Crisil unveils bank loan ratings

Crisil, the country's largest rating agency and a subsidiary of Standard & Poor's', today released first bank loan ratings, which would allow banks to allocate substantially lesser capital for A to AAA entities.

Crisil has rated the bank facilities of Hero Honda, Hero Honda Finlease, NTPC, Reliance Industries, and UltraTech.

The ratings will help banks determine risk weights for their loan exposures under Basel II norms. Foreign banks and Indian banks with international presence have to adopt capital norms under Basel II by March 2008. Banks are likely to insist on a rating for the loan to corporates, as under the Basel II norms they have to set aside more capital for unrated loans.

If a bank chooses to keep some of its loans unrated, it may have to provide a risk weight of 150 per cent for credit risk on such loans.

Till April 2009, fresh unrated loans above Rs 50 crore will attract a risk weight of 150 per cent. After April 1, 2009, this minimum size will be reduced to Rs 10 crore, bringing many more loans within the 150 per cent risk weight bracket.

Banks can save capital on loans by getting loans rated in the A to AAA-rated categories as the risk weight for these higher rated categories would range between 50 and 20 per cent. For AAA rated borrowers this would mean capital saving of 80 per cent for the bank. The ratings could also be used to decide the terms of the loans.

Banks may share the capital savings with the high-rated corporates by lowering of interest rates for loan and providing other incentives.

Crisil expects pricing of fresh loans to be strongly co-related with their credit ratings. According to Roopa Kudva, executive director and chief rating officer, Crisil, "We expect that Bank Loan Ratings will be a key input for appropriate pricing of credit risk by banks."

The widespread use of bank loan ratings will impact the secondary debt and credit derivatives markets. According to Raman Uberoi, senior director, CRISIL Ratings, "BLRs will help develop an active secondary market for bank loans, as they have done in many developed economies. These ratings also augur well for the development of the Credit Default Swap (CDS) market, where ratings on the underlying reference obligations are indispensable."

CRISIL assigns BLRs to all forms of fund-based and non-fund based bank facilities, including cash credit, working capital demand loans, guarantees, and letters of credit.

The ratings are assigned on both long-term and short-term rating scales.

The criteria for assigning BLRs will be the same as ratings on bonds and debentures only taking into account features - such as technical defaults and minor differences in defining due dates - that are specific to bank facilities.