Credit rating in india

Credit rating in India

SUMMERY

Credi t ra t ing usual ly expressed in a lphabet ica l

symbols , a re a s imple and eas i ly unders tood tool

enabl ing the inves tor to d i f ferent ia te be tween

ins t ruments on the bas is of the i r c redi t qual i ty .

Credi t ra t ing had i t s or ig in in the f inancia l c r i s i s of

the U.S. in 1837. The f i rs t mercant i le c redi t : Rat ing

agency was se t up in New York in 1841 to ra te the

abi l i ty of the merchants to pay f inancia l obl iga t ions .

Impor tance of c redi t ra t ing to Inves tors for r i sk

recogni t ion and Fai r Assessment of i ssuer’s

c redibi l i ty , Quick decis ion be t te r choice Advantages

to In termediar ies , Advantages to Regula tors Credi t

ra t ing i s of recent or ig in in India . The f i rs t c redi t

ra t ing ins t i tu t ion in India was se tup in 1988.

I t was chr is tened as Credi t Rat ing and Informat ion

Services of India Ltd . (CRISIL) in a l l there are four

credi t ra t ing agencies funct ioning in the country the

most dominat ing fac tors i s the reputa t ion of the

credi t ra t ing agency and i t s analy t ica l c redibi l i ty .

Credible and Independent St ruc tures and Procedures .

Market forces v iz . , i ssuers , Corpora te Disc losure and

Credi t Educat ion underwri ters , Rel iance on the

Market Mechanism d Government . Exis tence of Debt

Market

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Issuer Company appoints Rat ing Agency The ra t ing

agencies are approached by a prospect ive i ssuer

through a formal reques t to ra te i t s debt /commercia l

paper / f ixed deposi t s .The ra t ing agency appoints a

team to under take the \ ra t ing work.

The team normal ly comprises members having ‘ the

requi red exper t i se and ski l l s to evaluate the i ssue of

the f i rm.The i ssuer i s reques ted to provide

informat ion wi th Regard to severa l impor tant

bus iness and f inancia l r i sks . Business r i sk inc ludes

de ta i l s of indust ry charac ter i s t ics , market pos i t ion ,

The ra t ing agency minute ly examines the informat ion

about the indust ry charac ter i s t ics of the i ssuer as i t

i s a key de terminant of the level of vola t i l i ty in

earnings of any bus iness .

The Rat ing Commit tee af ter the analys is and

prepara t ion of repor t holds a preview meet ing

fo l lowed by ra t ing meet ing to ass ign ra t ing Business

Analys is Financia l Analys is i s , Management Eva

Credi t Rat ing Agencies Many Factors cont r ibut ing to

success of c redi t ra t ing &Problem Faced by CRISIL

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HISTORICAL BACKGROUND

Journal i s t Thomas Fr iedman once sa id ,” There are

two superpowers in the wor ld today. There’s the

Uni ted Sta tes and there’s Moody’s Bound Rat ing

Service . The US can des t roy by dropping bombs and

Moody’s can des t roy them by downgrading the i r

bounds “ . ra t ing agencies p lay a key ro le in the

inf ras t ruc ture of modern f inancia l sys tem.

The or ig in of c redi t ra t ing can be t raced to the

1840s , fo l lowing the f inancia l c r i s i s of 1837, Louis

Tappan es tabl i shed the f i rs t mercant i le c redi t agency

in New York in 1841. The agency ra ted the abi l i ty of

merchants to pay the i r f inancia l obl iga t ions . I t was

subsequent ly acqui red by Rober t Dun and i t s f i r s t

ra t ing guide was publ ished in 1859. Another s imi lar

agency was se t up by John Brads t ree t in 1849, which

publ ished a ra t ing book in 1857.These two agencies

were merged together to f rom Dum & Bradst ree t in

1933, which became the owner of Moody’s Inves tors

Service in 1962. The h is tory of Moody’s i t se l f goes

back about 100 years John Moody founded Moody’s

Inves tors Service , and in 1909 publ ished h is ‘Manual

of Rai l road Secur i t ies” wi th comments on 200 major

ra i l road companies by John Moody. This manual

covered the ra i l road companies opera t ing then in the

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United Sta tes . This was fo l lowed by other repor ts

where in John Mood ass igned ra t ings to a l l types of

i ssuers . This was fo l lowed by the ra t ing of u t i l i ty

and indust r ia l bounds in 1941, and the ra t ing of

bounds i ssued by US c i t ies and other munic ipa l i t ies

in the ear ly 1920s .

Fur ther expansion of the credi t ra t ing indust ry took

place in 1916, when the Poor’s publ ish ing Company

and the Poor’s publ ish ing company merged in 1941

to form Standard and Poor’s which was subsequent ly

taken over by McGraw-Hi l l in 1966.

In 1941 Standard and Poor’s Corpora t ion s tar ted

credi t ra t ing opera t ion and over a per iod of t ime

Moody and Standards & poor came to be widely

recognized for ra t ing bus iness as in ternat ional ra t ing

agency in Japan which had a major inves tor market .

Other agencies such as Japan Bond Research

Ins t i tu te , Japan credi t Rat ing Agency and Nippon

Inves tors’ Services came to be es tabl i shed soon

thereaf ter .

For a lmost 50 years , s ince the se t t ing up of Fi tch

Publ ishing in 1924, there were no major new ent rants

in the f ie ld of c redi t ra t ing agencies commenced

opera t ion a l l over the wor ld .

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CONCEPT OF CREDIT RATING

Rat ings , usual ly expressed in a lphabet ica l symbols ,

a re a s imple and eas i ly unders tood tool enabl ing the

inves tor to d i f ferent ia te be tw ins t ruments on the

bas is of the i t c redi t qual i ty . Credi t ra t ingis the

symbol ic indica tor of the current opinion of the

re la t ive b i r i ty of1f i to service debt obl iga t ions in a

t imely fashion wi th speci f ic reference to the

ins t rument be ing ra ted . I t i s focused on

communica t ing to inves tors the re la t ive ranking of

the d i f ferent loss probabi l i ty for a g iven f ixed

income inves tment , in compar ison wi th o ther ra ted

ins t ruments .

