Credit Rating — Internal & External
Relevant for JAIIB Paper 1 | CAIIB ABM | CCP Module A
Why It Matters in Branch:
Your bank’s internal credit rating determines pricing, monitoring frequency, and sometimes sanction authority. Every loan you handle has a rating assigned. Understanding it is essential.
SHORT NOTES
Credit rating is the systematic measurement of credit risk — the probability that a borrower will default.
EXTERNAL CREDIT RATING AGENCIES
India’s registered CRAs (Credit Rating Agencies) under SEBI:
- CRISIL, ICRA, CARE, India Ratings (Fitch), Brickwork Ratings, SMERA (for MSMEs)
Rating symbols: AAA → AA → A → BBB → BB → B → C → D (Default)
- Investment Grade: AAA to BBB (BBB-)
- Speculative Grade (Junk): BB and below
- AAA = Highest safety, lowest credit risk
Banks must obtain external rating for large exposures (typically above Rs.5 crore for public issuances). External ratings are mandatory for capital market instruments.
INTERNAL CREDIT RATING
Banks develop their own internal credit rating models for loan accounts. Parameters typically include:
- Financial parameters: Turnover, profitability, leverage, liquidity ratios, DSCR
- Management quality: Experience, track record, succession planning
- Business parameters: Industry risk, market position, customer diversification
- Conduct of account: Repayment history, utilisation, cheque returns
Internal rating determines:
- Pricing (interest rate): Higher risk = higher rate (Risk-Based Pricing)
- Monitoring frequency: Lower-rated accounts reviewed more frequently
- Sanction authority: High-risk proposals may need higher authority
- Provisioning requirements under Basel II/III
CREDIT INFORMATION COMPANIES (CICs)
CIBIL, Equifax, Experian, CRIF High Mark — maintain credit history of individuals and entities. Banks must mandatorily check CIBIL score before processing retail loans.
CIBIL Score range: 300-900. Score above 750 = good; below 650 = risky.
BRANCH CONTEXT
✦Every loan proposal getting processed at branch should have an internal credit rating form attached. The rating directly determines the interest rate offered and which authority — Branch Manager, DGM, or Circle Office — can sanction it. A good borrower with a BBB internal rating gets a lower rate than a similar borrower rated BB. Rating is not just paperwork — it has real money impact.
