Understanding CRISIL Rating: A Comprehensive Guide
CRISIL Limited, a leading credit rating agency in India, offers invaluable services for assessing the financial health and reliability of various entities, including corporations, banks, and mutual funds. This article delves into the intricacies of CRISIL Rating, providing a comprehensive understanding of how it works and what it means for investors.
What is CRISIL Rating?
CRISIL Rating is a credit rating assigned by CRISIL Limited to various companies. These ratings are based on different time variants, such as 3 years, 5 years, and 10 years, reflecting the organization's evaluation criteria. The top 10% of funds receive a 5-star rating, while the bottom 10% receive a 1-star rating. CRISIL rates only open-ended schemes, using a range of robust parameters to rank mutual funds.
Key Parameters in CRISIL Rating
Superior Rating Score: This score denotes the fund's returns and risks. Portfolio Concentration Analysis: This assesses the risks due to over-variation in the portfolio. Mean Return and Volatility: These metrics measure the average return and the fluctuation in returns over a given period. Quality of Assets: This calculates the probability of default by the debt securities. Tracking Error: This is particularly relevant for index funds, indicating the deviation of a portfolio's returns from those of the benchmark index. Industry Risk Score: This considers the industry-specific risks to which the fund is exposed.About CRISIL
CRISIL is India's leading rating agency, providing top-tier research to the world's largest banks and leading corporations. They offer transparent and independent ratings, benchmarks, analytics, and data to the capital and commodity markets globally. CRISIL operates through two segments: Ratings and Research.
The Rating Process
The rating process begins with a rating request from the issuer. Subsequently, a rating agreement is signed, and fees are collected. CRISIL's business development team handles all interactions related to rating fees, while their analytical team does the analysis. Once the process is completed, an analytical team is assigned to analyze the issuer's credit risk profile, which they do by collating preliminary information from the issuer.
Management Interaction
CRISIL strongly values open dialogue with the issuer’s management. This is crucial for incorporating non-public information and arriving at forward-looking ratings. Management interactions can take place through telephonic or in-office discussions, covering competitive position, strategy, financial policies, historical performance, and future prospects. CRISIL’s analysts include a focus on business risks and strategies, rather than just financial projections.
Rating Committee and Assignment of Ratings
After the management interaction, the rating team compiles a report detailing their assessment of business risk, financial risk, and management risk. The report is presented to the rating committee, which assigns a rating after thorough discussion. This process ensures the objective and consistency of the ratings.
Communicating the Rating to the Issuer
The rating decision is communicated to the issuer shortly after the RCM, with a detailed rationale document to assist the issuer in understanding the key analytical factors. If the issuer accepts the rating, it communicates acceptance to CRISIL. Disagreements can lead to appeals for additional data or information, with CRISIL’s rating committee evaluating the new information before making a final decision.
Credit Rating Scales
CRISIL uses various scales to assign ratings, including short-term, long-term structured finance, and fixed deposit scales. Each scale has its own criteria, from A1 (very strong degree of safety) to D (in default). These scales ensure that investors can easily understand the ongoing creditworthiness of a particular issuer or financial instrument.
For long-term structured finance, the highest safety is denoted by CRISIL AAA, and the lowest by CRISIL D. For corporate credit, the highest strength is CCR AAA, and the lowest is CCR D, with intermediate categories indicating varying degrees of strength and risk.
Conclusion
CRISIL Rating provides valuable insights into the creditworthiness of various financial entities, helping investors make informed decisions. Understanding the rating process and the parameters involved is crucial for leveraging these assessments effectively in investment strategies.