CHAPTERIV

CREDIT RATING AGENCIES IN INDIA

The history of Credit Rating in India is only a decade and half. During this

short span of time, the rnqjor rating agencies have instilled confidence in the

minds of the Investors and Regulatory bodies. The mqjor rating agencies in India

are attracting the Global Rating Agencies, which have entered into alliances

with them for technical collaboration and equity participation. The Indian Rating

Agencies are providing training and technical assistance in setting up rating

agencies in many other countries. Moreover the Indian Rating Agencies are

instrumental for the incorporation of Association of Credit Rating Agencies of

Asia (ACRAA). The Indian Rating Agencies also provide adequate information to

the Investors through their publications. In this chapter, an attempt has been

made to study the rating practices and the role paid by the Indian Rating Agencies.

Credit rating emerged in India with the birth of Credit Rating Information

Services of India Limited (CRISIL). The Investment Information and Credit

Rating Agency (ICRA), Wt Analpis and Research Limited (CARE), Duff 6.

Phelps (US) in joint venture with Alliance Capital Ltd. Calcutta were formed in

India to provide various services to the investing community in India. The services

rendered by these Credit Rating Agencies are discussed in detail in this Chapter.

4.1. Credit Rating Information Services of India Limited (CRISIL)

CRISIL has been promoted by IQCI and UTI as a public limited company

with its head quarters at Barnbay, having branches at Chennai, Calcutta,

Bangalore, Ahmedabad, Hyderebed and Delhi

4.1.1. Capital Structure Of CRISIL

CRISIL, was incorporated on January 29th 1987 and commenced its

operations from Janl, 1998 with a capital base of Rs. 4 crores in which institutions

hold shares in the following proportions:

lkblo 4.1

Capital Structure of CRISIL -- --

ICICI 15%

UTI 15%

ADB 15%

LIC 05 %

GIC 8 SUBSIDIARIES 05 %

SBI 05 %

HDFC 05 %

NATIONALISED BANKS 18%

FOREIGN BANKS 17%

Source : CRISIL RATING SCAN

CRISIL issued shares to the public at a premium of Rs.40 per share in the

year 1993-94.

The Credit Rating Information Services of India Limited (CRISIL) was the

first Rating Agency, rating of the financial instruments in the country. CRISIL's

business has grown far beyond and the services include advisory services, research

capabilities, and quality information services. CRISIL has the required

competence in risk identiAoatim and assessment, offering creative solutions to

various sectors of the capital market.

4.1.2. CRISIL Business Divisions:

1. CRISIL Advisory Services (CAS)

2. Credibility F'irst Rating and Evaluation Services

3. CRISIL Training Services

4. Subsidiaries

CRIS - Infac

Global Data Services of India Limited

CRIS - RISK and Information Solutions Company Ltd (CRIS - RISC)

Table 4.2

Segment wise Revenue:

Source: www.nlril.oom

SEGMENT

RATINGS

CAS

CRIS

OTHERS

CRISIL is the market leader having rated more than 1800 companies and

3600 instruments amounting to a debt volume of over $62.1 1 billion since its

inception in 1987. At present CRISIL is having the strategic alliance with the

global market leader Standard 8 Poor's, USA (SBP).'

REVENUE (%)

6 1

2 4

11

4

4.1.4. CEUSIL Advisory Services (CAS)

The consultancy division of CRISIL offers specialized advisory services in

the areas of energy, transpartation, and urban infrastructure, economy, capital

markets, banking and finance, kconsulting etc. CRISIL has advised Governments,

Agencies, Regulatory bodies as well as Corporate and other private sector entities.

4.1.5. CRISIL's Rating Process

Request of the company: The rating process begins at the request of a company

desirous of having its issue obligations under proposed instrument rated by

CRISIL.

Assignment toanwcal team : On receipt of the above request, CRISIL assigns

the job to an analytical team that will be responsible for carrying out the rating

assignment.

Obtainingandpmcessingof data : The analytical team, which generally contains

two experts, obtains requisite information from the client company and analyses

the same. To obtain clarification and better understanding of the client's

operations, the team meets and interacts with company's executives.

Rndings pmsenurtim The findings of the team completion of investigation

process are presented to Rating Committee (which comprises some directors not

connected with any CRISIL shareholder), which then decides on the rating.

Communication of decision: The decision of the Rating committee is

communicated to tho client compkry with remarks that the company, if it so

likes, may present some additional information for reconsideration of rating grade

assigned to this instrument. In case the company has nothing to produce as

additional fact, the rating grade is fonnally confirmed to the company by CRISIL.

Monitohg of change cafmtlng: Once the company has decided to use the

rating, CRISIL is obliged to monitor the rating, over the life of the instrument.

Depending upon k w information, or developments concerning the company,

CRISIL may change the rating. Any change, so effected, is made public by CRISIL.

4.1.6. CRISIL'S Rating Methodologp'

CRISIL analyses five factors while assessing the instrument.

1. Business Analgsis

In Business Analysis the following aspects are considered.

Industry risk

Market position of the company within the industry

Operating efficiency

Legal position

2 . Financial Analysis '

Under financial analysis all relevant aspects connected with the business

and financial position of the company are assessed, namely accounting procedure,

method of income recognition, depreciation policies and inventory calculations,

valuation of assets. The earning potential, profitability, future earnings, adequacy

of cash flows are considered to be important factors in financial analysis.

3. Management 6valuation

The Manageyent is evaluated on the basis of its goals and philosophies,

strategies and abilities, past performance, planning and control systems,

relationship with the shareholders, mergers and acquisition considerations

aggressiveness regarding Anancial risk etc.

The trends in the financial system regarding regulation and deregulation

and their impact on the comperry have been considered for rating purposes.

