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Rating Criteria for Security Receipts

Security Receipts (SR) are issued by the Asset Reconstruction Companies (ARCs)/Securitization Companies
(SCs), when Non-Performing Assets (NPAs) of commercial banks (CB) and/or financial institutions (FI) are
acquired by the ARCs for the purpose of recovery. As per extant instructions, investment in SRs is restricted to
the Qualified Institutional Buyers (QIBs), as defined by the Securitisation & Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002(SARFAESI Act). Usually, any ARC purchasing an NPA
from a CB/FI forms a Trust for administering the financial asset thus acquired, and the Trust issues the SRs to
the QIB. The receipts are presently not tradable, and transfer is also restricted to another QIB.

The rating of SRs is based on the information provided by the ARCs on the clients, which are vetted for
reasonableness.

Brickwork Ratings bases the rating of SRs on the following criteria:

• The resolution strategy –Restructuring, or OTS or Enforcement of assets – and the estimated capability of
the ARC to implement the preferred strategy, keeping in mind the reasons for delinquency by the borrowing
entity,

• The nature of security in possession/charged to the ARC, especially where enforcement is the first option at
resolution,

• The status of legal actions taken by the lending banks/FIs,

• The anticipated timelines for resolution, as estimated by the ARC,

• The expected cash-flows, and the Net Present Value (NPV) thereof, keeping in mind the estimated timelines
as well as the adopted strategy.

The SRs are rated on the basis of the recovery percentage, as calculated by measuring the NPV of expected
recoveries against the face value of the SRs.

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Brickwork Ratings SEBI Registered, RBI Accredited, NSIC Empanelled

Brickwork Ratings -- Rating Scale:

BWR RR1+ Recovery Value (RV) is greater than 150% of the face value (FV) of the Srs
BWR RR1 RV is in the range of 100% -150% of the SR Face Value
BWR RR2 RV is in the range of 75% -100% of the FV
BWR RR3 RV is in the range of 50% -75% of the FV
BWR RR4 RV is in the range of 25%-50% of the FV
BWR RR5 RV is less than 25% of the FV of the SRs

As evident from the Rating Scale, BW RR1+ represents the highest recovery, while BW RR5 represents the
lowest recovery value. As mentioned earlier, NPV of the expected recovery is used for assessing the recovery
percentage.

Pooled assets

Often it happens that the ARCs bundle more than one small loan into a portfolio and issue SRs for the pooled
asset as a whole. While valuing such SRs, the valuation of each individual loan is examined. It is also possible
that different strategies are applied for different units of the pool by the ARC. Obviously, the rating of such SRs
will be based on the recoveries effected/expected from individual assets in the pool.

Frequency of rating:

The initial rating is done within six months of acquisition of the asset by the ARC and formation of the Trust.
Thereafter, the rating is reviewed as at the end of every June and December of the years, till the life of the Trusts
(5 or 8 years as the case may be).

Disclaimer:
It must be clearly understood that a Rating opinion is based on various factors/aspects which includes application of certain Rating criteria. The
particular criteria applied depends on a number of factors, inter alia, sector/Industry, historical performance, cyclical trends, prevailing economic
condition, group support etc. Rating opinions factor many assumptions and the application of any particular criteria or a set of criteria may be full
or partial depending upon peculiarity of each case. Application of any Rating criteria should not therefore be considered as rendering finality or
completeness to a Rating assessment. A reference to criteria needs to be perceived in broad terms, only as an aid to a rating decision.

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