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CRISIL Default Study 2011

CRISIL Annual Default and

Ratings Transition Study - 2011

CRISIL Default Study 2011

About CRISIL Issuer Profile

CRISIL Issuer Profile is an attempt by CRISIL Ratings to provide greater clarity and understanding about large and
regular issuers in the Indian debt market and banking system. CRISIL Issuer Profile should enable investors and
lenders develop a better understanding of such issuers' credit risk drivers, business profiles, and financial risk profiles.

Analytical Contacts:
Arun Panicker
Chief Analytical Officer
Tel: +91 22 3342 3300
Email: [email protected]
Somasekhar Vemuri
Head - Criteria and Product Development
Tel: +91 22 3342 3106
Email: [email protected]
Sujeet Kumar
Manager - Criteria and Product Development
Tel: +91 22 3342 3409
Email: [email protected]
Chahana Kacker
Analyst - Criteria and Product Development
Tel: +91 22 4040 5978
Email: [email protected]

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CONTENTS
This 2011 edition of CRISIL's Default and Ratings Transition Study contains:
I.

Page No.

A Significant Shift in CRISIL's Rating Distribution...........................................................

II. Movement in Overall Annual Default Rates since Inception.......................................

III. For Corporate Issuers............................................................................................................

One-year, two-year and three-year cumulative default rates

One-year transition rates for ratings on long-term scale

One-year transition rates for ratings on short-term scale

Movement in stability rates over past four years

IV. For Structured Finance Instruments...................................................................................

n

One-year, two-year, and three-year cumulative default rates

One-year transition rates

Movement in stability rates over past four years

V. Retail ABS and MBS Issuance - One-year Transition Rates............................................

VI. Annexures................................................................................................................................

11

Annexure 1: Industry-wise classification of defaults

Annexure 2: Analysis of defaults : time to default

Annexure 3: Comparative default and transition rates based on annual data

Annexure 4: Lorenz curve and Gini coefficient for CRISIL Ratings

Annexure 5: Methodology used by CRISIL in this study

CRISIL Default Study 2011

Box 1: Meaning and Significance of Default Rates, Default Definition, and Method of Computation

Default Rates
What are default rates?
The default rate for a specified period is the number of defaults among rated entities during the period, expressed as a percentage of
the total number of rated entities whose ratings were outstanding throughout the period. Default rates can be calculated at each
rating level, and can be calculated over multiple periods.
What are transition rates?
A transition rate measures the probability of a change in credit rating over a specified period. Transition rates can be calculated for
the entire rated population, or can refer to a specified rating level.
How are default and transition rates used?
For all debt market participants, accurate and reliable default and transition rates are critical inputs in formulating the following
decisions:
a)

Pricing debt
Default and transition rates are critical inputs for pricing a debt instrument or loan exposure. Default probabilities associated
with ratings help investors and lenders quantify credit risk in their debt exposures, and provide inputs on whether and how
much to lend, and at what price.

b)

Structuring and pricing credit-enhanced instruments

The structuring, rating, and pricing of credit-enhanced instruments depend heavily on the default and transition rates of
underlying borrowers and securities.

c)

Credit risk measurement

Default and transition rates are key inputs for many quantitative risk assessment models. Investors in rated instruments can
manage their risk exposures effectively if they have access to reliable default and transition rates. Transition rates are also
important for debt funds that need to maintain a certain threshold of credit quality in their portfolios, and for investors who are,
because of regulations or otherwise, mandated to invest only in securities that are rated at a certain level or above.

d)

Indicating efficacy of rating scale

CRISIL's credit ratings are an indicator of probability of default. If ratings are reliable, the default rates should decrease as one
moves up the rating scale. Default and transition rates can therefore be used to validate rating scales and quantify rating
stability.

Key Variables for Default Rate Computation

(i)

Definition of default
For the purpose of computing default rates, there needs to be a clear definition of default. CRISIL defines default as any missed
payment on a rated instrument. This means that if a rated debt obligation is not serviced in full by the due date, the rating moves
to 'CRISIL D' or an equivalent. Furthermore, since CRISIL's credit ratings are an opinion on the timely repayment of debt, any
post-default recovery is not factored into CRISIL's credit ratings. CRISIL believes that such an objective definition of default,
coupled with its consistent application over time provides a firm foundation for the meaningful third-party use of its default rates.
Thus, CRISIL's default rates are free from default recognition bias.

(Ii) Period of computation

Default rates can be computed over varying timeframes, potentially exposing such computation to period selection bias. For
example, if default rates were published over a period of economic strength, they would appear to be artificially low, and hence,
would be of limited use to market participants. CRISIL publishes its default rates from inception to date, ensuring that they are
free from period selection bias.
(iii) Computation methodology
Default rates can be computed using different computation methodologies. Each methodology has implications for the
numeric outcome as explained in Table A13. CRISIL's default rates are computed using the Annual Average Cumulative
Default Rate approach, using the weighted annual marginal default rate methodology, with full year-withdrawal adjustments
as explained in Annexure 5.
A 'normalisation' of the above variables must, therefore, precede any comparison of default statistics across rating
agencies.

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CRISIL Annual Default and Ratings Transition Study - 2011

CRISIL Ratings' overall annual default rate increased to 3.5 per cent in 2011 from 2.3 per cent in 2010. The increase is
on account of the weakening credit quality of Indian corporate entities. The number of defaults by entities rated by
CRISIL on the long-term scale increased to 161 in absolute terms in 2011 from 68 in 2010. This rise in the default rates
was also aided by a surge in rated entities in the lower rating categories, which have traditionally been more susceptible
to defaults. This trend in the overall annual default rate is likely to continue as credit pressures are likely to continue in
2012, even as the rating composition shifts further towards the lower rating categories.

Though default rates rose in 2011, they were still far lower than the historical highs witnessed between 1998 and 2001,
leading to an overall decrease in the average default rates for 1988-2011 compared with 1988-2010. There was also an
increase in stability rates, more significantly in the lower rating categories. These trends were witnessed on a
significantly expanded portfolio of more than 8000 ratings as on December 31, 2011, as against 900 ratings as on
December 31, 2008; of these, the ratings 'CRISIL BB' and below increased significantly to around 4200 from 150 during
the same period.

The short-term instrument ratings also saw similar improvements in default rates and stability rates. CRISIL's ratings
for asset-backed securities reported its first-ever default in 2011, after the 19th year since such securities were first
rated by CRISIL.