CRlSIL R A m G OWL^ for Banlu and Financial Institutions, CRISIL, Bank Rating Sorninar. IQSQ, pp. 1-91.

Fundamental analysis considers liquidity, asset quality, profitability and

financial position, interest and tax obligations.

4.1.7. Performance Highlights

In the year 2000-01, upgrading equaled downgrading of instruments. In

the past four years downgrades exceeded upgrades. The "AAA" ratings increased

substantially during the year. A strong cornlation was observed between CRISIL's

rating actions and macro economic factors like GDP, Index of industrial production

and equity rose by the companies?

The following table 4.3 analyzes the sector wise rating actions for the year

2000-01.

Table 4.3

Sector wise Rating Actions for the year 2000-01.

Source: CRISE RATINGS -ROUNDUP 2000-01.

During the year 2000-01 rating upgrades in manufacturing sector accounted

for over 75% of total upgrades and downgrades accounted for 90% of total

downgrades.

' CRISIL RATINGS - ROUNDUP 2000-01.

Rating Stability

CRISIL Ratings were more stable during the year 2000-01, which was

evidenced by high degree of correlation between stability rates and the rating

levels during 2000-01, The following table 4.4 will provide more evidence of

stability rates.

Table 4.4

CRISES Rating Stability

Source: CRISIL RATINGS -ROUNDUP 200041.

In 2001-2002 the amount of debt raised by CRISIL's AA and A rated entities

accounted for a significantly lager share of the total new debt issued. This rose

from 14.3% in 2000-01 to 35.8% in 2001-02, The number of issues rated has

fallen from 108 to Be, howww the debt amount rated has increased. The trends

for the year 2000-01 and 200192 are shown in the following table 4.5.

8 year Average

96.8%

85.2%

82.3%

73.2%

58.1%

62.5%

59.4%

Stability Rates

AAA

A A

A

BBB

BB

B

C

2000-01

97.4%

88.1 %

82.6%

85.3%

77.3%

60.0%

86.7%

Table 4.5

CRISILS' Rating b n d s

Source: qjay Dwivedi, CRXSIL Ratingscan, June 2002, pp. 11-16.

Short - mrm Debt Instruments

Commercial paper (CP) and short-term debt rated volumes have grown by

more than 85% in 2001-02 over 2000-01. Number of instruments rated in

2001-02 has reduced but volume has increased per client significantly. The

following table will illustrate the trends in short-term debt instruments.

Table 4.6

Short-term Debt Instruments

Source: 4ay Owfpvdt eRI8a, lW@om, June 2002, pp. 11-16.

4.1.8. CRISIL Mile StMm , 'Ihble 4.7

CRISES Mile Stones

1987

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

Year of Incorporation

Commenced rating of corporates

Published CRISIL - IDBI Bond Yield Tables

Started CRISIL Credit Assessment Service for Banks Launched

CRISIL Rating Scan to announce new and current ratings and

disseminate CRISIL rating rationale

Established Information Services Group and started CRISIL

CARD Service.

Provided technical assistance and training to Rating agency

Malaysia Berhard and MAALOT. The Israel Securities Rating

Company Ltd.

Developed methodology and Eramework for rating Structure

Obligations and Asset Securitisation Programs. . Evolved methodology and framework of bank ratings.

~ntroduced CRISIL 'Rating Set-Debentures' and CRISIL

'RatingSET-Fixed Deposits'.

Published CRISIL 'Rating Digest'

Made public offer of 20,00,008 equity shares of Rs.10 each at a

premium of Rs.40 per share, The offer was over subscribed by

2.47 times.

Crossed the mark of 1000 debt instruments rated

Launched CRlSa Ban Card Service.

Advisory !hmiow Gmup set up.

1994-95

1995-96

1996-97

1997-98

New products like Ratings on real estate developers' projects.

Assessing credit quality of State Electricity Boards and State

Governments, CRISIL EcoScan, CRISILVIEW were introduced.

Set up a separate department for securatisation.

Strategic Wiance with Standard 8 Poor's Ratings Group, New

York.

Tie-ups with international information Vendors for

Dissemination of CRISIL Ratings.

New products like ratings on municipal bonds and on Liquefied

Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) were

introduced.

CRISIL - 500 Equity Index was launched.

CRISIL SECTOR VIEW and CRISIL INDUSTRY VIEW reports

were launched.

New products like ratings on mutual funds, bank loan ratings,

public finance ratings were launched.

Standard 6 Poor's acquisition of interest in CRISIL by acquiring

9.68% of shareholding in the Company.

Developed and launched Municipal Bonds ratings.

CRISERVICE, a retainership service was introduced. CRISIL

MNC Index and CRISXL Indian Business Groups Index were

introduced.

Set up IISPL, a Joint venture between CRISIL and National

Stock Exchange for carrying out Index business and related

activities. The new Company entered into consultancy and

License Agreemsnt with Standard 6. Poors', New York.

Launched Anandal strength rating for Insurance companies.

1998-90

1999-2000

Developed end launched a framework for rating debt obligations

supported by credit enhancements based on overseas

guarantees called Foreign Structured Obligations.

Risk Assessment Model (RAM) was launched as a user-friendly

software package.

New products such as CrisilCard500, Crisil DebtBase, Crisil

Bondvaluer, Crisil Debtview, Crisil EcoView and Crisil GO1

benchmarks were launched.

CRIS tied up with S6.P MMS and S6P Platts to market their

products in India.

Developed new product on ratings of real estate developers in

association with National Real Estate Development Council

(NAREDCO).

Introduced new products viz. Crisil Gilt-X (GO1 Index), Crisil

AAA Corporate Bond Index - the country's first corporate bond

index, Crisil Gil Base - database on GO1 securities and two

business publications - Crisil Insight and Crisil Alert.

