What are safety ratings? How do they affect your choice of FDs?

Fixed Deposit Ratings

Fixed deposits are not just offered by banks. In fact, Non-Banking Financial Institutions (NBFCs) and other corporate companies also routinely offer fixed deposit schemes too. Now, if you take a look at FDs offered by NBFCs and corporations, you’ll often find them being marketed with safety ratings like FAAA, FAA+, and MAAA, among others.

Have you ever wondered what these safety ratings are and the kind of impact they have on fixed deposits? If you have, then here’s some information that can help bring some much needed clarity on what they are.

What are Safety Ratings?

In India, there are as many as 7 different Credit Rating Agencies (CRAs), which includes CRISIL, ICRA, and CARE. These agencies are usually tasked with the responsibility of inspecting, assessing, and researching the financials of companies and the different loan and debt instruments issued by them.

Upon carefully assessing the company and the instrument, these CRAs issue specific ratings. These ratings are known as credit ratings or safety ratings and are used to denote the level of credit default risk.

What are the Different Factors Taken Into Consideration When Assigning Safety Ratings?

Credit Rating Agencies take into account a plethora of different factors when assessing an FD instrument of an institution. These factors include –

  • The maturity profile of the FD
  • The renewal rate of the FD
  • The granularity of the FD
  • The liquidity of the issuer
  • The debt repayment profile of the issuer
  • The track record and customer service of the issuer
  • The existing competition and the market for the FD
  • The risk management structure of the issuer
  • The management team of the Issuer
  • The scope for business expansion

What are the Different Safety Ratings?

As you’ve already seen above, there are multiple Credit Rating Agencies in India. And each one of them has their own set of safety ratings. Here’s a quick look at the different ratings issued by three of the top CRAs in India – CRISIL, ICRA, and CARE.

Credit Rating Nomenclature – CRISIL

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India’s premier Credit Rating Agency, CRISIL Ratings Limited was founded in the year 1987. The full-service agency provides rating services upon conducting in depth research into companies and a wide range of instruments. The ratings that CRISIL offers for FDs of institutions are as follows.

RatingDefinition
CRISIL AAAHighest degree of safety
CRISIL AAHigh degree of safety
CRISIL AAdequate degree of safety
CRISIL BBBModerate degree of safety
CRISIL BBModerate risk of default
CRISIL BHigh risk of default
CRISIL CVery high risk of default
CRISIL DDefault / Expected to be in default

Credit Rating Nomenclature – ICRA

Incorporated in 1991, ICRA Limited is an independent Information and Credit Rating Agency. The agency provides ratings, gradings, and research services for companies and the instruments that they issue. The ratings scale of ICRA for FDs are tabulated below.

RatingDefinition
MAAAHighest credit quality / Lowest credit risk
MAAHigh credit quality / Low credit risk
MAAdequate credit quality / Average credit risk
MBInadequate credit quality / High credit risk
MCRisk-prone credit quality / Very high credit risk
MDLowest credit quality / Very low prospects of recovery

Credit Rating Nomenclature – CARE

Established in the year 1993, CARE Rating Limited is one of the leading Credit Rating Agencies in India. The agency rates other companies, debt instruments, capital market instruments, and structured credit. The safety ratings that CARE assigns to FD instruments are as follows.

RatingDefinition
CARE AAAHighest degree of safety / Lowest credit risk
CARE AAHigh degree of safety  / Very low credit risk
CARE AAdequate degree of safety / Low credit risk
CARE BBBModerate degree of safety / Moderate credit risk
CARE BBModerate risk of default
CARE BHigh risk of default
CARE CVery high risk of default
CARE DDefault / Expected to be in default

How Do They Affect Fixed Deposits?

Safety ratings are used to denote the level of credit default risk. And so, the lower the safety rating, the higher is the default risk. For instance, if a company or an instrument carries a low safety rating, say a CARE B or an MB rating, chances are that the investor may not be able to recover their investment in the near future.

On the other hand, the higher the safety rating, the lower is the credit default risk. Institutions that have high ratings almost always provide their investors with guaranteed returns. For instance, if an FD issued by a company carries an MAAA or a CRISIL AAA rating, it means that there’s little to no default risk associated with the instrument.

Conclusion

If you’re planning on investing in a FD scheme issued by an NBFC or a corporation in the near future, remember to analyse the safety ratings accorded to it. Doing so can help you easily assess the level of risk that you’re taking by investing in the scheme. As an investor, it is advisable to invest only in fixed deposit instruments that carry the highest safety rating. This will ensure that you don’t run into any trouble at the time of maturity of the deposit.

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