The Infrastructure sector is integral to the development of the country, to support economic progress and industrial growth. The inherent risks of project implementation make infrastructure projects highly vulnerable to volatile cashflows, resulting in lower credit ratings on the conventional rating scale which is based on the Probability of Default (PD). However, Infrastructure projects have many unique characteristics which enables a regular stream of cashflows post completion and stabilization phase. In this backdrop, CARE Ratings along with the Ministry of Finance and other stakeholders initiated the Expected Loss Ratings (EL Ratings) in January 2017. The EL framework not only factors in the PD (as in the conventional rating scale) but also includes the computation of an additional parameter i.e. Loss Given Default (LGD) estimate, by looking at the recovery prospects post occurrence of default.
The composite rating based on EL is a measure of comprehensive risk and is able to rank various infrastructure project SPVs based on their relative riskiness. Moreover, in its disaggregated form, this scale will be capable of commenting on the probability of default (for investors seeking timely repayment) and prospects of recovery of their principal and interest, post-default, and thereby provides incremental information to the investors/lenders regarding likely loss.
Ratings are assigned on the seven-point scale CARE [INFRA] EL 1 to CARE [INFRA] EL 7, where CARE [INFRA] EL 1 rating signifies the lowest expected loss and CARE [INFRA] EL 7 signifies the highest expected loss, over a defined period of time.