Acquisition of the business of Information Products and

Research Services (India) Pvt. Ltd. along with its brand INFAC.

CRISIL was granted Certificate of Registration under SEBI

(Credit Rating Agencies) Regulations, 1999.

Strategic alliance with National Economic Research Associated

(NERA), a unit of Mercer Consulting Group and a subsidiary of

Marsh and Mclennan Companies Inc., USA, to get international

expertise in the am of regulations and regulatory reforms.

CRId launches Wo series of publications called CRISIL insight

and CRfSIL Ah%,

Launched a w h i t e crisil.com

Source: www.criril.aom

2tl00-01

2001-02

CRISIL Fundscan, an in-house development of comprehensive

mutual fund tracking and query product for Internet was

launched.

Launch of mutual fund ranking service for the domestic mutual \ ,

fund market.

Launch of subsidiary for conducting online web business named

Crisil Com Ltd., now renamed CRIS-Risk 6 Information

Solutions Co. Ltd (CRIS-RISC), in line with its businesses of

capital markets research, information and news.

The first ever Mortgage Backed Securities (MBS) issue

originated by HDFC and LIC Housing Finance Limited was rated

by CRISIL.

CFUSIL successfully rated an innovative structure of the Single

Risk Collateralised Bond Obligations (CBO) transaction, backed

by rated bonds.

Another subsidiary for carrying the business of collecting data

relating to companies, trade, industry, geographic and other

ancillary matters incorporated in the name of "Global Data

Services of India Limited".

Grading of healthcare institutions launched.

EIrst rated debt transaction for an acquisition.

First rated take-out cum guarantee facility by an infrastructure

development financial institution.

New rating and grading services for stock brokers, construc-

tion 'industry entities. SME's and B2B exchange.

Launched new Ratings website www.crisilratings.com

During the first half-year of 2002-03 recorded a change in economic

direction. During the first half the number of upgrading was the same that of

last year, numbering only four. However, there was significant reduction in the

number of downgrades, recording only ten compared to thirty-eight during the

first half of last year, CRISES modified credit ratio continues to exhibit a strong

a correlation with macro economic indicators. Further the half-year has also

recorded improvement in stability of rating. CRISIL reaffirmed about 88% of its

continuing long-term ratings compared to the rearmation of 84% during the

same period. The fixed deposit-rating portfolio witnessed 8 upgrades and 4,

downgrades.

The following table reveals the trends in credit rating done by CRISIL.

Table 4.8

CRISIL's Recent Trends

Source: Venkatammaa S., RATINGS ROUNDUP, First Half 2002-03.

Rating

AA A

April-September 2001 -02

Number

of issues

. 25

April- September 2002-03

Number

of issues

17

Debt

Volumes

Rs.

Billion

174.33

Debt

Volumes

Rs,

Billions

210.12

Percentage

of total

Debt

54.82%

of total

Debt

90.25%

Percentage

of total

Debt (excl

IDBI)

75.94%

4.1.9. NBFC Ratings

During the five-year period from April 1997 to March 2002, CRISIL down-

graded 108 NBFCs. The number of NBFCs downgraded has registered a steep

decline from 84 during EInancial Year (FI) 1997-98 to 57 during FY 1998-99 to

just three during FY 2000-01 and five during FY 2001-02. The downgrades

during the first four years, that is, from April 1997 to March 2001, were prima-

rily due to the deteriorating business and financial risk profiles of the NBFCs. In

contrast, the downgrades of as many as three of the five NBFC's during FY 2001-

02 were due to a downgrade of the parents of the NBFCs.

CRISIL had observed that rating actions in the NBFC sector have stabi-

lized. This was based on an analysis of the rating changes which as a percentage

of total rhting actions taken by CRISIL in the NBFC sector, had reduced signifi-

cantly from approximately 82% during FY 1997-08 and 76% during FY 1 998-99

to 41% during FY 1998-2000. CRISES anticipation of the stabilization in rat-

ings was based on the profile of the new NBFCs that had emerged. The credit

profile of many NBFCs benefited on account of promoters of strong credit stand-

ing andlor strong manufacturer linkages. As predicted, the proportion of rating

changes has further reduced to 19% during FY 200 1-02.

During the five-year period from April 1997 to March 2002, 12 NBFCs

were upgraded. It is pertinent that as many as ten of these upgrades under-

scored strong parent support eqjoyed by these entities rather than any improve-

ment in their standalone business and financial risk profile. The revisions re-

flected the parent's willinanerr, ability m d actual demonstration of support and

also, in some specific iruianm, a revieion in the rating of the parent company

itself'

' Giri5h.K. "NBPC RATINGS: Inonrrd pohrltation and linkages mark post-shakeout trends",CRISIL RatlngScan, M a y 2002, pp 3 4

Table 4.9

CRISIL's Downgradw and Upgrades

Source: GWh. K. "NBFC RATINGS: h a m u d poluizadon and linkages mark post-shakeout trends", CRISIL Rating Scln Mey 2002

Year

97-98

98-99

99-00

Minimum Credit Rating for NBFC

Under Para 4(1) of the Directions, no NBFC having specified NOF can accept

public deposit unless it has obtained minimum investment grade or other specified

credit rating for fixed deposits from any one of the approved credit rating agencies

at least once a year.

Downgrades

92

5 7

9

The approved m d i t rating agencies, and the minimum credit rating are specified

as follows:

Table 4.10

Minimum Credit Rating for NBFC

Upgrades

1

1

8

Name of the agency

The Credit Rating Investment

Services of India Ltd. (CRISIL)

ICRA Ltd.

Credit Analysis 8 b e a r c h Ltd. (CARE)

Duff 8 Phelps Credit Rating Indie (I?) Ltd.