CRISIL incorporates all known global best practices in default rate computation in its default study. These best
practices include defining default in a digital manner, eliminating period selection bias, using the globally accepted
marginal default rate method, and employing the monthly frequency static pools as base data. Starting Default Study
2009, CRISIL has been using static pools of a monthly frequency in computing default and transition rates; its previous
studies factored in only the year-end status of ratings. This method significantly enhances the study's ability to capture
defaults and rating changes that have occurred during the year. CRISIL is India's only rating agency to adopt this
rigorous method to compute its default rates. CRISIL has also published default and transition statistics over the last
ten years to provide investors with information on the more recent performance of ratings.

CRISIL Default Study 2011

I. A Significant Shift in CRISIL's Rating Distribution

A surge in ratings in the lower rating categories with smaller companies availing of ratings for their
bank loan facilities
There has been a fundamental shift in the distribution of CRISIL's long-term ratings over the past two years. There was a
surge in ratings in the 'CRISIL BBB', 'CRISIL BB', and 'CRISIL B' categories with smaller companies entering the bank
loan market. Consequently, CRISIL's median rating moved to 'CRISIL BB' in December 31, 2011, from 'CRISIL BBB' in
December 31, 2008 (refer to Chart 1). It indicates increasing penetration and acceptance of credit ratings in the bank
loan market.

Chart 1: CRISIL's rating distribution

Shift in CRISIL's rating distribution
2500

No. of Ratings

2000

1500
1000

500
0

AAA

AA

BB

BBB
2008

2011

Source: CRISIL Ratings

This is a significant development in the credit rating landscape of India, which was earlier dominated by 'AAA' and 'AA'
ratings. This will also lead to more robust and informative default and transition statistics.

II. Movement in Overall Annual Default Rates Since Inception

1

Annual default rates for corporate issuers increase in 2011

Default rates have to be both low and stable, over a given time horizon, to be usefully factored for pricing debt. The trend
for CRISIL's annual default rate (the proportion of total defaults in a particular year to total ratings outstanding
throughout that year) is shown in Chart 2.

1
'Corporate issuers' is a generic term used here to refer to various types of entities, which have availed of credit ratings from CRISIL and form a
part of the Default Study. The term includes companies--both public and private limited, societies, partnerships, proprietorship, and trusts,
among others, across the manufacturing, financial, as well infrastructure sectors.

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Chart 2: Overall Annual Default Rates

Trends in Overall Annual Default Rate
Overall-S&P

Overall-CRISIL
10%
8%
6%
4%
2%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

0%

Source: CRISIL Ratings

The annual default rate increased to 3.5 per cent in 2011, the highest in the past 10 years, from 2.3 per cent in 2010. The
increase reflects the difficult credit quality environment in 2011, and marks a reversal in the upward trend in credit quality
witnessed in 2010.
This trend reversal in corporate India's credit quality in 2011 was also highlighted by CRISIL in its semi-annual
publication Ratings Roundup, which analyses CRISIL's rating actions and its linkages with macroeconomic factors.
The increase in 2011 can also be attributed to a sharp increase in ratings in the lower rating categories (refer to Chart 1),
which have traditionally been more susceptible to defaults, leading to an increase in the overall annual default rate in
2011.

III. For Corporate Issuers

One-year, two-year and three-year cumulative default rates
As credit ratings are opinions on default risk, the higher the rating, the lower should be the probability of default. Such an
inverse correlation between credit ratings and default probabilities is desirable for any rating agency and is called the
test of ordinality. Table 1 shows CRISIL's one-, two-, and three-year withdrawal-adjusted cumulative default rates
across different rating categories from 1988 until December 2011 (Please refer to Annexure 5 for the methodology used
in the calculation of default rates). CRISIL's default rates continue to be ordinal. Notably, not a single long-term
instrument rated 'CRISIL AAA' has ever defaulted.

CRISIL Default Study 2011

Table 1: CRISIL's average cumulative default rates for long-term ratings (withdrawal-adjusted)
One-, Two-, and Three-Year CDRs, between 1988 and 2011
Rating

Issuer-months

One-Year Two-Year Three-Year

CRISIL AAA

11846

0.00%

0.00%

0.00%

CRISIL AA

24368

0.04%

0.40%

1.09%

CRISIL A

25694

0.82%

3.52%

7.66%

CRISIL BBB

29366

1.89%

5.34%

12.27%

CRISIL BB

22685

5.80%

12.52%

24.58%

CRISIL B

11489

8.25%

17.89%

37.90%

CRISIL C

2350

21.36%

37.23%

50.79%

Total

127798

Source: CRISIL Ratings

There was a general decrease in average default rates for 1988-2011 across all rating categories compared with 19882010, even as the overall default rate for 2011 has risen (refer to Chart 2). This is because, despite the increase, the
default rates for 2011 are still much lower than the historical highs witnessed in 1998-2001.
CRISIL also publishes the average default rates of the past 10 years (2001-11), to provide a picture of rating behaviour
over more recent periods. These are presented in Table A3 in Annexure 3. These default rates are also ordinal.
Since 2009, CRISIL uses monthly static pools to compute default statistics as against annual static pools in the past.
However, for the purpose of comparison, the default study also presents the default rates for the periods between 1988
and 2011, and between 2001 and 2011, calculated using annual static pools in Annexure 3 (in Tables A4 and A5,
respectively).

One-year transition rates for ratings on both long-term scale and short-term scale
Transition rates indicate the probability of a given rating moving to other rating categories. Since credit ratings drive
bonds' yields and, therefore, their prices, transition rates are relevant for investors who do not intend to hold debt
instruments to maturity, or need to mark their investments to market regularly. Additionally, they are of crucial
importance for investors who are mandated to only hold investments that are of a certain minimum credit quality. Table 2
presents CRISIL's transition rates for various rating categories.

