Bank Loan Rating vs NCD Rating: What Is the Difference

Many growing companies end up with two credit ratings: one on their bank loan facilities and one on a debt instrument such as non-convertible debentures. Both rest on the same assessment of the company, yet they serve different readers, follow different rules and can carry different grades.

This guide explains what each rating is for, why the grades can differ, what each costs to maintain and which one a company usually needs first.

Two ratings, one company

Agencies rate instruments, not just companies. Each bank facility and each security gets its own rating, shown with the amount rated. Behind all of them sits one view of the issuer's ability to pay, so in most cases the ratings match.

A bank loan rating covers the facilities in your sanction letters: term loans, cash credit, working capital demand loans, and non-fund limits such as letters of credit and bank guarantees. An NCD rating covers a specific debenture issue, on the terms in its offer document or term sheet.

Long-term facilities and debentures are rated on the long-term scale, from AAA down to D. Facilities of up to a year, such as letters of credit, bank guarantees and short working capital loans, are usually rated on the short-term scale, from A1+ down to A4 and D, while cash credit, which is rolled over year after year, is often rated on the long-term scale.

What a bank loan rating is for

The bank loan rating is mainly about the bank's capital. Under RBI's standardised approach, the capital a bank must hold against a corporate loan depends on the borrower's external rating. The current risk weights run from 20 percent for AAA, 30 for AA and 50 for A, to 100 for BBB and 150 for BB and below, with unrated loans generally at 100.

Size matters too. An unrated borrower whose total exposure from the banking system exceeds Rs 200 crore attracts a 150 percent risk weight. RBI has also released draft revisions to these rules, so the current table applies only until final changes are notified.

For the borrower, a bank loan rating is not a legal requirement. It matters commercially: a good rating lowers the bank's capital cost on your loan, which can support a finer interest rate, while an unrated or low-rated account costs the bank more to carry. That is why banks often ask for a rating at renewal.

What an NCD rating is for

The NCD rating is about investors. For a listed debenture issue, a rating from at least one SEBI-registered credit rating agency is mandatory, and every rating obtained, including any the issuer did not accept, must be disclosed in the offer document.

Beyond the law, the rating decides who can buy. Mutual funds, insurers, pension funds and bank treasuries work under investment rules and internal mandates that limit unrated or lower-rated paper, so the grade shapes both demand and the coupon you pay.

Even for an unlisted private placement, where a rating may not be legally required in every case, institutional buyers usually expect one. Check the current list of registered agencies on SEBI's website before appointing one.

Why the two ratings can differ

Because both ratings start from the same issuer assessment, a gap between them comes from the instrument itself. A debenture with a structured payment mechanism or a third-party guarantee can sit above the bank loan rating; a subordinated issue or a long bullet repayment can sit below it.

Differences are disclosed openly in the rationale, with suffixes that tell investors what supports the grade. The main drivers:

• Ranking: subordinated debt is usually rated below senior debt of the same company, because it is paid only after senior lenders
• Structure: an escrow of cash flows, a payment waterfall or a reserve account the agency can rely on may lift an instrument above the issuer's standalone grade; structured finance ratings carry the SO suffix
• Credit enhancement: a guarantee or other support from a stronger third party, such as a parent company, carries the CE suffix, and the unsupported rating must be disclosed alongside it
• Tenor and repayment: a long bullet repayment concentrates risk at maturity, while an amortising term loan reduces exposure every year
• Scale: short-term facilities and commercial paper sit on the short-term scale, which each agency links to its long-term grades in published criteria

Cost, surveillance and disclosure

Each rating carries an initial fee and an annual surveillance fee, broadly linked to the amount rated. Rating all bank facilities and a debenture issue together in one exercise is usually more efficient than separate mandates.

Surveillance is the same for both: a monthly no default statement from the company, at least one review a year, and event-driven reviews when something material happens. Rating actions and rationales are published on the agency's website, so lenders and investors see every change.

Listed debentures add obligations. Rating changes must be disclosed to the stock exchange, and debenture terms often carry a coupon step-up or an early redemption right if the rating falls. Because the issuer assessment is shared, a downgrade on one instrument usually moves the others.

Which rating do you need first?

For most SMEs and mid-sized companies, the bank loan rating comes first. Banks are the main lenders, the rating supports pricing and renewal, and it builds a public track record with an agency.

An NCD rating makes sense once you plan to raise money from the market, for longer tenors, bullet repayments or diversification away from banks. By then a few years of clean bank loan rating history helps the agency and the investors, and the issuer assessment is already in place.

Whichever comes first, do the readiness work once, choose the agency on the quality of its sector coverage and analysts rather than fee alone, and keep information flowing between reviews.

Frequently asked questions

Does each bank facility get a separate rating?

Usually all bank facilities are rated together in one exercise, and the rationale lists each facility with its amount and rating. Long-term facilities get a long-term rating and short-term facilities a short-term one. When limits change, the agency updates the rated amounts.

Can the NCD rating be higher than the bank loan rating?

Yes, if the debenture has a structured payment mechanism or third-party credit enhancement. A CE rating is published with the unsupported rating next to it. Without such features the two usually match, because they rest on the same issuer assessment.

Is a bank loan rating mandatory?

Not by law for the borrower. It matters because an unrated loan can cost the bank more capital, especially for larger borrowers, so banks often ask for a rating and may price a well-rated loan more finely.

What rating does commercial paper need?

Commercial paper is rated on the short-term scale, and RBI's directions set a minimum rating of A3 for issuance. In practice, investor demand tends to concentrate in the highest short-term grade, so test appetite with arrangers before planning an issue.

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