(DCR India)

Minimum investment grade rating

FA - (FA Minus)

MA - (MA Minus)

WFtE BBB (FD)

Ind BBB - (BBB Minus)

It may be noted that Para 4(1) of Directions, is not applicable to Equipment

Leasing or Hire Purchase Finance Company [referred to in Para 4(4)(8) of

Directions].

Note: A copy of the rating must be sent to RBI.along with the return on

prudential norms.

Any subsequent upgrading or downgrading of credit rating must be

intimated to RBI within 15 working days of such ~pgradingldowngrading.~

4.1.10. Rating Criteria - Banks and Financial Institutions

The objective of CRISIL's analysis is to form an opinion as to the types of

risk that'may affect the relative ability of Bank~~nanc ia l Institutions (FI's) to

service interest and repayment of principal on the rated instrument in a timely

manner.

The entity specific analysis of the risk profile is done through a qualitative

cum quantitative can approach, following a structured methodology called

'CRAMEL' model. 'The relative strengths and weaknesses of each entity as

compared to its peer group are evaluated, based on the rating criteria.'

The 'CRAMEL' model comprises the following:

Capital Adequacy

Resource raising ability

Asset Quality

Management B systems evaluation

Earnings potential

Liquidity/Asset Liability Management

Minimum C d t h-, N o o - ~ PtMnchl Companies, New Delhi, Taxrnan, 2000, pp 1-26-29 M ' G CRITERIA - BA#ICS A m FINANCIAL INSTITUTIONS, CRISn.

No one factor has an overriding importance or is considered in isolation.

All these six factors are viewed in conjunction before assigning a rating. In

addition to the factor, which constitutes the CRAMEL, the size of the financial

entity is also an important parameter. The size of an entity in the financial

sector, imparts it the ability to withstand systemic shocks, determine the

extent of system support that can be expected for the entity.

4.2. INVESTMENT INFORMATION AND CREDIT AGENCY OF INDIA LTD

(ICRA)

ICRA Ltd. (formerly, Investment Information and Credit Rating Agency

of India Limited) was incorporated on January 16, 1991 and launched its

services on August 3 1,1991. ICRA is an INDEPENDENT AND PROFESSIONAL

company providing investment information and credit rating services. ICRA's

major shareholders include Moody's Investors Service and leading Indian

financial institutions and banks. As the growth and globalisation of Indian

Capital markets have led to an exponential surge in demand for professional

credit risk analysis, ICRA has actively responded to this need by executing

assignments including credit ratings, equity grading, and mandated studies

spanning diverse industrial sectors. In addition to being a leading credit

rating agency with expertise in virtually every sector of the Indian economy,

ICRA has broad-based its services to the corporate and financial sectors, both

in India and overseas, and presently offers the following service^.^

Rating Services

Information Services

Advisory Services

ICRA Llmlted, CREDIT RATING, 2000.

4.2.1. ICRA Milestones

Tbble 4.11

ICRAW88tOnes

September 2001

July 2001

Moody's Investment Company India (Private) Limited

becomes the largest shareholder in ICRA

Moodys's Investment Company India (Private) Limited

became the largest shareholder in ICRA by acquiring an

additional 9% stake.

Moody's Investment Company India (Private) Limited

becomes the largest shareholder in ICRA

Moody's Investment Company India (Private) Limited

became the largest shareholder in ICRA by acquiring an

additional 9% stake.

ICRA and NAREDCO launch a grading system for Real

Estate Developer

ICRA Limited and the National Real Estate Development

Council (Naredco) jointly launched the ICRA-Naredco

grading system for real estate developers and projects

designed to make investors- the buyers of property-aware

of the risks associated with the developers' ability to

deliver in accordance with the terms, and the quality and

safety standards stipulated.

The ICRA-Naredco Developer Ability Grading and Project

Ability Grading will also provide an objective and

independant opinion to lenders (banks and financial

iMdWb8) on their ability.

June 2001

October 1999

August 1999

March 1999

ICRA launchem Corporate Governance Ratings

ICRA launched its Corporate Governance Ratings (CGR)

for the Indian Market with a focus on Corporates' business

practices and quality of disclosure standards with respect

to the requirements of regulators and interests of its

financial stakeholders i.e, its shareholders, lenders and

creditors. ICRA believes that this rating service would

assist the corporate to develop a credible opinion on its

management quality and responsiveness towards the

interest of all its financial stakeholders.

ICRA launches ICRA Interactive

ICRA launches its new corporate website making all its

research publications available through the Internet in

the electronic format.

The new site offers many new and useful features

including a powerful on-site search engine, electronic

subscription lists and customized e-mail update services.

Moody's and ICRA Announce Final Equity Agreement

Moody's Inv88tOm Service and ICRA Limited announced

the Anal agreement for Moody's to make an equity

investment and provide technical services to ICRA. The

signing of the agreement follows the December 08, 1998

endorsement of a memorandum of understanding (MOU)

between the two rating agencies.

Launched Grading services for construction entities

Launched grading services for entities involved in

February 1999

January 1999

December 1998

construction projects including contractors, consultants,

project owners and the project itself. The grading system,

evolved in collaboration with CIDC, is an objective system

designed to provide lenders and others with an

independent opinion on the quality of the entity being

examined.

ICRA becomes the first Indian rating company to rate all

non Life Insurance Companies

ICRA became the first Indian rating agency to rate all

non-life insurance companies in the country.

ICRA's latest feat follows its 1998 initiative in introducing

a rating methodology for the claims paying ability of

general insurance companies in India.