The te rm “Credi t Rat ing” comprises two words :

“credi t” and “ra t ing” . Credi t i s t rus t in a person’s

abi l i ty and in tent ion to pay or reputa t ion of so lvency

and hones ty . Rat ing means es t i th of , or to ass ign I i ie

tOëlass i fy ing a person’s pos i t ion wi th reference to a

par t icular subjec t mat ter . In o ther words , c redi t i s an

ac t of ass igning va lues by es t imat ing wor th or

reputa t ion of so lvency and hones ty so as to repose

t rus t in a person’s abi l i ty and in tent ion to repay.

Thus , c redi t ra t ing could be def ined as an express ion

of an opinion through symbols about c redi t qual i ty of

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the i ssuer of secur i t ies or company wi th reference to

se l l tha t secur i ty . I t provides r i sk which i s one of the

severa l fac tors in inves tor dec is ion making. I t does

not indica te market r i sk or forecas t fu ture market

pr ice . I t i s a lways a speci f ic evalua t ion done for a

par t icular ins t rument . The ra t ing process i s i t se l f

based on cer ta in “givens” . The agency, for ins tance ,

does not perform an audi t . Ins tead i t : s requi red re ly

informat ion and opinion provided by the i ssuer and

col lec ted by analys ts f rom di f ferent sources ,

inc luding personal in terac t ion wi th var ious ent i t ies .

In de termining ra t ing , both quant i ta t ive and

qual i ta t ive analyses are employed. The judgment i s

qual i ta t ive i t na ture and the use of quant i ta t ive

analys is i s to make the bes t poss ib le overa l l

qual i ta t ive judgment because u l t imate ly the ra t ing i s

an opinion.

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ORIGIN OF CREDIT RATING

Credi t ra t ing had i t s or ig in in the f inancia l c r i s i s of

the U.S. in 1837. The f i rs t mercant i le c redi t : Rat ing

agency was se t up in New York in 1841 to ra te the

abi l i ty of the merchants to pay f inancia l obl iga t ions .

This agency was la ter acqui red by Rober t Dun. I t

publ ished i t s f i r s t Rat ing Guide in 1859. John

Brads t ree t se t up the second credi t ra t ing agency in

1849. I t publ ished a ra t ing book in 1857. In 1933,

these two agencies were merged to form Dun &

Brads t ree t . In 1900, John Moody es tabl i shed

Moody’s Inves tor Service . He publ ished in 1909 the

Manual of Rai l road Secur i t ies . Moody’s fur ther

publ ished a ra t ing of u t i l i ty and indust r ia l bonds in

1914 and the ra t ing of bonds i ssued by U.S. c i t ies

and other munic ipa l i t ies in the ear ly 1920s .

In 1916, Poor’s Publ ish ing Company publ ished the i r

f i r s t ra t ing . This was fo l lowed by Standard Sta t i s t ics

Company in 1922. These two were merged in 1941 to

form Standard & Poor’s which was subsequent ly

taken over by McGraw Hi l l in 1966. A number of

c redi t ra t ing Agencies were se t up in the 1970s .

These inc luded the Canadian Bond Rat ing Services .

Thompson Bankwatch, Japanese Bond Rat ing

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Ins t i tu te , McCar thy Cr is tani and Maffe i , Dominican

Bond Rat ing Service , IBCA Ltd . , and Duff & Phelps

Credi t Rat ing Company. In India , the f i rs t c redi t

ra t ing agency, v iz . , the Credi t Rat ing and

Informat ion Services of India Ltd . , (CRISIL) , was

se t up in 1987. This was fo l lowed by the se t t ing up

of ICRA Ltd . , in1 former ly ca l led as Inves tment

Informat ion and Credi t Rat ing Agency of India Ltd .

Credi t Analys is and Research Ltd . (CARE), was se t

up in 1994. In 1996, Duff & Phelps Credi t Rat ing (P)

Ltd . , was se t up by Duff & Phelps in associa t ion wi th

Indian non-banking f inance Companies (NBFCs) .

IMPORTANCE OF CREDIT RATING

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Credi t ra t ing i s h ighly useful to Inves tors , I ssuers ,

In termediar ies and Regula tors . The mer i t s of c redi t

ra t ing as re la ted to each of these groups are

d iscussed hereunder

.

Advantages to Investors : -

( i ) Credi t ra t ing provides symbols which represent

degree of r i sk involved.

( i i ) Absence of any l ink be tween the i ssuer and

ra t ing agency ensures fa i r assessment of c redibi l i ty

of Issuer Company.

( i i i ) I t te l l s the inves tor about safe ty and r i sks

involved.

( iv) I t saves t ime and energy and thus , re l ieves the

inves tor f rom the burden of ge t t ing f i rs t -hand correc t

informat ion about the ins t rument and the i ssuer .

(v)Quick decis ions and easy unders tanding of

inves tment oppor tuni t ies .

Advantages to Issuers:

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( i )Wider inves tor base i s exposed.

( i i ) Rat ing ac ts as a market ing tool .

( i i i ) I t reduces the cos t of borrowing as a h ighly

ra ted ins t rument may carry lesser re turns or in teres t .

( iv)Enhancement in company’s reputa t ion and

goodwil l .

Advantages to Intermediaries:

( i ) I t i s a useful tool in the process f nm rac ing

underwri t ing , p lacement , and promot ion o i ssues .

( i i ) The brokers , dea lers and merchant bankers could

use ra t ing as an input for the i r moni tor ing .

( i i i ) The merchant use credi t ra t ing for pre-

packaging of i ssues by way of asse t secur i t iza t ion .

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Advantages to Regulators:

( i ) The regula tors have promoted the use of c redi t

ra t ing by making i t obl iga tory for Issuers .

( i i ) The regula tors res t r ic t ent ry in to the market of

new issues ra ted be low a par t icular grade .

( i i i ) The regula tors s t ipula te d i f ferent margin

requi rements for mor tgage of ra ted and unra ted

ins t ruments and prevent ins t i tu t ional inves tors f rom

purchas ing or holding of ins t ruments ra ted be low a

par t icular level .

In India , as per the regula t ions of the Secur i t ies and

Exchange Board of India , publ ic i ssues of debentures

and bonds redeemable beyond a per iod of 18 months

need credi t ra t ing .