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Table 2: CRISIL's average one-year transition rates for long-term ratings

One-year average transition rates: between 1988 and 2011
Issuer-months

CRISIL
AAA

CRISIL
AA

CRISIL
A

CRISIL
BBB

CRISIL
BB

CRISIL
B

CRISIL
C

CRISIL
D

CRISIL AAA

11846

96.79%

3.21%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

CRISIL AA

24368

1.77%

91.87%

5.27%

0.72%

0.26%

0.05%

0.03%

0.04%

CRISIL A

25694

0.00%

4.00%

85.71%

6.02%

2.84%

0.20%

0.41%

0.82%

CRISIL BBB

29366

0.00%

0.15%

3.95%

85.78%

6.69%

0.89%

0.65%

1.89%

CRISIL BB

22685

0.00%

0.11%

0.00%

4.29%

84.58%

3.65%

1.57%

5.80%

CRISIL B

11489

0.00%

0.00%

0.05%

0.24%

10.00%

80.43%

1.03%

8.25%

CRISIL C

2350

0.00%

0.00%

0.00%

0.51%

2.47%

15.45%

60.21%

21.36%

Total

127798

Rating

Source: CRISIL Ratings

As can be seen, between 1988 and 2011, almost 92 per cent of the instruments rated in the 'CRISIL AA' category
remained in that category at the end of one year; around 1.8 per cent were upgraded to a higher rating ('CRISIL AAA'),
and around 6.2 per cent were downgraded to a lower rating. The highlighted diagonal of Table 2 contains the stability
rates of different rating categories.
As with CRISIL's default rates, CRISIL's one-year transition rates are also comprehensive and reliable because they
have been compiled using monthly static pools that cover data since the first rating was assigned by CRISIL and include
multiple business cycles. For transition rates based on the annual static pools methodology, refer to Tables A6 and A7 in
Annexure 3.
Stability of ratings assigned on short-term ratings scale are critical for investors with a short-term investment horizon as
the sensitivity of the credit risk of their investments to rating transitions is more than that for an investor with a long-term
investment horizon. Table 3 provides the one-year transition rates for CRISIL's short-term ratings. The diagonal
displays the stability rates for each rating. The numbers to the left of the diagonal represent the proportions of upgrades,
while that to the right represent the proportion of downgrades. A 'CRISIL A1+' rating has a stability rate of more than 97
per cent over one year, and a 'CRISIL A1' rating has more than 14 per cent rate of transition to a higher rating 'CRISIL
A1+' over one year.
Table 3: CRISILs average one-year transition rates for short-term ratings
One-year average transition rates: between 1988- 2011
Issuer-months

CRISIL
A1+

CRISIL
A1

CRISIL
A2

CRISIL
A3

CRISIL
A4

CRISIL
D

CRISIL A1+

46329

97.24%

2.10%

0.34%

0.29%

0.03%

0.00%

CRISIL A1

8620

14.63%

81.76%

2.33%

0.78%

0.15%

0.35%

CRISIL A2

8771

0.57%

5.94%

88.52%

3.18%

1.10%

0.70%

CRISIL A3

13991

0.00%

0.13%

5.42%

86.58%

6.65%

1.23%

CRISIL A4

23723

0.00%

0.00%

0.06%

2.69%

92.27%

4.99%

Rating*

Total

101434

Source: CRISIL Ratings

*CRISIL A2, CRISIL A3 and CRISIL A4 include ratings of the respective modifiers levels.

CRISIL Default Study 2011

CRISIL A1' and 'CRISIL A2' ratings show stability of 81.8 per cent and 88.5 per cent, respectively. The stability rates for
'CRISIL A1' were higher during the more recent period between 2001 and 2011 as against the stability rate in the entire
24-year rating history of CRISIL (refer to Table A8 in Annexure 3). For transition rates based on the annual static pools
methodology, refer to Tables A9 and A10 in Annexure 3.

Movement in stability rates over the past four years

Stability rates indicate the proportion of ratings remaining unchanged over a given time horizon. The stability of
CRISIL's ratings increases with movement up the rating scale; in other words, CRISIL's stability rates are also ordinal.
Table 4 shows CRISIL's one-year stability rates over the past 24 years. The stability rate for 'CRISIL BBB' has increased
significantly to 85.8 per cent for 1988-2011 from 81.6 per cent for 1988-2010.
Table 4 and 5: Stability rates of CRISILs long-term ratings
Table 4: One-year average stability rates since 1988
Period

CRISIL AAA

CRISIL AA

CRISIL A

CRISIL BBB

1988-2011

96.80%

91.90%

85.70%

85.80%

1988-2010

96.40%

91.30%

84.60%

81.60%

1988-2009

96.10%

91.00%

83.90%

74.50%

1988-2008

97.10%

91.20%

83.40%

72.50%

Source: CRISIL Ratings

Table 5: One-year average stability rates since 2000

Period

CRISIL AAA

CRISIL AA

CRISIL A

CRISIL BBB

2000-2011

97.30%

94.40%

89.90%

89.30%

2000-2010

96.90%

93.90%

88.80%

87.20%

2000-2009

96.50%

93.80%

88.40%

80.20%

2000-2008

97.90%

94.70%

87.70%

75.80%

Source: CRISIL Ratings

Considering the period since 2000, Table 5 shows the one-year stability rates at individual rating levels since 2000.
'CRISIL AAA' and 'CRISIL AA' stability rates have been consistently above 96 and 93 per cent, respectively. Likewise,
'CRISIL A' and 'CRISIL BBB' ratings have also displayed high stability rates.

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IV. For Structured Finance Instruments

CRISIL was the pioneer in rating several complex structured finance securities in the Indian market and its database
comprises 3871 issue-years (including 2053 issue-years for retail asset-backed securities (ABS) and retail mortgagebacked securities (MBS) spanning 19 years). CRISIL has ratings outstanding on a variety of structured finance
securities; besides ABS and MBS instruments, these include single-loan sell-downs and instruments backed by full or
partial guarantees.

One-year, two-year, and three-year cumulative default rates (CDRs)

Table 6 provides the one-, two-, and three-year average CDRs at each rating category level between 19932 and 2011
(Please refer to Table A11 in Annexure 3 for default rates between 2001 and 2011).
Table 6: CRISILs average CDRs for ratings on structured finance securities (between 1993 and 2011)
One-, Two-, and Three-Year CDRs, between 1993 and 2011
Ratings

Issue-years

One-Year

Two-Year

Three-Year

CRISIL AAA(SO)

2616

0.04%

0.16%

0.27%

CRISIL AA(SO)

465

0.22%

0.54%

1.02%

CRISIL A(SO)

554

0.36%

1.87%

3.92%

CRISIL BBB(SO)

194

0.00%

1.79%

1.79%

CRISIL BB(SO) and below

42

26.19%

29.71%

29.71%

Total

3871

Source: CRISIL Ratings

The one-year cumulative default rate for securities rated 'CRISIL AAA(SO)' is 0.04 per cent. This is on account of a
central-government-guaranteed 'CRISIL AAA(SO)'-rated instrument that defaulted in 2005, because the trustee
delayed the invocation of the guarantee, resulting in a delay in payments to investors; under its rigorous default
recognition norms, CRISIL treated this as a default. This default was subsequently cured, the investors were paid in full
and the rated instrument redeemed.

One-year transition rates

Around 68 per cent of all structured finance ratings2616 issue-years of the total 3871 issue-years-are rated 'CRISIL
AAA (SO)' and show a high stability rate of 97.9 per cent. Table 7 shows the one-year average transition rates between
1993 and 2011 for structured finance securities.