Launched ICRA Corporate Review

Introduced the first edition of its corporate analysis report

titled ICRA Corporate Review (ICR) which is a bi-annual

publication by ICRA Information Services, a division of

ICRA, tailored to meet the Information needs of both the

retail and wholesale investor. Specifically, ICR is conceived

and designed to act as a 'first level' information resource

for investors, asset managers, creditors, term lenders,

bankers, merger 8 acquisition specialists, treasury

managers, regulators and academicians, among others.

Moody's Investors Service and ICRA Limited announce

their joint agreement to Moody's' taking up minority stake

in the equity capital of ICRA.

July 1998

February 1997

March 1996

The US-based international credit rating agency Moody's

Investors Service and ICRA Limited announced their

mutual agreement to Moody's picking up a minority stake

in the equity capital of ICRA. Significantly, this is a rare

occasion where Moody's has agreed to a minority stake

in a venture in a developing market.

Introduced Rating methodology for the Claims paying

ability of General Insurance Companies in India.

The rating of insurance companies enables purchasers of

insurance policies and investors access timely, authentic

and dependable information about the fundamental

capacity of the insurance company to service claims and

obligations. Simultaneously, it helps the insurance

company widen its market as name recognition is

complemented by the objective opinion of ICRA.

Launched Money BFTnance, a research programme (in the

form of a quarterly publication) is directed at analysis of

contemporary developments that characterize Indian

money and finance with the ultimate objective of

developing analytical models which can explain the inter-

related movements of the principal macro-variables

defining the monetary and financial sector of the Indian

economy.

Signed agreement with Financial Proformas Inc., a

Moody's company (now called Moody's Risk Management

Services)

Source: w w w W W W l ~ o o m

December 1995

April 1995

March1 993

September 199 1

January 1991

Signed agreement with Financial Proformas Inc., a

Moody's company (FPI), to provide credit education, risk

management software, credit research and consulting

services to commercial banks, financial and investment

institutions, financial services companies and mutual

funds in India.

@ Launched credit assessment for small and medium scale

industry

Credit Assessment for Small 8 Medium Scale Industry

(under CII cluster Approach).

Launched EPRA (Earnings Prospects and Risk Analysis)

range services

EPRA (Earnings Prospects and Risk Analysis) launched,

Information Service for the Equity Investor.

Launched Investment Information Service 6 Research

Publications

Launching of Investment Information Service 6 Research

Publications.

@ Launched Rating Services

Launching of Credit Rating Services on 1 September 199 1.

Incorporation

@ Promoted by leading financial institutions and banks of

India, Investment Information and Credit Rating Agency

of India Limited was incorporated on 1 6th January 199 1.

4.2.2. MAJOR SHAREHOLDERS

Moody's Investment Company India Private Limited

IFCI Limited

State Bank of India

* Life Insurance Corporation of India

Unit Trust of India

N a b National Bank

* General Insurance Corporation of India

* Union Bank of India

Central Bank of India

Allahabad Bank

United Bank of India

Indian Bank

* UCO Bank

Canara Bank

AndhraBank

Export-Import Bank of India

Housing Development Financial Corporation Limited

Infrastructure Leasing 8 Financial Services Limited

* The Vysya Bank Limited

* Indian Overseas Bank

Oriental Bank of Commerce

Others

4.2.3. ICRA OFFICES:

NEW DELHI (HEAD OFFICE)

CHANDIGARH

CALCUTTA

MUMBAI

m T N E

* HYDERABAD

CHENNAI

* , BANGALORE

Leveraging on ICWs core competence of business analysis ICRA Information

Services is focused on addressing the unique information needs of investors and

the capital markets community. The emphasis is on providing up-to-date,

authentic and value added information in a user-friendly format to supplement

investment decision-making. The products of ICRA Information Services are all

designed to promote efficiency in the financial markets. They reflect independent,

professional and impartial opinions, which help issuers - including lesser-known

companies - access a broader investor base. The quality and authenticity of

information is a derivative of ICRA's wide research base, which includes Monetary

and Fiscal, Industry and Corporate research in its ambit. A panel of advisors

who bring expertise in Banking, Infrastructure and Monetary 6 Fiscal sectors

further complements the in-house capabilities in these areas. We are committed

to provide a healthier environment for the market participants and regulators by

promoting wider investor awareness and interest, and increasingly bridging the

information gap in the Indian financial market. It is our endeavour to constantly

upgrade our existing products and introduce new ones in cognizance of the

dynamic and evolving nature of the Indian business environment. This, we

believe, will sustain our pre-eminence in providing quality research material

that market participants, with India and overseas, will continue to need to make

investment decisions in the increasingly complex and volatile markets.

ICRA's Information Services include

Corporate Reports

* Industry and Sector Research

Bulletin on Money 8 FInance

Rating Profile

Customised Research

Grading Services

Rating request: Ratings in India are initiated by a formal request (or mandate)

from the prospective issuer. This mandate spells out the terms of the rating

assignment. Important issues that are covered include: binding the credit rating

agency to maintain confidentiality, the right to the issuer to accept or not to

accept the rating and binds the issuer to provide information required by the

credit rating agency for rating and subsequent surveillance.

Rating team: The team usually comprises two members. The composition of the

team is based on the expertise and skills required for evaluating the business of

the issuer.

Information requirements: Issuers are provided a list of information requirements

and the broad framework for discussions. These requirements are derived from

the experience of the issuers business and broadly conform to all the aspects,

which have a bearing on the rating. These factors have been discussed in detail

under rating framework.

Secondary infonnatian: The credit rating agency also draws on the secondary

sources of information including its own research division. The credit rating

agency also has a panel of industry experts who provide guidance on specific

issues to the rating team. The secondary sources generally provide data and

trends including policies about the industry.

Management meetings and plant visits: Rating involves assessment of number

of qualitative factors with a view to estimate the future earnings of the issuer.