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CREDIT RATING

THE INDIAN SCENARIO

Credi t ra t ing i s of recent or ig in in India . The f i rs t

c redi t ra t ing ins t i tu t ion in India was se tup in 1988. I t

was chr is tened as Credi t Rat ing and Informat ion

Services of India Ltd . (CRISIL) in a l l there are four

credi t ra t ing agencies funct ioning in the country .

Credi t Rat ing and Informat ion Services of India Ltd . ,

was promoted by the Indust r ia l Credi t and

Inves tment Corpora t ion of India , Nat ional ized Banks ,

Fore ign Banks and Insurance Companies in 1988. I t

f loa ted an equi ty i ssue in 1992 and i s , now, a l i s ted

company. I t en tered a s t ra tegic a l l iance wi th

Standard and Poor’s in 1995. I t s services of fered

comprise ra t ing , Informat ion inf ras t ruc ture services

and consul t s . I t ’ s ra t ing services of long, medium

and shor t te rm debt ins t rument and secur i t ized asse ts

and const ruc t ions . I t s informat ion services of fer

corpora te research repor ts . I t a l so prepares CRISIL

500 Index. I t s consul tancy div is ion provides

ass is tance to inf ras t ruc ture indust r ies , v iz . , power ,

te lecom and inf ras t ruc ture f inancing.

ICRA Ltd . was promoted by the Indust r ia l F inance

Corpora t ion of India , na t ional ized banks , fore ign

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banks , and insurance companies in 1991. I t provides

services dea l ing wi th advisor and inves tment

informat ion mat ters . I t s .ana ly t ica l services inc lude

ra t ing 0f debt ins t ruments and crea1t i i i i c

i ses i fagiccounsel l ing , assessment regard to

res t ruc tur ing advice for sec tor speci f ic services such

as for power , te lecommunica t ion , por ts and

munic ipa l ra t ings . In 1994, ICRA negot ia ted a

s t ra tegic a l l iance wi th Financia l Programmed Inc . ,

which i s a subs id iary of Moody’s , of fer ing services

on sof tware and r i sk management t ra in ing.

The Credi t Analys is and Research Ltd . , (CARE), was

promoted by the Indust r ia l Development Bank of

India and severa l banks and insurance Companies in

1992; i t of fers services concerning ra t ing of debt

ins t ruments . I t a l so prepares sec tor-speci f ic indust ry

repor ts .

Dur ing 1996, the four th credi t ra t ing agency was

se tup in India as a jo in t venture be tween Al l iance

Capi ta l Ltd . , Calcut ta , and Duff and Phelps , US.

FATCORS CONTRIBUTING TO SUCCESS

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A number of fac tors cont r ibutor to the success of

c redi t ra t ing . However , the most dominat ing fac tors

i s the reputa t ion of the credi t ra t ing agency and i t s

analy t ica l c redibi l i ty . Some of the fac tors

cont r ibut ing to success of c redi t ra t ing are d iscussed

as be low:

( I ) Credible and Independent Structures and

Procedures: -

The credibi l i ty of the credi t ra t ing agency depends

on the objec t iv i ty which resul t s f rom the ra ter be ing

independent of the i ssuer’s bus iness .

As credibi l i ty i s a pr imary ingredient of c redi t

ra t ing , agency, i t must mainta in independence f rom

a l l in teres ted market forces v iz . , i ssuers ,

underwri ters and Government . Some of the fac tors

tha t could enhance the credibi l i ty of a ra t ing agency

inc lude o and impar t ia l i ty of opinions ,

profess ional i sm, consis tency, re levant exper t i se

across re la t ing to the sens i t ive and conf ident ia l

informat ion of the i ssuer , t imel iness of ra t ing review

and announcement of changes and ac t iv i ty to reach a

wide range of inves tors by means of press repor ts ,

pr in t or e lec t ronic and more f r iendly research

services .

( i i ) Rel iance on the Market Mechanism: -

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Rel iance on the capi ta l market for resource

a l loca t ion genera tes a s t rong demand for inves tment-

re la ted informat ion. Rat ing agencies provide th is

informat ion.

( i i i ) Corporate Disc losure and Credit Educat ion: -

As a par t of corpora te d isc losure and credi t

educat ion , i t i s n for ra t ing agencies to ensure tha t

the informat ion about the regula tory guidel ines for

mandatory d isc losures of ra t ings reaches the users .

However , the ra t ing should not be taken as the f ina l

word about f inancia l hea l th . The users should be

in te l l igent enough to ar r ive a t meaningful and

conclus ions by in terpre t ing the ass igned ra t ing . They

should a lso be aware of the l imi ta t ions of c redi t

ra t ing and not take credi t ra t ing as a synonym for

insurance or guarantee agains t defaul t or r i sk .

( iv) Existence of Debt Market: -

The phenomenal growth of the debt market has

resul ted in t remendous demand for the credi t ra t ing

bus iness . The ra t ing agencies in order to cont inue to

provide the i r services need an ac t ive pr imary and

secondary debt market .

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Analytical Factors Considered by Indian

Agencies

The analyt ica l f ramework of the ra t ing methodology

adopted by four Indian credi t ra t ing agencies v iz . ,

CRISIL, ICRA, CARE and Fi tch inc ludes analys is

and appra isa l of a l l the re levant fac tors tha t a f fec t

the credi t wor th iness of the borrowing ent i ty . The

analyt ica l f ramework for ra t ing agencies i s d iv ided

in to two in terdependent segments dea l ing

respect ive ly wi th opera t ional charac ter i s t ics and

f inancia l charac ter i s t ics of the i ssuers of the debt

ins t ruments . Bes ides quant i ta t ive and objec t ive

fac tors , qual i ta t ive aspects l ike assessment of

management capabi l i t ies p lay a very impor tant ro le

in ar r iv ing a t the f ina l ra t ing for an ins t rument . The

re la t ive impor tance of quant i ta t ive and qual i ta t ive

components of analys is vary wi th the type of i ssuer

and i s analyzed independent ly and col lec t ive ly .

