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The bank loan market is much larger than the bond market, given the wide reach of banks and the large funds at their disposal when compared with capital market participants. Banks lend to various entities, many of whom have not felt the need for or do not have the ability to access bond markets; many such entities have therefore not been rated so far. Now, however, with the advent of Basel II regulations, which encourage banks to better calibrate the credit risk on their books, bank loan ratings (BLRs) are gradually coming into their own in India.
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CRISIL Bank Loan Rating
A CRISIL BLR is CRISIL's opinion on the relative degree of risk associated with timely payment of interest and repayment of principal on a specified bank facility. CRISIL assigns BLRs on the same long-term and short-term rating scales as it does its other credit ratings. BLRs can be used by banks to determine risk weights for their loan exposures, in keeping with the Reserve Bank of India's (RBI's) April 2007 Guidelines for Implementation of the New Capital Adequacy Framework.
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Benefits of a CRISIL Bank Loan Rating
For Banks:
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The new guidelines from RBI create an incentive for banks to use BLRs, by giving significant relief in the capital that banks must hold against their corporate loan exposures. The highest relief of 80 per cent is available for 'AAA' and 'P1+' rated exposures, but there is substantial relief for exposures that are rated below the highest category as well. For instance, both 'A' category-rated long-term loans and 'P2' category-rated short-term facilities provide 50 per cent relief. BLRs will also be a key input for appropriate pricing of credit risk by banks.
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For Borrowers
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A CRISIL BLR will help borrowers obtain more precise risk-based pricing on bank loans. Borrowers may also benefit when the capital savings that the banks enjoy are reflected in loan pricing. In the long run, as many lower rated borrowers obtain BLRs, and the market understands the risk associated with such lower ratings, access to markets for lower rated corporates is likely to improve significantly.
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For the Debt Market
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BLRs will help develop a secondary market for loans, and will provide a uniform scale for analysing credit risk of bank loans. Over time, they will contribute immensely to the development of a Credit Default Swap market, where ratings on the underlying reference obligations are indispensable.
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Symbols for BLRs
CRISIL BLRs are assigned on a scale that is analogous to CRISIL's rating scale for long-term and short-term debt ratings. The scale ranges from 'AAA' to 'D' for a long-term rating (with maturity over 365 days), and from 'P1+' to 'P5' for a short-term rating (maturity of up to 365 days). CRISIL may apply '+' (plus) or '-' (minus) signs for ratings from 'AA' to 'C' on the long-term scale, and from 'P1' to 'P4' on the short-term scale, to reflect comparative standing within the category. Additionally, CRISIL may assign rating outlooks for BLRs from 'AAA' to 'B'. Ratings on 'Rating Watch' will not carry outlooks. A rating outlook indicates the direction in which a rating may move over a medium-term horizon of one-to-two years. A rating outlook can be 'Positive', 'Stable', or 'Negative'. A 'Positive' or a 'Negative' outlook is not necessarily a precursor to a rating change.
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Criteria for assigning BLRs
CRISIL's criteria for assigning BLRs incorporate all the features of the criteria applied for rating bonds and debentures. Moreover, the criteria factor in features such as technical defaults and minor differences in defining due dates that are specific to bank facilities.
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Contact us
For more information, call our toll free no 1800-22-1301
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