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