This requires intensive interactions with the issuer's management specifically

relating to plans, future outlook, and competitive position and funding policies.

Plan visits facilitate understanding of the production process, assess the state of

equipment and main facilities, evaluate the quality of technical personnel and

form an opinion on the key variables that influence level, quality and cost of

production. These visits also help in assessing the progress of projects under

implementation.

Preview meeting: After completing the analysis, the findings are discussed at

length in the internal committee, comprising senior analysts of the credit rating

agency. All the issues having a bearing on the rating are identified. At this stage,

an opinion on the rating is also formed.

Rating committee meeting: This is the final authority for assigning ratings. The

rating team makes a brief presentation about the issuers business and the

management. AU the issues identified during discussions in the internal committee

are discussed. The rating committee also considers the recommendation of the

internal committee for the rating. FEnally. A rating is assigned and all the issues,

which influence the rating, are clearly spelt out.

Rating communication: The assigned rating along with the key issues is

communicated to the issuer's top management for acceptance. The ratings, which

are not accepted, are either rejected or reviewed. The rejected ratings are not

disclosed and complete confidentiality is maintained.

Rating Reviews: If the rating is not acceptable to the issuer, he has a right to

appeal for a review of the rating. These reviews are usually taken up only if the

issuer provides fresh inputs on the issues that were considered for assigning the

rating. Issuers' response is presented to the Rating Committee. If the inputs are

convincing, the Committee can revise the initial rating decision.

Surveillance: it is obligatory on the part of the credit rating agency to monitor

the accepted ratings over the tenure of the rated instrument. As has been

mentioned earlier, the issuer is bound by the mandate letter to provide information

to the credit rating agency. The ratings are generally reviewed every year, unless

the circumstances of the case warrant an early review. In surveillance review

the initial rating could be retained or revised (upgrade or downgrade). The various

factors that are evaluated in assigning the ratings have been explained under

rating framework.

Rating Framework8

The factors can be conceptually classified into business risk and financial

risk drivers. Table 4.12

Rating Framework

CREDIT RATING, Institute of C h W d Accountants of India. 1999, pp. 1-80.

Business risk drivers

Industry characteristics

Market position

Operational efficiency

New projects

Management quality

Demand factors

Drivers 6. potential

Nature of product

Nature of demand - seasonal, cyclical

Financial risk drivers

Funding policies

Financial flexibility

State of competition

Existing 6 expected capacities

Intensity of competition

Entry barriers for new entrants

4.3. CREDIT ANALYSIS 6 RESEARCH Ltd. (CARE)

Bargaining position of customers

Environmental factors

Role of the industry in the economy

Extent of government regulation

Government policies - Current and

future direction

Care is Credit Rating 8 Information Service Company, promoted by

Industrial Development Bank of India (IDBI) jointly with investment institutions,

banks and finance companies offering the following services. v

Credit Rating of Debt instruments.

Credit Assessment of Companies for use by banks and financial institutions

Advisory Services for

1. Structuring financial instruments,

2 , Infrastructure financing,

3. Municipal finances,

4. Securitisation transactions.

Exit barriers

Threat of substitutes

Bargaining position of suppliers

Availability of raw material

Dependence on a particular supplier

Threat of forward integration

Switching costs

Credit Reports on Indian companies, on request

Performance rating of parallel marketers of LPG and Kerosene, under

Government of India Scheme,

Rating of collective Investment Schemes of Plantation Companies.

1. Credit Rating of Debt Instnunen& :

Credit rating is an opinion on the relative ability and willingness of an

issuer to make timely payments on specific debt or related obligations over the

life of the instrument. CARE'S ratings are intended to serve as indicators or

forecasts of the potential for credit loss because of failure to pay, a delay in

payment or partial payment. The following regulatory authorities in India accept

CARE'S ratings:

Securities and Exchange Board of India (SEBI)

Reserve Bank of India (RBI), and

Government of India for all instruments or services for which rating has

been made obligatory.

4.3.1. Qpes of Instnunents

CARE undertakes credit rating of all types of debt instruments of all

maturities:

Shortierm instruments like Commercial Paper, Certificate of Deposit,

Inter-corporate Deposits, with maturities not exceeding 12 months.

Medium and Long-term instruments: Term Deposits, Floating Rate

Notes, Bonds and Debentures.

CARE rates Securitised Paper and Structured Obligations.

Credit Analps Rating: CARE undertakes credit assessment of companies for

the use of banks or Anancia1 institutions. A 'Credit Analysis Rating' is without

reference to any particular instrument. CARE analyses the overall debt

management of the company and its capability to service its obligations.

Advisory Sarvices : CARE provides advisory services in the areas of

Securitisation transactions;

Structuring financial instruments;

financing of infrastructure projects; and

Municipal finances.

Credit Reports CARE offers credit reports on companies, based on published

information and CARE'S own research base.

Rating o f ~ d l p a r k e t ~ z s of'LPCand K m e n e CARE undertakes 'performance

rating' of parallel marketers of Liquefied Petroleum Gas (LPG) and Superior

Kerosene Oil (SKO), as per the scheme notified by Ministry of Petroleum and

Natural Gas, Government of India.

Rating of CoIIective Investment SchemesCARE undertakes rating of Collective

Investment Schemes (CIS) as required by SEBI.

Rating methodoIogy of CARE (General Methodology) Analytical framework of

CARE'S rating methodology is divided into:

Operational characteristics;

Financial characteristics and

Management capabilities.

Key areas considered in a rating analysis i n c l ~ d e : ~

Business Risk

Industry characteristics - its performance and outlook,

Operation position (capacity, market share, marketing network),

Technological aspects,

Business cycles, size and capital intensity.