2
CRISIL assigned its first structured finance rating in Jan 1992, which forms a part of 1993 annual static pool. For calculating default and
transition rates for structured finance ratings, CRISIL has used annual static pool methodology as defaults in structured finance securities have
been rare.

CRISIL Default Study 2011

Table 7: CRISILs average one-year transition rates for structured finance securities
One-year Average Transition Rates, between 1993 and 2011
Issue-years

Rating

CRISIL
CRISIL
AAA(SO) AA(SO)

CRISIL
A(SO)

CRISIL
CRISIL
BBB(SO) BB(SO)

CRISIL
B(SO)

CRISIL
C(SO)

CRISIL
D(SO)

CRISIL AAA(SO)

2616

97.94%

1.80%

0.19%

0.00%

0.00%

0.00%

0.04%

0.04%

CRISIL AA(SO)

465

7.53%

87.10%

4.95%

0.22%

0.00%

0.00%

0.00%

0.22%

CRISIL A(SO)

554

0.72%

4.51%

90.61%

0.72%

2.89%

0.18%

0.00%

0.36%

CRISIL BBB(SO)

194

5.16%

2.58%

8.25%

82.47%

0.52%

0.52%

0.52%

0.00%

CRISIL BB(SO)

35

0.00%

0.00%

5.71%

20.00%

54.29%

0.00%

0.00%

20.00%

CRISIL B(SO)

0.00%

0.00%

0.00%

0.00%

0.00%

60.00%

0.00%

40.00%

CRISIL C(SO)

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

100.00%

Total

3871

Source: CRISIL Ratings

The highlighted diagonal in Table 7 shows the stability rates for various rating categories.

Movement in stability rates over the past four years

Tables 8 and 9 present the one-year stability rates of structured finance ratings for different periods.
Table 8: One-Year Stability Rates Since 1993
CRISIL AAA(SO)

CRISIL AA(SO)

CRISIL A(SO)

CRISIL BBB(SO)

1993-2011

97.90%

87.10%

90.60%

82.50%

1993-2010

97.80%

83.10%

87.80%

84.00%

1993-2009

97.50%

83.80%

88.00%

92.20%

1993-2008

97.00%

87.60%

88.10%

97.20%

Period

Source: CRISIL Ratings

Table 9: One-Year Stability Rates Since 2000

Period

CRISIL AAA(SO)

CRISIL AA(SO)

CRISIL A(SO)

CRISIL BBB(SO)

2000-2011

98.00%

88.60%

89.90%

82.90%

2000-2010

97.70%

85.10%

86.70%

84.50%

2000-2009

97.40%

86.40%

86.80%

93.00%

2000-2008

96.90%

91.80%

86.80%

98.60%

Source: CRISIL Ratings

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These stability rates are high; however, the Indian securitisation market has been 'CRISIL AAA(SO)'-centric, reflected
in the large number of issue-years for this rating. There has been a recent improvement in data density in the other
higher rating categories upto 'CRISIL BBB(SO)', largely explaining a move towards ordinality in stability rates since
2010.

V.Retail ABS and MBS Issuance-One Year Transition Rates

CRISIL's database of retail ABS and MBS transactions consists of 2053 issue-years across 19 years (1993 2011). 2011 saw the first-ever defaults in CRISIL-rated ABS and MBS instruments, with defaults in two
CRISIL-rated ABS pools. However, investors continued to receive payments and their losses were small.
Table 10 shows the transition rates for ABS and MBS ratings for the period between 1993 and 2011. 'CRISIL
AAA(SO)'-rated ABS or MBS instruments, which account for almost 90 per cent of the ratings in the database,
have stability rates of 97.9 per cent.
Table 10 : CRISIL's average one-year transition rates for ABS and MBS ratings- between 1993 and 2011
Rating
CRISIL AAA(SO)

Issue-years

CRISIL CRISIL
AAA(SO) AA(SO)

1830

97.98%

1.75%

CRISIL AA(SO)

54

42.59%

48.15%

CRISIL A(SO)

17

23.53%

29.41%

CRISIL BBB(SO)

150

6.67%

3.33%

0.00%

0.00%

CRISIL BB(SO)
and below
Total

CRISIL CRISIL CRISIL

A(SO) BBB(SO) BB(SO)
0.27%

CRISIL
B(SO)

CRISIL
C(SO)

CRISIL
D(SO)

0.00%

0.00%

0.00%

0.00%

0.00%

7.41%

1.85%

0.00%

0.00%

0.00%

0.00%

29.41%

17.65%

0.00%

0.00%

0.00%

0.00%

10.00%

78.67%

0.00%

0.67%

0.67%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

100.00%

2053

Source: CRISIL Ratings

The stability rates of these ratings are comparable with those of other ratings assigned by CRISIL. Data density
is sparse below 'CRISIL AAA(SO)', largely explaining the non-ordinal stability rates below 'CRISIL AAA(SO)'.
Furthermore, a significant number of 'CRISIL AA(SO)' and 'CRISIL A(SO)' rated instruments have performed
well, resulting in upgrades.

CRISIL Default Study 2011

Conclusion:
The overall annual default rate increased in 2011 from that in 2010 because of the weakening credit quality of corporate
India and a change in rating composition, resulting from a surge in the number of entities in the lower rating categories.
However, the default rates in 2011 were far lower than the historical highs witnessed in 1998-2001, leading to a decline
in the overall average default rates for 1988-2011 compared with 1988-2010.
The strength of CRISIL's rating process is vetted by the ordinal nature of default rates, high stability, and robust
predictive ability of CRISIL's ratings. These processes have been set up, stabilised, and refined in the light of two
decades of CRISIL's rating experience, and their robustness is today recognised by issuers and investors. This study is
based on CRISIL's ratings assigned over nearly 25 years covering multiple credit cycles. Because of the quality, vintage,
and diversity of the instruments, the size of the database, and use of monthly static pool methodology, this remains the
most comprehensive study on corporate defaults and rating transitions in India.

