Ratings By Credit Rating Agencies May Affect Fixed Deposits

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RBI has announced a new rule applicable to unclaimed, matured FD accounts. That is the funds in an unclaimed, matured FD account will attract an interest rate as applicable to the savings account or the contracted rate of the matured FD, whichever is lower.

Saving in a bank’s fixed deposits is mostly done by the investors who follow a conservative approach. One receives risk-free and guaranteed returns by investing in banks fixed deposits. FDs are often chosen to balance out the risk of the portfolio. Also, the banks enjoy systemic support of the RBI that steps in and prevents the banks from falling. Unfortunately, in recent years the rate of interest offered on fixed deposits have depressed to a great extent.

However, the company’s fixed deposits’ returns are quite attractive than the bank’s fixed deposits. Since the returns are higher, risks associated with such fixed deposits are also on the higher side.  

To motivate the investors to invest in the company’s fixed deposits, the credit rating agencies rate the company’s fixed deposits. They determine the company’s credibility (issuer) by analysing certain factors such as the track record, scope of business expansion, debt repayment history, customer service, existing market for FD and competition, management team, FD maturity profile, liquidity profile, FD granularity or renewal rate.

Hence, the credit rating agencies rate the company’s FD after considering the above factors. The level of risk in the FD is differentiated by various types of ratings given by the credit rating agencies. 

The CRISIL rates FDs with a tenor of more than a year on a 14-point rating scale (FAAA to FD). 

Here is the basic nomenclature of CRISIL ratings for the fixed deposits of non-bank entities with a tenor of more than a year.

NM: Not meaningful

FD: Default

FC: High risk

FB: Inadequate safety

FA: Adequate safety

FAA: High safety

FAAA: Highest safety

In addition to the above, CRISIL attaches + or – to these symbols to indicate relative ratings. For instance, FAA+ is safer than FAA and FAA-.

Similarly, the other credit rating agencies have different nomenclature to define the risk of FD.

As per the above terminology, the company’s FD rated as FAAA shall be considered the safest. 

The rating is neither an opinion on the likely future price of the rated bonds nor on the issuer’s equity shares’ potential value. The rating agencies also do not recommend buying, selling or holding a rated instrument. The ratings are based on qualitative and quantitative analyses of the information provided by issuers or obtained from other sources that are considered reliable. The credit rating indicates the issuer’s ability and willingness to pay interest and repay the principal on time.

Once a rating is assigned and accepted, the rating agencies continuously monitor the rated instruments’ credit quality till such time, the rating is withdrawn. 

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