How do CRISIL ratings impact an FD?

Fixed deposits (FD) are known for their guaranteed returns and safety. That’s why these can be called a conservative investor’s best friend. Still, fixed deposits are not entirely risk-free; they carry a risk of default, meaning: when the issuer of a fixed deposit fails to pay the principal and interest on FD on its maturity. So then how to gauge the safety of an FD? One way is to look at their CRISIL ratings? But what are CRISIL ratings? Read on to know more.

A fixed deposit offered by a commercial bank is covered by an insurance of Rs 5 lakh per depositor. Before the Union Budget 2020, the insurance limit was Rs 1 lakh. In contrast, corporate FDs are not covered by insurance. Then how to gauge the safety of a company FD? Well, that’s where the CRISIL rating of a fixed deposit comes into the picture.

What is CRISIL?
CRISIL stands for Credit Ratings and Information Services of India Limited. The agency rates financial products and institutions that offer them. CRISIL ratings of issuers of investment products suggest their credibility so you can choose to invest your funds with a trustworthy issuer.

Are CRISIL ratings reliable?
CRISIL was the pioneer of credit ratings in India. Ergo, the ratings given by CRISIL are considered to be trustworthy. These, in turn, aid your decision-making process when evaluating an FD.

Which instruments does CRISIL rate?
CRISIL rates:

• Bonds
• Loans
• Fixed deposits
• Certificates of deposit
• Commercial papers
• Bank hybrid capital instruments
• Asset-backed securities
• Mortgage-backed securities
• Non-convertible debentures

How does CRISIL rate fixed deposits?
Fixed deposits having a tenor of over a year are rated based on a rating scale from FAAA to FD. In contrast, FDs offered by banks having a tenor of less than a year have a rating scale of CRISILA1+ to CRISIL A5. The nomenclature of each of CRISIL’s rating suggests the safety and quality of the FD.

CRISIL rating nomenclature for FDs with a tenor of over a year
NM: Not meaningful
FD: Default
FC: High risk
FB: Inadequate safety
FA: Adequate safety
FAA: High safety
FAAA: Highest safety

FAAA being the highest credit rating and NM being the lowest. While the latter indicates very fewer chances of default by the issuer of an FD, NM indicates the highest defaulting risk.

Why are CRISIL ratings for fixed deposits significant?
When investing in a fixed deposit, comparing the interest rate offered by various issuers helps you pick the best scheme and optimise your returns. However, since FDs are also not entirely risk-free, it makes sense to compare the CRISIL ratings of fixed deposits offered by various issuers before entrusting them with your hard-earned money. Continue reading the impact of CRISIL ratings on a fixed deposit here.