Loss Given Default Ratings

Loss given default (LGD) is the likely loss or shortfall in recovery that a lender/ investor has to bear in the event of a default on credit exposure. 

An LGD rating represents Crisil’s independent opinion on the likely range of loss that a lender could be exposed to - as a percentage of its exposure - in the event of a default. An LGD rating is issue-specific as it factors in the seniority of claim on cash flows and presence of security (if any).

Crisil's LGD rating may be used by a variety of users. 

In the context of stressed assets, LGD ratings could be quite useful in the following ways:

• Providing independent inputs and enabling objective evaluation of resolution strategies for timely resolution of non-performing assets (NPA)
• Identifying appropriate resolution tool to be pursued
• Providing pricing benchmarks for sale of assets to an asset reconstruction company (ARC)
  

It can also be useful for standard assets in the following ways:

• Providing an input in the interest rate decision and asset cover stipulation
• Assessing ‘fair value’ of loans for lenders
  
• Identifying obligations with healthy recoverability prospects, and thus helping contain future losses to lenders
  
• Offering a comparable independent evaluation for LGD to supplement lender’s own internal evaluation
  

Crisil's LGD rating derives strength from our expertise in corporate sector ratings, and builds upon our strong understanding of post-default recovery characteristics through experience in recovery-risk rating