The key fac tors cons idered for the assessment of

( i ) Manufactur ing companies

( i i ) F inancia l companies

( i i ) Indian s ta tes

( i i i ) Banks and

( iv) Bond fund ra t ings

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Manufacturing Companies: - The analyt ica l f ramework consis ts of three broad se ts

of fac tors , i .e . bus iness analys is , f inancia l analys is

and management evaluat ion .

(1)Business Analys is : -

This inc ludes an analys is of indust ry r i sk , market

pos i t ion , opera t ing ef f ic iency and legal r i sk of the

company. The main e lements of these components of

Business analys is a re as under :

( i ) Industry Risk:-

Indust ry Risk i s analysed wi th reference to the

es t imated current demand / supply and indust r ia l

growth prospect ; in tens i ty of compet i t ion in the

indust ry ; ent ry barr ie rs and threa ts of new ent rants

in the indust ry ; government regula t ions and pol ic ies

re la t ing to the indust ry ; vulnerabi l i ty to

technologica l changes and to subs t i tu tes ;

cycl ica l i ty / seasonal i ty fac tors and pr inc ipa l

companies in the indust ry and the i r s t rengths and

weakness .

( i i )Market Posi t ion:-

Market Pos i t ion i s evalua ted f rom di f ferent angles

v iz . , market share and i t s s tabi l i ty , compet i t ive

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posi t ion in market Segments , compet i t ive advantages

and disadvantages v is -à v is the neares t compet i tors ,

d ivers i ty of products and cus tomers , se l l ing and

dis t r ibut ion ar rangements and research and

development wi th l inkage to product obsolescence .

( i i i )Operat ing Eff ic iency:-

Opera t ing Eff ic iency i s assessed wi th reference to

product ion process indica t ing s t rength/weakness v is -

à-vis the neares t compet i tors , product iv i t ies and

ef f ic iencies compared to o ther p layers , loca t ion

advantages , labour re la t ionships , product cos t

s t ruc ture and manufactur ing ef f ic iency as compared

to the neares t compet i tors , level of capi ta l and

employee product iv i ty , energy cos ts and compl iance

of pol lu t ion cont ro l requi rements .

( iv)Legal Posi t ion:-

Legal Pos i t ion considers aspects such as te rms of

of fer document - prospectus or le t te r of of fer , te rms

of debenture t rus t deed, t rus tees and def ined

parameters of the i r responsib i l i t ies , protec t ion

agains t forgery , modal i t ies and ar rangements for

buy-back fac i l i t ies .

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(2)Financial Analys is :

All re levant aspects connected wi th the bus iness

and f inancia l pos i t ions of the company are assessed

which inc lude account ing qual i ty , earnings

protec t ion , adequacy of cash f lows and f inancia l

f lexib i l i ty .

( i )Accounting Qual i ty:-

Account ing Qual i ty depends on audi tor ’s

qual i f ica t ion , overs ta tement / unders ta tement of

prof i t s , method of income recogni t ion , inventory

va lua t ion and deprec ia t ion pol ic ies , undervaluat ion

overvaluat ion of f ixed asse ts , of f -ba lance sheet

l iabi l i t ies and the l ike .

( i i )Earnings Protect ion:-

Earnings Protec t ion i s assessed through prof i tabi l i ty

ra t ios , pre- tax coverage ra t ios , earnings in re la t ion

to f ixed income charges , sources of fu ture earnings

growth and so on.

( i i i )Adequacy of Cash:-

F lows i s appra ised in re la t ion to debt and f ixed and

working capi ta l requi rements , var iabi l i ty of Future

cash f lows, capi ta l spending f lexib i l i ty , working

capi ta l management e tc .

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( iv)Financial Flexibi l i ty: -

Financia l F lexibi l i ty i s examined in te rms of

a l te rna t ive f inancing p lans in t imes of s t ress , abi l i ty

to ra ise funds or ra ise capi ta l to meet s t ress

requi rements , asse t redeployment potent ia l , and debt

service schedule and so on.

(3)Management Evaluat ion:-

Track Record of the management i s evalua ted wi th

reference to goals , phi losophy, s t ra tegies and abi l i ty

to overcome adverse s i tua t ions . Management

competence i s judged f rom pas t opera t ing and

f inancia l resul t s . Other aspects cons idered for

judging the ca l iber of management inc lude

conservat ive out look or aggress iveness wi th respect

to f inancia l r i sk , p lanning and cont ro l sys tem, depth

of manager ia l ta lents and success ion p lans ,

commitment , cons is tency & credibi l i ty .

( i )Financial Companies: -

The assessment of f inancia l companies lays

emphasis on the regula tory envi ronment and

fundamenta l analys is in addi t ion to the f inancia l

analys is and management evaluat ion as a l ready

discussed.

Regula tory Environment i s evalua ted in re la t ion to

s t ruc ture and regula tory f ramework of the

f inancia l sys tem and t rends in

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regula t ion/deregula t ion and the i r impact on the

company.

Fundamenta l Analys is covers aspects such as

l iquidi ty management , asse t qual i ty , prof i tabi l i ty

and f inancia l pos i t ion and in teres t and tax

sens i t iv i ty of the company.

Liquidi ty Management : i s analysed in te rms of

capi ta l s t ruc ture , te rm-matching of asse ts and

l iabi l i t ies , pol icy on l iquid asse ts in re la t ion to

f inancing commitments and matur ing deposi t s .

Asset Qual i ty : i s re f lec ted in the qual i ty of the

company’s credi t r i sk management , sys tems for

moni tor ing credi t , sec tor r i sk , exposure to

individual borrowers , management Of problem

credi t s e tc .

Prof i tabi l i ty and f inancia l pos i t ion: i s examined

on the bas is of h is tor ic prof i t s , spreads on fund

deployment , revenues on non-fund based services ,

accre t ion to reserves and so on.

In teres t and Tax Sensi t iv i ty : re fers to exposure to

in teres t ra te changes , hedge agains t in teres t ra te

and tax law changes and the l ike .

The evaluat ion i s car r ied out by a team of

profess ional ly qual i f ied persons and inc ludes da ta

col lec t ion , analys is and meet ings wi th key personnel

in the company to d iscuss s t ra tegies , p lans and other

i ssues tha t may inf luence credi t evalua t ion of the

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company. Discuss ions a lso inc lude the company’s

forecas ted bus iness and f inancia l p lans . The process

g takes four to s ix weeks . In addi t ion , the in i t ia l

ass igned ra t ings are moni tored on cont inuous bas is

by analys t .