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VI. Annexures
Annexure 1: Industry-wise Classification of Defaults
CRISIL is the first rating agency in India to have published an industry-wise classification and a chronological account of
all the defaults in its portfolio that form part of the static pools used for computing default rates. Over the past 24 years,
four industries (textiles-apparel and luxury goods; metals and mining; food products, and non-banking financial
companies) accounted for around 40 per cent defaults on CRISIL-rated debt instruments, as shown in Table A1.
Table A1: Industry-wise and chronological break-up of defaults over the last 24 years.
Industry

1988 to 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sum

Textiles- Apparel and Luxury Goods

Food Products

Non Banking Financial Company

12

Metals and Mining

Machinery
Pharmaceuticals

Hotels Restaurants and Leisure

12

26

61

28

52

23

20

1
1

Chemicals

Paper and Forest Products

Construction and Engineering

Electrical Equipment

1
2

17

16

15

14

14

13

13

11

1
1

Construction Materials

Distributors

10

Diversified Consumer Services

10

10

Household Durables

Independent Power Producers and Energy Traders

Real Estate Development

Auto Components

Containers and Packaging

10

Electronic Equipment Instruments and Components

Road and Rail

Beverages

Commercial Services and Supplies

Others
Total Defaults
Overall Annual Default Rate

0
0.0%

13

45

27

12

1
11

21

46

43

68

161

402

0.6% 1.2% 2.3% 9.5% 6.3% 3.7% 4.1% 1.3% 0.5% 1.0% 0.0% 0.0% 0.0% 0.5% 3.2% 2.3% 3.5%

Source: CRISIL Ratings

The highest number of defaults, in absolute terms, since inception, was reported in 2011. However, it should be noted
that these defaults were on a much higher base of more than 8000 ratings. Moreover, this increase was also aided by a
spurt in the lower rating categories, which have traditionally been more susceptible to defaults. The huge number of
defaults between 1997 and 1999 were because of a number of factors operating simultaneously in that period,
including an economic slowdown, and structural/regulatory changes, especially in the financial sector.
Textiles, and metals and mining industries witnessed the maximum defaults in 2011 as well, in line with observed past
trends. These industries have always seen the highest number of defaults on account of being highly leveraged, which
makes them more vulnerable to economic cycles.

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CRISIL Default Study 2011

Annexure 2: Analysis of Defaults: Time to Default

Higher ratings farther away from default
Since CRISIL's inception, there have been 402 defaults by issuers carrying a long-term rating. An analysis of these
defaulted issuers indicates that amongst the entities that defaulted, the higher-rated entities were farther away from
default in terms of the number of months prior to default than the lower-rated entities. While issuers rated in the 'CRISIL
B' or ' CRISIL C' categories that defaulted did so in about 11.5 months on an average, the few entities that defaulted from
higher categories did so after a much longer period. For instance, the 3.5 per cent (approximately) of entities that
defaulted from the 'CRISIL AA' category did so after 58 months on an average (see Table A2).

Table A2: Average Time to Default (of Defaulted Entities)(In number of months)
Rating Category

Months to Default

CRISIL AAA

No Defaults

CRISIL AA

58

CRISIL A

43

CRISIL BBB

30

CRISIL BB

15

CRISIL B

10

CRISIL C

13

Source: CRISIL Ratings

Annexure 3: Comparative Default and Transition Rates for different periods

Three-year CDRs for long-term ratings-monthly static pools
Table A3: One-, Two-, and Three-Year CDRs, between 2001 and 2011
Ratings

Issuer-months

One-Year

Two-Year

Three-Year

CRISIL AAA

7916

0.00%

0.00%

0.00%

CRISIL AA

12453

0.00%

0.00%

0.00%

CRISIL A

10876

0.25%

0.86%

1.90%

CRISIL BBB

22976

1.27%

2.57%

3.89%

CRISIL BB

19669

3.65%

8.47%

19.50%

CRISIL B

11056

7.78%

15.46%

15.46%

CRISIL C

1575

15.18%

24.58%

26.62%

Total

86521

Source: CRISIL Ratings

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Three-year CDRs for long-term ratings - annual static pools

Table A4: One-, Two-, and Three-Year CDRs, between 1988 and 2011
Ratings

Issuer-years

One-Year

Two-Year

Three-Year

CRISIL AAA

1032

0.00%

0.00%

0.00%

CRISIL AA

2115

0.00%

0.29%

0.97%

CRISIL A

2325

0.65%

3.24%

7.26%

CRISIL BBB

3045

1.68%

4.40%

10.20%

CRISIL BB

2590

5.37%

10.89%

21.77%

CRISIL B

1388

8.57%

16.91%

25.22%

CRISIL C

222

19.37%

29.89%

48.18%

Total

12717

Source: CRISIL Ratings

Table A5: One-, Two-, and Three-Year CDRs, between 2001 and 2011
Ratings

Issuer-years

One-Year

Two-Year

Three-Year

CRISIL AAA

727

0.00%

0.00%

0.00%

CRISIL AA

1176

0.00%

0.00%

0.00%

CRISIL A

1107

0.36%

1.28%

2.90%

CRISIL BBB

2522

1.27%

2.39%

3.72%

CRISIL BB

2330

3.61%

7.47%

17.65%

CRISIL B

1353

8.13%

15.31%

15.31%

CRISIL C

159

14.47%

17.37%

27.69%

Total

9374

Source: CRISIL Ratings

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CRISIL Default Study 2011

One-year transition rates for long-term ratings-annual static pools

Table A6: One-year average transition rates: between 1988 and 2011
Issuer- years

CRISIL
AAA

CRISIL
AA

CRISIL
A

CRISIL
BBB

CRISIL
BB

CRISIL
B

CRISIL
C

CRISIL
D

CRISIL AAA

1032

96.90%

3.10%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

CRISIL AA

2115

1.70%

91.90%

5.30%

0.90%

0.20%

0.10%

0.00%

0.00%

CRISIL A

2325

0.00%

3.80%

86.40%

5.70%

2.80%

0.20%

0.50%

0.60%

CRISIL BBB

3045

0.00%

0.10%

3.90%

87.10%

5.90%

0.80%

0.50%

1.70%

CRISIL BB

2590

0.00%

0.10%

0.00%

4.10%

85.90%

3.40%

1.20%

5.40%

CRISIL B

1388

0.00%

0.00%

0.10%

0.30%

9.30%

80.70%

1.10%

8.60%

CRISIL C

222

0.00%

0.00%

0.00%

0.50%

2.30%

17.60%

60.40%

19.40%

Total

12717

Rating

Source: CRISIL Ratings

Table A7: One-year average transition rates: between 2001 and 2011
Issuer- years

CRISIL
AAA

CRISIL
AA

CRISIL
A

CRISIL
BBB

CRISIL
BB

CRISIL
B

CRISIL
C

CRISIL
D

CRISIL AAA

727

97.70%

2.30%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

CRISIL AA

1176

1.50%

94.60%

3.00%

0.90%

0.00%

0.00%

0.00%

0.00%

CRISIL A

1107

0.00%

4.60%

90.80%

3.50%

0.50%

0.10%

0.10%

0.40%

CRISIL BBB

2522

0.00%

0.00%

3.40%

90.50%

4.20%

0.40%

0.20%

1.30%

CRISIL BB

2330

0.00%

0.00%

0.00%

4.40%

87.90%

3.40%

0.70%

3.60%

CRISIL B

1353

0.00%

0.00%

0.10%

0.10%

9.50%

81.20%

1.00%

8.10%

CRISIL C

159

0.00%

0.00%

0.00%

0.60%

3.10%

24.50%

57.20%

14.50%

Total

9374

Rating

Source: CRISIL Ratings

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One-year transition rates for short-term ratings- monthly static pools

