What are Credit Ratings for Fixed Deposits and How to pick-up AAA Rated FD Scheme?
Banks fixed deposit interest rates are falling in the last few quarters. Investors who are looking for fixed income options are looking for other avenues like company fixed deposits. While bank FD’s are being considered relatively safe, corporate fixed deposits come with high risk. One of the critical elements one has to check on the corporate fixed deposits is the credit rating of the fixed deposits issued by the company. There are several credit rating agencies like CRISIL, ICRA,CARE etc., who issue credit ratings to company FDs. In this article we would provide the view about credit ratings for fixed deposits in India and how an investor should understand these ratings before investing in company fixed deposits.
What is a Credit Rating for Fixed Deposits?
SEBI has conducted a survey in 2015 about how households are saving their money. As per the survey, it is almost 95% of the savings are going into fixed deposits. While this is 5 years back old story, still many investors invest in fixed deposits to get regular fixed income. While bank FDs are considered relatively safe as these are even secured with DIGCC insurance, corporate fixed deposits are considered as high risk as there is no such insurance. Hence, while corporate FDs offer higher returns, these are high risk too. Here comes the credit rating for FDs in India.
To provide some security and encourage fixed deposits in India, credit rating agencies like ICRA, CRISIL etc. provide credit ratings to corporate fixed deposits. Such credit ratings are indicated as FAAA / MAAA (highest credit quality) to FD / MD (Lowest credit quality). Such ratings would help investors to know high risk fixed deposits vs low risk FDs.
What Factors do the rating agencies consider for Credit ratings in Fixed Deposits?
Here are key factors credit rating agencies, considers while doing FD credit ratings.
1) What is issuer’s liquidity status?
2) How is Issuer’s debt repayment profile look like?
3) How FD issuer’s track record and customer service is?
4) What is the market for FD and competition there-off?
5) How is the issuer’s management team and risk management structure?
6) What is the scope to expand its business?
7) How is the FD’s maturity profile, renewal rates and granularity of the FD.
How would credit rating agencies give credit ratings for fixed deposits?
Every FD is assigned a credit rating. If you want to understand in simple terms, here is how you can check:
AAA, AA, A = Good credit quality
BBB and BB = Average credit quality
B, C and D = Low Credit quality
Whether it is bank FD or corporate FD or NCDs, above simple terminology is the bible for any investor.
Now let us go into a little deeper. Every credit agency would not have same definitions. Let us look at the definitions by CRISIL and ICRA who are leading credit rating agencies.
CRISIL Credit Ratings for FDs
1) FAAA – Highest Safety
2) FAA – High Safety
3) FA – Adequate Safety
4) FB – Inadequate Safety
5) FC – High Risk
6) FD – Default
7) NM – Not meaningful
ICRA Credit Ratings for FDs
1) MAAA – Highest Credit quality
2) MAA – High Credit quality
3) MA – Adequate credit quality
4) MB – Inadequate credit quality
5) MC – Risk-prone credit quality
6) MD – Lowest Credit Quality
In addition, they attach + (positive) or – (negative) to these credit ratings. E.g. MAA+ has high credit quality than MAA or MAA-.
Don’t get confused with above detailed terminologies. Simply AAA / AA /A are good quality FDs and others are high risk / low credit quality FDs.
How to check for good credit quality rating FD schemes?
All this is fine, but you might still have query how to check good credit quality company fixed deposit schemes. While corporate fixed deposits are high risk, these offer high returns, hence you might want to check how we can apply these ratings to existing corporate fixed deposit schemes. Let me try to help you. These are not ranked by me. These are ranked by respective credit rating agencies.
Bajaj Finserv FD Scheme rated as as FAAA by CRISIL which indicates a high degree of safety and MAAA by ICRA which indicates high credit quality.
Mahindra Finance FD Schemes rated as FAAA by CRISIL which indicates a high degree of safety.
Shriram Transport Finance FD Schemes rated as FAAA/Stable by CRISIL which indicates a high degree of safety and MAA+/Stable outlook by ICRA which indicates high credit quality.
LIC Housing Finance FD is rated as FAAA/Stable by CRISIL.
PNB Finance FD Schemes rated as FAAA/Negative by CRISIL.
ICICI Home Finance FD is rated as FAAA/Negative by CRISIL.
HDFC FD is rated as AAA by CRISIL and ICRA.
Please note that FD’s offered by some of the state governments like KTDFC etc., does not have current credit ratings (ratings of 5 years back only available) as these are guaranteed by respective governments. Also TNPFC FD scheme though a TN govt entity has low credit rating of MA-Stable by ICRA. One can argue that these are Govt owned entities, hence should be low risk. Since the filter we are doing based on credit rating, these two are not appearing in above list.
DHFL had CARE AAA ratings for its FDs in 2017 and crisis started 2018 – Should I not worry then?
Your question is valid. DHFL FD has AAA credit ratings from CARE in 2017, however DHFL Crisis started from Sep-18. Many investors are still hunting with delay in repayment of NCD investors and investors of FD.
How to pick-up Top rated FD scheme?
Based on these ratings indicated above, you can make sound investment decisions. You can invest in FDs that have high credit quality or a high credit rating. Such credit ratings indicate consistent, stable and credibility of the companies. DHFL kind of cases might keep giving surprises. Beyond checking the company credit ratings and credibility, there is nothing an investor can do. If you are willing to take high risk and invest in corporate FDs, check these ratings and make your own decisions. Instead of investing in a single company FD scheme, you can spread across 2-3 company FD to minimize the risks.
Remember, I keep telling again and again – Company FDs provide high returns, but they are high risk too!!!
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What are Credit Ratings for Fixed Deposits and How to pick-up AAA Rated FD Scheme
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