Credit Rat ing AgenciesThe concept of c redi t ra t ing has been widely

d iscussed and debated in India in recent t imes . S ince

the se t t ing up of the f i rs t c redi t ra t ing agency Credi t

Rar ing and Informat ion Services of India Ltd .

(CRISIL) in India in 1987, there has been a rapid

growth of c redi t ra t ing agencies in India . The major

p layers in the Indian market , apar t f rom CRISIL

inc lude Inves tment Informat ion and Credi t Rat ing

Agency of India Ltd . ( ICRA), promoted by IDBI in

1991 and Credi t Analys is and Research Ltd . (CARE),

promoted by IFCI in 1994. Duff and Phelps has t ied

up wi th two Indian NBFCs to se t up Duff and Phelps

credi t Rat ing India (pr iva te) Ltd in 1996.

Rating Services

The pr imary objec t ive of CRISIL is to ra te debt

obl iga t ions of Indian companies . The ins t ruments

ra ted by i t a re long- term such as debentures I bonds

and preference shares , medium-term inc luding

cer t i f ica tes of deposi t s , f ixed deposi t s and shor t - te rm

inc luding commercia l paper . CRISIL a lso ra tes o ther

22


new and innovat ive ins t ruments inc luding asse t -

backed secur i t ies , munic ipa l bonds and bond funds .

I t s ra t ing services a lso extend to rea l es ta te

developers , para l le l marketers of Liquef ied

Pet ro leum Gas (LPG), chi t funds , banks and s ta tes .

Credi t Rat ing Services

Opera t ions

-Manufactur ing Cos . -Debt inves tment-

-F inance Companies -S t ruc ture obl iga t ion

-Banks -F ixed Deposi t s

Programme

-Commercia l Papers

-Projec t Repor t

-Bui lder’s ra t ing

23

Rating Rating Watch Rating Update

CoverageInstruments

Rated


CRISIL Research and Information Services (CRIS)

Although credi t ra t ing remains i t s pr imary bus iness ,

CRISIL has a lso d ivers i f ied in to informat ion services

as a thrus t a rea : Tor fu ture . The extens ive

compi la t ion and analys is of da ta by e CRISIL for

ra t ing bus iness i s a l so used to provide: services to

the corpora te c l ients . They provide - services

through CRISIL Card , CRISIL Sector v iew, CRISIL

View, CRISIL Judge, and CRISIL Index , the

corpora te and balance sheet da ta , formula ted for easy

analys is of se lec ted companies i s provided by

CR1SIL Card . The CRISIL View Suppl ied

informat ion to the fund managers , inves tors and

lenders on the bas is of publ ished da ta re la t ing to the

indust ry and companies , on the out look and solvency

of the Concerned companies . CRISIL Sector View

provides an in-depth analys is of the impor tant and

potent ia l growth indust r ies India on the indust ry

s t ruc ture , the present indust ry dynamics and

CRISIL’s out look on the indust ry . The CRISLL

Judge i s a sof tware package wi th da ta and analys is

of Indian corpora te . I t a l so has a comprehensive

va lue added data-base on India which i s avai lable on

24


wire services BLOOMBERG cater ing to 60,000

inves tment and corpora te c l ients . Recurred and

Knight Riddes a lso carry . J da ta-base on the i r

screens . CRISIL a lso launched the CRISIL—500

equi ty index, a market va lue weighted composi te

index of 500 companies , represent ing about 73% f

the market capi ta l i sa t ion of the Mumbai s tock

exchange, and77 indust ry group.

The main objec t ive of the broad based CRISIL-500

equi ty Index i s to capture the market movement of

the : Indian s tock markets in a comprehensive manner

and thus? Provide the inves tment communi ty wi th an

accura te performance benchmark agains t which they

can measure Por t fo l io performance . CRISIL has

recent ly launched the CRISIL Midcap 200 Equity

Index , compris ing 200 medium capi ta l ized

companies , captures about 86% of the market

capi ta l i sa t ion .

The CRISIL Research and Informat ion Services

(CRIS) d isseminates va lue-added research and

under takes cus tomized s tudies in four areas v iz . ,

Indian economy; Indian capi ta l markets ; Indian

Indust r ies and the Indian corpora te sec tor . CRIS has

a la rge c l ient base , in India and overseas , compris ing

ins t i tu t ional inves tors , inves tment bankers ,

25


commercia l banks , f inancia l ins t i tu t ions , corpora te

p lanners , mutual funds and asse t management .

The services rendered by CRISIL ear l ie r as CRISIL,

Cared Services and CRISIL’s Economic Services

have been. Reorganised and ass imi la ted under CRIS.

CRIS renders the fo l lowing se t of services :

1 . CRISIL Sectorview

2. CRISIL View

3. In ternat ional Informat ion Vending

4. CRISIL Index Services

(1)CRISIL Sectorview:

CRISIL sec tor v iew is an in-depth analys is of the

impor tant and potent ia l growth indust r ies in India .

CRISIIL considers the qual i ty of research and

analys is as i t s for te . Contents of CRISIL Sectorview

inc ludes the fo l lowing: A br ief of the indust ry ;

S t ruc ture of the indust ry and i t s charac ter i s t ics ; An

analys is of the d i f ferent products in the indust ry

based on fac tors l ike Product Speci f ica t ions , Cost

St ruc ture , Capaci t ies , Technology, Sector Use;

Demand Supply Analys is both present and fu ture ; An

analys is of the major p layers in the indust ry ;

Government pol ic ies ; Indust ry Risks /Const ra in ts ;

In ternat ional Compet i t iveness ; Key Factors ; and

CRISIL’s Out look on the indust ry .

26


A monthly update i s a l so provided for a l l the CRJSIL

Sector v iews. Cl ient Segments u t i l iz ing CRISIL

Sector v iew Includes Financia l Ins t i tu t ions ; Mutual

Funds; Corpora te Bodies ; Merchant Banks; Banks;

Inves tment Ins t i tu t ions ; Asse t Management

Companies ; F inance Companies ;

Leas ing Companies ; Const i tuencies ; Brokers ,

Government Depar tments ; Fore ign Ins t i tu t ional

Inves tors ; Indust ry Associa t ions ; and Academicians

and Indust ry Analys is .