Table A8: One-year average transition rates between 2001 and 2011Monthly Static Pools
Rating*

Issuer-months

CRISIL A1+

CRISIL A1

CRISIL A2

CRISIL A3

CRISIL A4

CRISIL D

CRISIL A1+

26915

98.14%

1.29%

0.16%

0.41%

0.00%

0.00%

CRISIL A1

5186

10.93%

85.63%

1.76%

1.04%

0.25%

0.39%

CRISIL A2

8346

0.16%

5.79%

88.99%

3.20%

1.14%

0.73%

CRISIL A3

13975

0.00%

0.13%

5.42%

86.58%

6.66%

1.22%

CRISIL A4

23716

0.00%

0.00%

0.06%

2.69%

92.26%

4.99%

Total

78138

Source: CRISIL Ratings

*CRISIL A2, CRISIL A3 and CRISIL A4 include ratings of the respective modifiers levels.

One-year transition rates for short-term ratings - annual static pool

Table A9: One-year average transition rates between 1988 and 2011Annual Static Pools
Rating*

Issuer-years

CRISIL A1+

CRISIL A1

CRISIL A2

CRISIL A3

CRISIL A4

CRISIL D

CRISIL A1+

4061

97.34%

2.00%

0.30%

0.35%

0.03%

0.00%

CRISIL A1

824

12.86%

83.25%

2.55%

0.97%

0.12%

0.24%

CRISIL A2

934

0.54%

6.32%

88.33%

3.21%

0.75%

0.86%

CRISIL A3

1544

0.00%

0.19%

5.38%

87.05%

6.09%

1.30%

CRISIL A4

2772

0.00%

0.00%

0.04%

2.67%

92.42%

4.87%

Total

10135

Source: CRISIL Ratings

*CRISIL A2, CRISIL A3 and CRISIL A4 include ratings of the respective modifiers levels.

Table A10: One-year average transition rates between 2001 and 2011 - Annual Static Pools
Rating*

Issuer-years

CRISIL A1+

CRISIL A1

CRISIL A2

CRISIL A3

CRISIL A4

CRISIL D

CRISIL A1+

2525

97.90%

1.50%

0.20%

0.50%

0.00%

0.00%

CRISIL A1

516

10.10%

85.70%

2.50%

1.20%

0.20%

0.40%

CRISIL A2

893

0.20%

6.30%

88.60%

3.20%

0.80%

0.90%

CRISIL A3

1542

0.00%

0.20%

5.40%

87.10%

6.10%

1.20%

CRISIL A4

2771

0.00%

0.00%

0.00%

2.70%

92.40%

4.90%

Total

8247

Source: CRISIL Ratings

*CRISIL A2, CRISIL A3 and CRISIL A4 include ratings of the respective modifiers levels.

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CRISIL Default Study 2011

Three-year CDRs for ratings of structured finance securities - for last 10 years
Table A11: One-, Two-, and Three-Year CDRs, between 2001 and 2011
Ratings

Issue-years

One-Year

Two-Year

Three-Year

CRISIL AAA(SO)

2455

0.04%

0.17%

0.29%

CRISIL AA(SO)

419

0.24%

0.61%

1.18%

CRISIL A(SO)

426

0.47%

0.47%

0.83%

CRISIL BBB(SO)

193

0.00%

1.80%

1.80%

CRISIL BB(SO) and below

40

27.50%

31.13%

31.13%

Total

3533

Source: CRISIL Ratings

Annexure 4: Lorenz Curve and Gini Coefficient for CRISIL Ratings

Chart 3: Graphical Representation of Gini Coefficient-Lorenz Curve
CRISIL Ratings - Lorenz Curve One-Year Defaults (1988 - 2011)

Cumulative Proportion of Defaults

Lorenz Curve

Random curve

Ideal curve

100%

80%

AAA

BB
60%

40%

B
1 -Yr Gini Coeff. = Q/(P+Q) = 0.63

20%
C
0%
0%

20%

40%

60%

Cumulative Proportion of Rated Universe

Source: CRISIL Ratings

The Gini coefficient for one-year defaults for 1988-2011 stands at 0.63.

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BBB

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How to read the chart on Gini Coefficient, a measure of rating accuracy

If ratings had no ability to predict default, then default rates and ratings would not be correlated. For example, consider
that 30 defaults occur in one year out of 1000 ratings (that is, a default rate of 3 per cent). For a randomly selected set of
100 companies (10 per cent of the rated population), one would expect to have three defaulted companies (10 per cent
of the defaulted population), since the number of defaults one would expect in a sample is proportional to the selected
number of companies. This is represented by the random curve, which will be a diagonal straight line. On the other hand,
if ratings are perfect predictors of default, in the aforementioned example, the lowest 30 ratings should capture all the
defaults. This is represented by the ideal curve.
Since no rating system is perfect, the actual predictive power of ratings lies between these two extremes. The
cumulative curve (Lorenz curve) represents the actual case. The closer the cumulative curve is to the ideal curve, the
better the predictive power of the ratings. This is quantified by measuring the area between the cumulative curve and
random curve (area 'Q' in Chart 3) in relation to the area between the ideal curve and random curve (the sum of the
areas 'P' and 'Q' in Chart 3). This ratio of Q/(P+Q), called the Gini coefficient or the accuracy ratio, will be 1 if ratings have
perfect predictive ability, as the cumulative curve will coincide with the ideal curve. On the other hand, it will be close to
zero if ratings have poor predictive power, as in this case, the cumulative curve will almost coincide with the random
curve. Thus, a higher Gini coefficient indicates the superior predictive ability of any rating system.

Definitions
Cumulative default curve (also called Lorenz curve)
The Lorenz curve is a plot of the cumulative proportion of defaults category-wise (of issuers with ratings outstanding at
the beginning of the year and being in default at the end of the year), against the total proportion of issuers up to that
category. For instance, in Chart 3, 78 per cent of the defaults recorded were in the 'CRISIL BB' and lower categories;
these categories included only 28 per cent of the total ratings outstanding. In other words, the bottom 28 per cent of the
ratings accounted for 78 per cent of all the defaults that occurred.