Financial Risk

Financial management (capital structure, liquidity position, financial

flexibility and cash flow adequacy, profitability, leverage, interest coverage),

Projections, with particular emphasis on the components of the cash flow

and the claims thereon,

Bhalla V.K. "Mnnngement of RnnnciaI brvices, Securiry Credit R8tings". New Delhi, Anmol Publicatio~, 2002, pp. 222-255

Accounting policies and practices, with particular reference to practices

of providing for depreciation, income recognition, inventory valuation,

off-balance sheet claims and liabilities, amortisation of intangible assets,

foreign currency transactions etc.

Management Assessment

Background and history of issuer,

* Corporate strategy and philosophy,

Quality of management and management capabilities under stress,

Organizational structure, personal policies including succession planning.

Environment Analysis

* Regulatory environment,

Operating environment,

National economic outlook, areas of special significance to the company,

* Pending litigation, possibility of default risk under a variety of future

scenarios.

4.3.2. RATING PROCESS

Table 4.13

The Rating Process at CARE

Client

Requests for rating

Submits information and detailed

schedules

Interacts with the team, responds to

queries raised and provides any

additional data necessary for

CARE

Assigns rating team

The team analyses the information

The team interacts with clients,

undertakes site visits, and analyses

data submitted by the client

Source: w w w . ~ t i n g s . c a m

4.3.3. Beneficiaries of the services offered by CARE

I

the analysis.

Accepts rating

Investors:

To draw their credit risk policies and assess the risk premium offered by

the market on the basis of credit ratings

To effectively monitor and manage investments in debt instruments

Internal committee previews analysis

Rating Committee awards rating to

client

Notification in press

Periodic Surveillance

Issuers of Debt Instruments:

For wide access to funds

* For pricing and timing of issues correctly

For financial flexibility

Financial Intermediaries:

Useful in lending and investments

Business Counter parties:

For establishing business relationships

For opening letters of credit, awarding contracts

For entering into collaboration agreements

Regulators:

To determine eligibility criteria and entry barriers for different types of

securities

To monitor financial soundness of organizations and promote efficiency in

the debt market

In general, the rating services by CARE increase the transparency of the financial

system, leading to a healthy development of the capital market.

Publications

'Rating Reckoner' - an update on accepted CARE ratings.

'CAREVIEW' - quarterly bulletin providing information on CARE ratings.

4.3 -4. PERFORMANCE

Commenced operations in October 1993.

As on January 31, 2001, CARE completed 1698 rating assignment,

covering 1536 instruments, 76 credit analysis ratings, 12 Collective

Investment Schemes and 74 Parallel Marketers in LPGISKO. Out of the

1536 instruments rated, involving a total debt volume of Rs. 2423 bn,

1213 ratings for a total debt volume of Rs, 1462 bn were accepted.

Assignments cover companies from a wide range of manufacturing

industries, banks, and financial services.

4.4. F'ITCH RATINGS INDIA

FITCH Ratings India (formerly Duff 8 Phelps Credit Rating India) is the

only international credit rating agency with a presence on the ground in India.

FITCH Ratings India has four rating offices located at Murnbai, Delhi, Chennai

and Kolkata. It draws upon the combined strength and expertise of Duff and

Phelps, Atch IBCA and Thornson Bankwatch to provide highest quality of rating

services to its clients. FITCH is one of the three internationally accredited credit

rating agencies. It rates 1000 financial institutions, over 1000 corporate and

also rates more than 800 insurance companies and 71 sovereign^.^

4.5. ONIDA INDMDUAL CREDIT RATING AGENCY (ONICRA)

Individual credit rating is an objective assessment of the risk attached to a

financial transaction with respect to an individual. ONICRA credit rating agency

of India Ltd, has pioneered individual credit rating services in India. Well-known

'ONIDA' group, a 900 crore-market leader in consumer durables in India, has

promoted ONICRA. A survey conducted by Onida shows that only 0.7 million

households own the three popular items, color TV, refrigerators and washing

machines and the potential buyers for a host of other goods like music system,

air conditioners, microwaves, etc, is very large. With India moving rapidly towards

a cashless society based on credit and consumerism, individual credit rating will

be an index that the lending institutions will have to bank on. Developed

economies like the US, Australia, UK, etc. is credit-driven and no loan is sanctioned

without a certification from a rating agency.l

Individual credit rating also assumes significance with consumer finance

companies having to explore the not-so-risk free segments to expand. A strict

collection policy is not advisable because of considerations such as customer

goodwill. The only alternative seems to be better credit assessments to keep bad

debts low, while keeping volumes high. The changing customer profile, with the

clientele no longer restricted to the upper crust of the society and even the

middle class going in for credit purchases calls for an individual credit rating.

ONICRA credit rating agency of India Ltd. was incorporated on the business

>f analysis, rating, evaluation and appraisal of obligations, dues, debts,

:ommitments of an individual. Based on its studies and research and on the

3xperience and expertise that it has gained in the field of individual credit rating,

3MCRA has also developed a credit rating model and methodology for assessing

.he credit risks to small and medium enterprises.

O Bhalla V.K. "mmt of Rnurd.l Savim, 88curItycr8rjit ratings'; New Delhi, Anmol 'ublications, 2002, pp. 222-255.

Individual credit rating is an innwative concept that ONICRA has introduced

to the Indian financial market, thereby streamlining the lending process into the

continuously expanding market of the post liberalization era. The rise in the

consumerism in India has increased the need fro having a means of performing

a quick, efficient and thorough assessment of an individual's credit worthiness

or credit rating. Individual credit rating is a measure of the risk attached to

fulfilling a financial obligation for a desired financial transaction for an individual.