The fo l lowing indust ry c lass i f ica t ions are a lso

avai lable f rom CRISIL’s research desk , v iz . ,

Aluminum; Automobi les — Two wheelers ;

Automobi les — Commercia l vehic les & Cars ;

Cement ; Pe t rochemicals (Cover ing Basic chemicals ,

polymers , f iber in termediar ies & Linear a lkyl

benzene/Anhydr ide / Or thoxylene) , Polyes ter Staple

f ibre /Polyes ter Fi lament Yam; Power ; Soda Ash;

Sof tware ; S tee l (cover ing f la ts and longs) ; Trac tors .

(2)CRISILVIEW:

CRISILVIEW provides CRISIL’s analys is of and

opinion on the bus iness and f inancia l out look of

company, based on which inves tors can take

decis ions having regards to individual r i sk

preferences . I t a l so provides a useful bas is for fund

27


managers in the i r por t fo l io a l loca t ion decis ions .

Medium term lenders can use these repor ts to

benchmark the i r exposure l imi ts .

CRISILVIEW is based on CRISIL’s in-depth

unders tanding of the indust ry in which the company

opera tes , as wel l as CRISIL’s unders tanding of the

re levant qual i ta t ive and quant i ta t ive fac tors a f fec t ing

the company’s performance .

The CRISILVIEWs is a comprehensive and

in terac t ive tool for Business Managers , Inves tors ,

Credi tors and Corpora te Decis ion. Makers .

According to CRISIL, the product has been

s t ruc tured speci f ica l ly to ca ter to the informat ion

needs of a dec is ion maker . I t s ta r t s wi th a br ief

in t roduct ion to the company, g ives an overview of

the indust ry in which the company opera tes , analyses

the bus iness and f inancia l out look, and deals wi th

de ta i led f inancia l both ac tua l t i l l da te and

projec t ions in the medium term. The f inancia l

projec t ions are for two years in the fu ture and are

based on cer ta in assumpt ions and under ly ing logic ,

a l l of which are out l ined.

28


(3)On-l ine Services: Internat ional Information

Vending

To make the CRISILs’ research avai lable to i t s

in ternat ional c l ients as wel l as to reach a wider

potent ia l c l ient base , i t s research and analys is i s a l so

avai lable v ia The Bloomberg. The menus tha t i t

of fers cover the ra t ing and advisory ass ignments

car r ied out as wel l as research under taken in the

three Divis ion of CRISIL. The Bloomberg carr ies

extens ive research and analys is in the fo l lowing

areas ; Indian Economy, Indian Capi ta l Markets , Key

Indust r ies and Indian Corpora tes . The c l ient base for

th is service inc lude Fund Managers , Fore ign

Ins t i tu t ional Inves tors , Inves tment Bankers ,

Commercia l Banks , Mul t i la tera l Development

Agencies , Const i tuencies , e tc . In addi t ion CRISIL

a lso has t ie -ups wi th a l l the o ther leading

in ternat ional informat ion vendors l ike Reuters Inc . ,

Knight -Ridder Informat ion Inc . (The Dia log

Corpora t ion) , In ternet Secur i t ies Inc . , and Matr ix

Services Pvt . Ltd . to d isseminate i t s research and

analys is wor ld-wide .

29


(4)CRISIL Index Services

CRISIL offers the fo l lowing Index Services which

are avai lable onl ine a lso .

( i )CRISIL — 500 Equity Index:

The CRISIL-500 Equi ty Index i s a broad-based,

market va lue weighted Index compris ing 500

companies across 79 indust r ies and represents about

74% of the market capi ta l i sa t ion and more than 95%

of the turnover on The Stock Exchange, Mumbai . The

main objec t ive of CRISIL —500 is to provide the

Inves tment communi ty wi th a more accura te

ref lec t ion of the s tock market movement . The Index

i s responsive to market developments as i t i s

mainta ined by a dedica ted team Of profess ionals

suppor ted by a sophis t ica ted computer ized: The

index i s computed da i ly and dai ly h is tor ica l an are

avai lable f rom 1991 onwards .

( i i ) CRISJL-Midcap 200 Equity Index:

The CRISIL midCap 200 Equi ty index i s a benchmark

for the midcap c the market . Compris ing 200 midcap

s tocks l i s ted on the s tock Exchange Mumbai . The

CRISIL Madcap 200 represents 74% and 80% of the

turnover of medium capi ta l ized segment of the mar le t

30


computed da i ly , h is tor ica l e avai lable . f rom 1993

onwards .

( i i i ) CRISIL Industry Indices:

CRISIL’s 79 Indust ry Indices serve as a s tandard for

compar ison of the s tock Market performance of

Individual companies v is -à-vis the i r Group and a lso

enable fund managers to - NAV performance vs .

speci f ic indust r ies . I t i s Computed da i ly , h is tor ica l

va lue of the indices are avai lable m 1991 onwards .

( iv) CRISIL Industry Indices:

With a v iew to provide r -e inves tors , fund managers

and market in termediar ies wi th a be t te r perspect ive

of the re la t ive s tock market performance of the

var ious segments in the corpora te sec tor . CRISIL has

developed 3 segment benchmark indices—

CRISIL MNC Index, a market capi ta l ize weighted index compris ing 50 MNCs’ l i s ted •on the Stock Exchange, Mumbai .

CRISIL Indian Business Groups Index compris ing 250 l i s ted companies on The Stock Exchange, Mumbai represent ing 107 Indian Business Group.

CRISIL PSE Index, a market capi ta l i sa t ion weighted index compris ing 20 PSE s tocks l i s ted on the Stock Exchange, Mumbai .

31


(v)Customized Indices:

Customized Indices CRISIL’s emphasis on sc ient i f ic

methodology of Index const ruc t ion and dynamic

index maintenance i s recognised by the market and

CRIS has rece ived reques ts for developing

benchmark as wel l as cus tomized indices . CRISIL

under takes development , computa t ion and

maintenance of cus tomized indices for c l ients as wel l

as of fers consul tancy services for developing

indices .