Random curve
The random curve is a plot of the cumulative proportion of issuers against the cumulative proportion of defaulters,
assuming that defaults are distributed equally across rating categories. In such a plot, the bottom 28 per cent of the
issuers would account for exactly 28 per cent of the defaults; the plot would, therefore, be a diagonal straight line, and
the ratings would have no predictive value.

Ideal curve
The ideal curve is a plot of the cumulative proportion of issuers against the cumulative proportion of defaulters, if ratings
were perfectly rank-ordered, so that all defaults occurred only among the lowest-rated entities. As CRISIL's overall
default rate is 3.5 per cent, the bottom 3.5 per cent of issuers would have accounted for all the defaults if the ratings were
perfect default predictors and any rating categories above this level would have no defaults at all.

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CRISIL Default Study 2011

Accuracy ratio/Gini coefficient

Accuracy ratio = (Area between the Lorenz curve and the random curve)/(Area between the ideal curve and the
random curve)

Annexure 5: Methodology used by CRISIL in this study

Concept of static pools
CRISIL, for calculating default and transition rates, has moved to a monthly static pool methodology from the annual
static pool methodology, since the 2009 edition of the default and transition study. The monthly static pool methodology
captures more granular monthly data such as intra-year transition and defaults, rendering default and transition rate
estimates more accurate and useful.
A static pool of a particular date is composed of a set of entities with a given rating outstanding as on that date. CRISIL
forms static pools on the first day of every month for its default and transition study. As CRISIL calculates one-, two-, and
three-year cumulative default rates, the static pools formed are of one-, two-, and three-year lengths. Once formed, the
pool does not admit any new entities. For an entity to be included in an n-year static pool, its rating has to be outstanding
through the entire period of n years. Entities whose ratings are withdrawn or are placed in default in the interim will
continue to be withdrawn or in default for the remaining years. Therefore, an entity that ceases to be rated and is
subsequently rated again, or an entity in the pool that defaults and recovers later, is not considered for re-inclusion in
the pool.
An entity that remains rated for more than one month is counted as many times as the number of months over which it
was rated. The methodology assumes that all ratings are current through an ongoing surveillance process, which, in
CRISIL's case, is the cornerstone of the ratings' value proposition.
For instance, an entity that had ratings alive (not withdrawn) from January 1, 2000, to January 1, 2002, would appear in
twelve consecutive static pools of one-year lengths, such as January 2000 to January 2001; February 2000 to February
2001; March 2000 to March 2001. On the other hand, a company first appearing on January 1, 2002, and having an
outstanding rating until February 1, 2003, will appear only in the January 2002 to January 2003 and February 2002 to
February 2003 static pools of one-year lengths. The static pools of two-year and three-year lengths are formed in a
similar manner.

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Weighted average marginal default rate

Notations:
For CRISIL's data,
M: Month of formation of the static pool (between 1988 and 2011)
R: A given rating category on the rating scale ('CRISIL AAA' to 'CRISIL C')
t: Length of the static pool in years on a rolling basis (1, 2, 3)
PtM(R) = Defaults from rating category 'R' in the tth year of the M-month static pool
QtM(R) = Non-defaulted ratings outstanding at the beginning of the tth year in the rating category R from the M-month
static pool
Illustration3: Consider a hypothetical static pool formed in January 2000, and having 100 companies outstanding at a
rating of 'CRISIL BB' at the beginning of the month. Suppose that, in this pool, there is one default in the first year
(ending December 2000), three in the second year (ending December 2001), and none in the third year (ending
December 2002). Also, assume there are no withdrawals in any year. Then, using the above notation,
P1Jan-2000(CRISIL BB) = 1; P2Jan-2000(CRISIL BB) = 3; and P3Jan-2000(CRISIL BB) = 0
Q1Jan-2000(CRISIL BB) = 100; Q2Jan-2000(CRISIL BB) = 99; and Q3Jan-2000(CRISIL BB) = 96
For rating category R, the tth year marginal default rate for the M-month static pool is the probability of an entity, in the
static pool formed in the month M, not defaulting until the end of period (t-1), and defaulting only in year t.
Mathematically, the marginal default rate for category 'R' in year t from the M-month static pool, MDRtM(R), is defined as
MDRtM(R) = PtM(R)/QtM(R)
Therefore, MDR1 Jan-2000 (CRISIL BB) = P1 Jan-2000 (CRISIL BB)/Q1 Jan-2000(CRISIL BB) = 1/100 = 0.01
The average marginal default rate is calculated as the weighted average of the MDRs of all the static pools of similar
lengths in the period, with the number of ratings outstanding at the beginning of the period (with appropriate withdrawal
adjustments discussed later) as weights.

This illustration is for explanation only, and does not indicate the actual or observed default rates in any rating category

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CRISIL Default Study 2011

Cumulative average default rate

The concept of survival analysis is used to compute the cumulative default probabilities. Using the average marginal
default rate, we calculate the cumulative probability of an entity defaulting as follows:

The cumulative probability of an

entity defaulting by the end of (t+1)
years

Cumulative probability of the entity defaulting by

the end of t years
+
Probability of the entity defaulting in the (t+1)th year

Furthermore, for an entity to default in the (t+1)th year, it should survive until the end of t years. So,

Probability of the entity defaulting in

the (t+1)th year

Probability of the entity not defaulting until the

end of the tth year
*
Marginal probability of the entity defaulting in
the (t+1)th year

Now,
Probability of the entity not
defaulting until the end of the tth year

1- Cumulative probability of the entity defaulting by the

end of t years

(1- Cumulative probability of the entity defaulting by the

end of t years)
*
Marginal probability of the entity defaulting in the
(t+1)th year

(1- Cumulative probability of the

entity defaulting by the end of t
years)
*
(Marginal probability of the entity
defaulting in (t+1)th year)

Hence,

Probability of the entity defaulting

in (t+1)th year

Therefore, returning to the first expression,

The cumulative probability

that an entity defaults by
the end of (t+1) years

Cumulative probability of
the entity defaulting by the
end of t years

Restating the above in notation, if CPDt+1(R) = cumulative default probability of an entity rated R defaulting in t+1
years, then,
CPDt(R) = MDRt(R);
CPDt+1(R) = CPDt(R) + (1- CPDt(R)) * MDRt+1(R)