By referring their credit checks to the specialists at ONICRA, financial institution1

companies will obtain a through, independent credit analysis of a specific

transaction, conducted by trained credit appraisers who precisely quantify the

risk attached with fulfilling a financial obligation, while allowing the financial

institution,companies to focus on their mainstream activities such as lending

and funds management. This is a product that aims at revolutionizing the way

credit rating is done in India today.

The market segment comprising of small business like dealership, traders,

retailers, stockbrokers, and SSI units from more than 70% of the financial

exposures in the business environment of the small and medium business

enterprises, the influence of the prornoterlowner is quite large, effecting the

style of functioning, financial health and financial discipline of the company For

this reason, the promoter'a/owner's personal financial portfolio also needs to be

taken into account while conducting a credit analysis of the business. OMCRAs

rating methodology for smell businew takes into account this factor thereby

providing a more complete and accmte picture of the credit risk.

ONICRA, beingthe Rrst to introduce the concept of individual credit rating,

has conducted indepth, pafnstaLing mearch into all aspects of the behavior of

credit seekers and has developed aompmhensive rating systems for various types

of credit extension. These systems take into account and analyze a vast range of

parameters, which have been found to influence an individual's credit behavior.

ONICRA has also conducted intensive research into the credit analysis of

small business as well as into the rating of fixed deposits programs of various

non-banking finance companies bared upon which it has developed systems and

procedures for performing rating in these areas.

The credit worthiness of the individual is based on various parameters.

ONICRA has divided the parameters on a 100 point scale where every aspect of

the credit seeker's history like age, qualification, occupation, stability at work,

savings etc, will come under microscopic examination. They also consider the

extent of repayment and the history of payment, i.e., the amount of loan that an

individual can avail of is calculated by discounting the present earnings over the

five years. The history of repayment includes the intention of an individual to

repay, which in turn leads to a higher exposure to risk. A rated individual is

given a certificate, which he can use to obtain credit.

An individual cannot approach ONICRA directly for a rating and it is the

finance company that will insists on its customer obtaining an ICR. ONICRA

takes up the credit rating for individuals at the request of a leading institution,

which writes to ONICRA whenever a potential customer approaches such a lending

firdinstitution for the customers' credit. The customer is required to fill in a

prescribed form. ONICRA takes up the rating exercise in hand and swiftly

establishes a credit rating of the individual customer. Depending upon the rating,

the lending institution takes decisions objectively on the financial exposure.

A lender can focus on the core interest areas of finance and investment

without undertaking the credit appraisal of the individual borrower. A lender

can depend upon the rating of the individual customer done by ONICRA based

on a highly sophisticated system of credit appraisal, which pools to provide a

comprehensive picture about hisfher credit-worthiness.

ONICRA maintains a centralized pool of information about the credit

performance of thousands of potential customers by creating a linkage amongst

a number of financial institutions across the country and continuously update

this massive database on day-today basis, which any individual institution would

not find it easy to take on.

4.5.1. ONICRA Rating Process

ONICRA is India's first individual credit rating system. Lending institutions

require an objective individual credit rating system that provides a reliable credit

rating for each of its potential customers to optimize opportunities and reduce

financial risk. In India there has been a conspicuous absence of rating agency for

individuals. ONICRA has fllled in this gap. It brings to India the internationally

established concept of providing d i t ratings of individuals, for the use of lending

institutions.

ONICRA takes up credit rating for individual customers at the request of a

lending firm/institutions, which writes to ONI& whenever a potential customer

approaches such a lending firmhlnstitutions for the customers' credit the customer

is required to fill in a presu'ibod form, ONICRA takes up rating exercise in hand

and swiftly establish a credit rating of the individual customer. Depending on

the rating, the lending institution takes decision objectively on the financial

exposure.

4.5.2. Benefits for the Lending IMtitutions

A lender can focus on the core interest areas of finance and investment

without understanding credit appraisal of the individual borrower. A lender can

depend on rating of the individual customer done by ONICRA based on a highly

sophisticated system of credit appraisal, which pools in information about

individual customer from diverse sources, to provide a comprehensive picture

about hisher credit worthiness.

ONICRA process to maintain a centralized pool of information about the

credit performance of thousands of potential customers by creating a linkage

amongst a number of financial institutions across the country and continuously

update this massive database on day-to-day basis which any individual institution

would not find it easy to take on.

ONICRA has a network of well-equipped offices in major business centers

of the country with a management team including finance and technology

specialists.

ONICRA credit rating system is based on the sophisticated software

developed in collaboration with James Martin 8 Co., the world's largest

Information Engineering Consultancy Company, James Martin 8 Co. has provided

to ONICRA the most comprehensive methodology that addresses the needs of

mega credit rating system.

The three major Indian Rating Agencies are playing a pivotal role in the

Indian Capital Market. The Investors' information provided by these agencies

periodically provides a warning signal to them about the various instruments

issued and rated. Apart from that the research analysis provided by the Rating

Agencies about the Industries, Corporate provide a valuable information guide

for the Investors while taking investment decisions. Moreover, the Rating Agencies

have established confidence in the minds of Investors and Regulatory bodies.

The Rating Agencies in India are emerging as market leaders in Asia, due to

their independent evaluation; analytical skills, research capabilities and proven

track record. The most crucial factor of their success is their credibility However,

there is a popular demand of Investors that someone should rate the 'raters'. In

USA, Securities Exchange Commission accredits by Nationally Recognized

Statistical Rating Organisation (NRSRO) and Credit Rating Agencies. In India,

Security Exchange Board of India (SEBI) regulates the Credit Rating Agencies.

The SEBI should play a crucial role by accrediting the Indian Rating Agencies

and act as a watchdog for the Investors. In the next Chapter, an attempt has

been made to analyse "Investors' Awareness of Credit Rating in India".