( iv)CRISIL Index Bul let in:

The CRISIL Index Bul le t in i s a monthly market

ac t iv i ty update and covers the market performance of

cons t i tuents of CRISIL Indices .CRISIL wi th

approximate seven- tenth share of the credi t ra t ing

bus iness i s evident ly the market leader in the

domest ic ra t ing indust ry . I t a l so fea tures among the

top f ive ra t ing agencies in the wor ld in te rms of both

i t s coverage and analyt ica l s t rength . The ra t ing

bus iness accounts for a lmost n ine- tenth of i t s

opera t ing income- the d ivers i f ica t ion in to o ther

informat ion and advisory services notwi ths tanding.

32


(v)CRISIL Advisory Services

CRISIL provides the f inancia l advisory services to

the Government , banks , Publ ic Sector Uni ts ,

f inancia l ins t i tu t ions and other semi- government and

quas i - government bodies . CAS a lso under takes

cus tomized s tudies for na t ional and in ternat ional

projec t developers ; mul t i la tera l lending agencies l ike

the World Bank, In ternat ional Finance Corpora t ion ,

and o ther exper ts . The objec t ive of these services i s

to ident i fy r i sks , mi t iga t ing r i sks and formula t ing

and execut ing s t ra tegies for the same. The ac t iv i t ies

of the group cover two main areas , v iz . ,

inf ras t ruc ture development and f inancia l sec tor

Reforms.

(a)Infrastructure Sector Services:

I t suppor t and provide counsel ing on aspects , such as

pr iva t iza t ion of publ ic sec tor under takings , debt

secur i t iza t ion , c redi t evalua t ion sys tem and so on.

(b)Financial Sector Services:

CRISIL focus on the banking sec tors and the capi ta l

markets . Advisory services of th is ca tegory are

provided a t two levels : S t ra tegic and Funct ional .

S t ra tegic ass is tance inc ludes d iagnost ic s tudies and

bus iness process re-engineer ing or res t ruc tur ing

33


s tudies based on a d iagnost ic analys is . Funct ional

ass is tance covers areas such as credi t management ;

resource mobi l iza t ion; r i sk management e tc . CAS

a lso advises cent ra l and s ta te governments on the i r

d is inves tment programmers . I t has a lso col labora ted

wi th up credi t ra t ing agencies in the ne ighbor ing

countr ies .

34


Rating Processes —The Indian Companies

A br ief descr ip t ion of var ious ra t ing processes fo l lowed by the Indian ra t ing agencies i s ment ioned below.

CRISIL: -

CRISIL fo l lows the ra t ing process as per

in ternat ional s tandards accompanied by minor

adjus tments made there in sui t ing to domest ic

condi t ions . CRISIL has publ ic ised the working of i t s

ra t ing process on the l ines of S & P’s . CRISIL’s

ra t ing process i s descr ibed be low:

(a) Rat ing Agreement and Assignment of the

Analyt ical Team: -

The process of ra t ing s tar t s wi th the i ssue of the

Rat ing Reques t le t te r by the i ssuer and the s igning of

the Rat ing agreement . On rece ip t of the reques t ,

CRISIL ass igns an analyt ica l team compris ing of a t

leas t two analys ts of whom one would be the lead

analys t and would serve as the i ssuer’s pr imary

contac t . The analys ts who have exper t i se in re levant

bus iness areas wi l l be responsib le for car ry ing out

the ra t ing ass ignment .

35


(b) Management Meet ing: -

Prior to meet ing wi th the : i ssuer , the analyt ica l team

obta ins and analyses informat ion Rela t ing to the

i ssuers f inancia l s ta tements , cash f low projec t ions

and other re levant informat ion.

The analyt ica l team then proceeds to have de ta i led

meet ings wi th the company’s management . CRISIL

s t rongly be l ieves tha t in teres t of inves tors a re bes t

served i f a d i rec t d ia logue i s mainta ined wi th the

i ssuer , as th is enables CRISIL to incorpora te non-

publ ic informat ion in a ra t ing decis ion and a lso

enables the ra t ing to be forward looking.

Topics d iscussed dur ing the management meet ing are

wide-ranging, inc luding compet i t ive pos i t ion ,

s t ra tegies , f inanced pol ic ies , h is tor ica l performance ,

and near and long- te rm f inance and bus iness

out look. Equal impor tance i s p laced on d the i ssuer

bus iness r i sk prof i le and s t ra tegies . Addi t ion to

reviewing f inancia l da ta . The ra t ing process ensures

comple te con of the informat ion provided by the

company. Al l informat ion i s kept s t r ic t ly

conf ident ia l by the ra t ings group and i s not used for

any other purpose , or by any th i rd par ty o ther than

CRISIL.

36


(c) Rat ing Committee: -

Af ter meet ing wi th management , the analys ts present

the i r repor t to a Rat ing Commit tee which then

decides on the ra t ing . The Rat ing Commit tee Meet ing

i s the only aspect of the process in which the i ssuer

does not par t ic ipa te d i rec t ly . The ra t ing i s a r r ived a t

a f te r a composi te assessment of a l l the fac tors

concerning the i ssuer , wi th the key i ssues ge t t ing

grea ter a t tent ion f rom the Rat ing Commit tee .

(d) Communicat ion to the Issuer: -

After the commit tee has ass igned the ra t ing , the

ra t ing decis ion i s communica ted to the i ssuer a long

wi th the reasons or ra t ionale suppor t ing the ra t ing .

For a ra t ing to have va lue to an i ssuer or to an

inves tor , the ra t ing agency must have credibi l i ty .

The thoroughness and t ransparency of CRISIL’s

ra t ing methodology and the in tegr i ty and fa i rness of

i t s approach are impor tant fac tors in es tabl i sh ing and

mainta in ing credibi l i ty? CRISIL is therefore a lways

wi l l ing to d iscuss wi th the management , the cr i t ica l

analy t ica l fac tors tha t the commit tee focused on

whi le de termining the ra t ing and a lso any fac tors

tha t the company fee ls may not have been considered

whi le ass igning the ra t ing .

