stakeholders. This ultimately contributes to stability and transparency within India’s financial system.
Crisil mutual fund rating criteria
CRISIL also provides independent research & ratings on the performance of mutual fund schemes and fund houses. The Crisil mutual fund rating methodology focuses on four key parameters:
- Portfolio Quality: Assessment based on the credit ratings profile of debt instruments in the portfolio
- Performance Analysis: Historical analysis of returns generated by the fund relative to category peers and benchmarks
- Fund House Evaluation: Capabilities of the asset management company managing investor assets
- Portfolio Characteristics: Analysis of portfolio concentration, liquidity, duration, etc. depending on scheme categories
How CRISIL rank mutual fund schemes?
CRISIL assigns ‘CRISIL Rank 1’ (highest portfolio quality) to ‘CRISIL Rank 5’ (poor portfolio quality) to various mutual fund schemes within a category, based on the overall fund analysis against the above parameters.
Some salient features of the CRISIL Mutual Fund Ranking System:
- Ranks are assigned at the scheme level, not the fund house level
- Relative ranking of schemes within categories (equities, debt, etc), not absolute benchmarks
- Ranks are reviewed on a quarterly basis based on the portfolios in that quarter
- Rank 1 suggests the highest level of portfolio quality and lowest credit risk
CRISIL also provides style boxes that assess mutual fund schemes on market capitalisation and valuation parameters. Fixed-income funds are further analysed on parameters such as credit quality, interest rate sensitivity and liquidity.
By providing a 360-degree analytical view of mutual funds, CRISIL rankings enable investors to make informed decisions for managing their portfolio risk-return payoff efficiently.
What types of mutual fund schemes get CRISIL rankings?
CRISIL assigns ranking across various categories of mutual funds based on quantitative and qualitative assessment. The rankings aim to help investors analyse funds from a risk-return standpoint.
Some key details on mutual fund schemes ranked by CRISIL:
Covered across market capitalisation and valuation styles:
- Large Cap
- Mid/Small Cap
- Value/Growth orientation
Across maturity profiles and credit risk spectrums:
- Liquid funds
- Short duration funds
- Corporate bond funds
- Banking and PSU funds
- Dynamic bond funds
- Gilt funds
A balanced mix of debt and equity based on allocation:
- Conservative Hybrid
- Aggressive Hybrid
- Dynamic Asset Allocation
- Multi-Asset Allocation
CRISIL also provides supplementary style box assessment of equity and hybrid schemes on market cap and valuation angles. Interest rate sensitivity analysis for fixed income schemes.
By providing holistic analysis across wide-ranging categories and investment styles, the CRISIL mutual fund ranking helps investors select appropriate schemes aligned to their risk appetite and investment needs.
In summary, CRISIL ratings and research help debt and equity investors gauge credit risks and objectively compare investment options for better decision-making. Leading banks, non-banking finance companies, and corporations rely on CRISIL ratings and analytics to price credit risk and benchmarks.
With India’s financial markets growing rapidly, the role of CRISIL as a provider of independent credit opinions, data and analytics is only expected to rise in the future. By arming investors with analytical insights on credit risks, CRISIL contributes enormously to the stability and transparency of India’s financial ecosystem.
Corporations with higher CRISIL ratings can raise capital faster at more competitive rates. They can renegotiate existing debt and lower interest costs as their rating improves. Moreover, it enhances their credibility with lenders, investors, and financial institutions.
CRISIL monitors rated issuers and reassesses ratings whenever new information is available. Ratings are formally reviewed at least once annually as part of surveillance.
No rating agency globally can predict defaults with 100% accuracy. CRISIL factors in reasonable downside scenarios while assigning ratings. CRISIL will conduct an impact analysis and downgrade rating in the event of default.
Investors can structure portfolios around CRISIL ratings to target desired credit quality. You can allocate higher exposure to AAA & AA for conservative funds. Moreover, you can increase allocation to A and BBB for higher yields with moderate risk.
Along with domestic coverage, CRISIL provides issuer and local currency ratings in other South Asian markets. CRISIL is expanding sector expertise to provide global comparability.
CRISIL charges issuers fees for assigning ratings based on a business scale
Also earns fees from investors, banks, etc, for sharing rating rationales and reports
Analytics, risk solutions, and other B2B offerings also drive revenues