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for t = 1
for t = 2, 3

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Withdrawal adjustment
In a one-year period, from the month of having obtained the rating, the entity can move to three different states - it can be
timely on payments (and have a non-default rating outstanding), can default on its debt repayments, or can repay the
debt fully and withdraw the rating. As entities are not monitored post-withdrawal, the 'true state' (whether default or no
default) of an entity whose rating has been withdrawn remains unknown in subsequent months. Therefore, a modified
MDRtM(R) that ignores withdrawn entities is an appropriate measure of marginal default probability. As mentioned
earlier, QtM(R) is also adjusted for the entities that belong to the static pool and have defaulted by the beginning of year t.
The modified QtM(R) is as follows:
QtM(R) = Number of entities in the static pool formed at the beginning of month M with rating category R
less Number of defaults till the end of period (t-1)
less Number of withdrawn entities until the end of period t
CRISIL uses full-year withdrawal adjustment, as against no-withdrawal adjustment or mid-year withdrawal adjustment
since the issuers whose ratings were withdrawn are not immune to the risk of default. Moreover, reliable information
meeting CRISIL's stringent requirements is not available post-withdrawal.
Post-default return of an entity
Post-default, entities sometimes recover, and consequently, receive a non-default rating in subsequent years. As
CRISIL's credit rating is an indicator of the probability of default, default is considered an 'absorbing state', that is, an
entity cannot come back to its original static pool post-default. In static pool methodology, the recovered entity is
considered a new entity, which, if continues to be rated, appears in the static pool of the month in which it recovered.
Methodology for transition rates
The t-year transition rate (from rating R1 to rating R2) for a static pool, is the proportion of entities rated R1 at the
beginning of the static pool, that are found to be in R2 at the end of t years. This proportion is called the t-year transition
probability from R1 to R2. The t-year transition matrix is formed by computing transition probabilities from various rating
categories (except CRISIL D) to other rating categories.
Withdrawal-adjusted transition rates are computed as mentioned above, but excluding entities that are withdrawn at
the end of the t years. In the computation of t-year transition rates, ratings at a point of time, and at the end of the tth year
thereafter, are considered.

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CRISIL Default Study 2011

Table A13 lists various elements of default rate computation and the competing approaches.

Table A13: Various Approaches to Computing Default Rates

Withdrawal Adjustments

Approach 1: Full-year withdrawal adjustments

Exclude all the ratings withdrawn during a year
from the base for calculating default rates.
Approach 2: Mid-year withdrawal adjustments
Exclude half of the ratings withdrawn during a year
from the base for calculating default rates.
Approach 3: No withdrawal adjustments
Take all the ratings outstanding at the beginning of
a year as the base, notwithstanding some of them
were withdrawn during the course of the year.

Calculating Cumulative
Default Rate (CDR)

Approach 1: Calculate CDR directly, without

using Marginal Default Rate (MDR)
Calculate CDR over a period as the number of
entities defaulting as a ratio of the number of
entities at the beginning of the period, ignoring
intra-period withdrawals.
Approach 2: Average MDR Methodology
Calculate MDR, weigh it by sample size and
accumulate it over a period to arrive at average
CDR.

Post Default Return of an

Entity

Data Pooling

CRISIL follows Approach 2, which takes

into account only the ratings that are were
not withdrawn at the end of each year as
the base. So it results in a more accurate
and conservative estimate of default rate.
Approach 1 is not comprehensive since it
ignores a large portion of the credit history
of entities who may have been rated just a
little while after the formation of the static
pool.

Approach 1: Treat default as an 'Absorbing

State'
Retain the status of a defaulted entity as default
even after recovery. Treat the recovered entity as a
new entity from the point of recovery.

CRISIL follows Approach 1. Since credit

ratings are an opinion of the likelihood of
default, the default state is treated as an
absorbing state or an end point, and the
entity's rating continues to be in 'default.'

Approach 2: Treat a defaulted and subsequently

recovered entity as a non-defaulted entity from the
point of recovery. So, if a non-defaulted entity
defaults in the 2nd year and recovers in the 3rd year, it
will not be treated as a defaulted entity in the 3rd
year MDR calculation.

If an entity emerges from default and has a

non-default rating on its debt instruments,
this entity is treated as a new company
forming a part of a different static pool from
the time its rating is revised from 'CRISIL
D'.

Approach 1: Static Pool

Charge defaults against all the ratings of the issuer
during the period.

CRISIL follows Approach 1. Debt

instruments are tradable in nature and can
be held by different investors at different
points of time. Since credit ratings, which
convey an opinion on the likelihood of
default are intended to benefit the
investors through the life of the instrument,
CRISIL believes that charging defaults
against all the ratings of the issuer during
the period is the most appropriate
approach in computing default rates.
Other approaches may have limited utility.
For instance, Approach 2 may be of
relevance only to the investor who invests
in the first-rated debt issuance of an entity
and holds it to maturity. Approach 3 may
be relevant only to those investors who
happen to be holding the instrument just a
year prior to its default.

Approach 2: Charge defaults against the initial

rating of the issuer.
Approach 3: Charge defaults against the most
recent year's rating of the issuer.

22

CRISIL follows Approach 1 since it

believes that the issuers whose ratings
were withdrawn are not immune to the risk
of default subsequent to the withdrawal.
More importantly, reliable information
about the timeliness of debt repayments,
which meets CRISIL's stringent
requirements, is not available post
withdrawal of the rating. Approach 1 results
in the most conservative estimate of the
default rates among the three approaches.

YEARS

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About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's
leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading
corporations.

About CRISIL Ratings

CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a
tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over 46,000
entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range of debt
instruments: bank loans, certificates of deposit, commercial paper, non-convertible debentures, bank hybrid capital
instruments, asset-backed securities, mortgage-backed securities, perpetual bonds, and partial guarantees. CRISIL
sets the standards in every aspect of the credit rating business. We have instituted several innovations in India including
rating municipal bonds, partially guaranteed instruments and microfinance institutions. We pioneered a globally unique
and affordable rating service for Small and Medium Enterprises (SMEs).This has significantly expanded the market for
ratings and is improving SMEs' access to affordable finance. We have an active outreach programme withissuers,
investors and regulators to maintain a high level of transparency regarding our rating criteria and to disseminate our
analytical insights and knowledge.

CRISIL Privacy Notice

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service your
account and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest.
For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can
view McGraw-Hill's Customer Privacy Policy at http://www.mcgrawhill.com/site/tools/privacy/privacy_english.
Last updated: 31 March, 2011

Disclaimer:
CRISIL has taken due care and caution in preparing this report. Information has been obtained by CRISIL from sources which it considers reliable.
However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors in
transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this report. No part
of this report may be reproduced in any form or any means without permission of the publisher. Contents may be used by news media with due credit
to CRISIL.
C CRISIL. All Rights Reserved.

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