37


In case the i ssuer d isagrees wi th the ra t ing outcome,

they may appeal the decis ion for which

new/addi t ional informat ion, which i s mater ia l to the

appeal and speci f ica l ly addresses the concerns

expressed in the ra t ing ra t ionale ; need to be

submit ted to the analys t . Subsequent ly , a note i s put

up once again before the Rat ing Commit tee where the

ra t ing may or may not undergo a change. The c l ient

has the r ight to re jec t the ra t ing and the whole

exerc ise i s kept conf ident ia l .

The ra t ing process , f rom the in i t ia l management

meet ing to the ass ignment of the ra t ing , normal ly

takes three to four weeks . However , when requi red

CRISIL has been able to de l iver ra t ing decis ions in

shor ter t ime f rames .

(e) Disseminat ion to the Publ ic: -

Once the i ssuer accepts the ra t ing , CRISIL then

d isseminates i t a long wi th the ra t ionale through pr in t

media inc luding Reuters . The ra t ings are a lso

d isseminated through CRISIL’s monthly publ ica t ion

CRISIL Rat ing Scan. The Financia l Times , UK’s

quar ter ly publ ica t ion FT CREM, and i s a lso avai lable

on o ther in ternat ional services l ike Bloomberg and

Knight -Rider Services .

38


( f ) Survei l lance and Annual Review: -

After a ra t ing has been ass igned, CRISIL is requi red

to moni tor the ra t ing over the l i fe of the debt

ins t rument . CRISIL keeps the ra t ing under

cont inuous survei l lance , moni tor ing both the on-

going performance of the i ssuer and the economic

envi ronment in - which i t opera tes . CRISIL typica l ly

conducts a formal Annual review of the ra t ing which

involves a meet ing wi th the i ssuer .

These review meet ings focus on developments over

the per iod s ince the las t meet ing and out look for the

coming year , enabl ing analys ts to s tay abreas t of

current developments , d iscuss potent ia l problem

areas , and be appra ised of any changes in i ssuer’s

p lan . Fol lowing a fu l l review, the ra t ing may e i ther

be af f i rmed or changed. Any change ef fec ted i s made

publ ic by CRISIL. In some ins tances , a c redi t ra t ing

may be p laced on ‘Rat ing Watch’ . A Rat ing Watch

l i s t ing h ighl ights an emerging s i tua t ion which may

mater ia l ly af fec t the prof i le of a ra ted ent i ty and can

be des ignated wi th pos i t ive , developing, or negat ive

impl ica t ions . Ins tances where an ent i ty’s ra t ing may

be p laced on Rat ing Watch inc lude the announcethent

of a merger or acquis i t ion or the occurrence of an

event tha t could resul t in a subs tant ia l change in the

i ssuing ent i ty r i sk , prof i le .

39


CRAMEL Model

CRISIL and ICRA conduct ra t ing of banks a lso .

These Rat ing agencies typica l ly fo l low the CRAMEL

model under Which banks are evaluated on s ix

d i f ferent parameters?

• C (capi ta l adequacy)

• R ( resource ra is ing abi l i ty)

• A (asse t qual i ty)

• M (management evaluat ion)

• E (earnings potent ia l )

• L ( l iquidi ty)

Capital Adequacy: -

I t g ives an indica t ion about the k ind of cushion the

bank has to absorb fu ture losses . A minimum capi ta l

adequacy ra t io of 8 per cent i s mandatory for a l l

banks in India

Resource Rais ing Abi l i ty: -

The main aspects of ra is ing resources by banks in

the i r ra t ing are :

• Trends and divers i ty of deposi t s base ;

• Trends in cos t of funds;

• Funding pol ic ies , namely , tenure matching and

in teres t ra te sens i t iv i t ies ; and

• Future p lans .

40


Asset Qual i ty: -

The impor tant e lements in the evaluat ion of the asse t

qual i ty of banks inc lude , in ter a l ia ,

• Qual i ty of c redi t r i sk management of banks as

ref lec ted in the appra isa l sys tem and prudent ia l

norms prescr ibed by the RBI;

• Qual i ty of loan por t fo l io in te rms of concent ra t ion ,

d ivers i ty , recovery and overdue pos i t ions and

re la t ive share of non-performing asse ts ;

• Speci f ic s teps to expedi te recovery; and

• Plans to improve asse t qual i ty .

Management Evaluat ion: -

The two crucia l aspects of management evaluat ion of

banks are (1) management s ty le and (2) in-depth

s tudy of the tenure of personnel .

Earnings Potent ia l of banks i s analysed on the bas is

of a Considera t ion of the fo l lowing fac tors ;

• Divers i ty of income prof i le ;

• Trends in lending spreads ;

• Trends in inves tments y ie lds ;

• Trends in fee-based income; and

• Expense level .

41


Liquidi ty of banks i s examined wi th reference to

three Factors , namely;

• Liquid asse ts ;

• Dependence on vola t i le funds; and

• Unut i l ized l ine of c redi t .

Bond Fund

CRISIL has in t roduced credi t qual i ty ra t ings for

bond funds to evaluate credi t qual i ty of the funds

under ly ing por t fo l io holdings . Under the scheme,

only pure bonds whose por t fo l io consis t ent i re ly of

f ixed income secur i t ies , apar t f rom a smal l

percentage of money market ins t ruments he ld for

l iquidi ty wi l l be ra ted . CRTSIL methodology for

bond fund ra t ings covers the fo l lowing aspects :

( i )Consis tency of c redi t r i sk associa ted wi th a

par t icular secur i ty of fund wi th the overa l l fund

ra t ing .

( i i )Examinat ion of var ious sys tems and procedures

such as sys tem for making and execut ing inves tment

dec is ions , back off ice sys tems, reconci l ia t ion wi th

cus todians and regis t rars , ca lcula t ion of ne t asse t

va lue , t racking of payments , rece ivables e tc .

( i i i )Evaluat ion of management’s t rack record in the

funds management bus iness , qual i ty of key

personnel , and inves tment s t ra tegy for the fund and

so on.

42


Rated Instrument and Rating Symbols

The ra t ing symbol . Are symbol ic express ions of the

opinion assessment of the credi t ra t ing agency wi th

regard to the inves tment /credi t qual i ty /grade of the

debt /obl iga t ion ins t rument . They group together

s imi lar , though not necessar i ly ident ica l , en t i t ies in

te rms of the i r re la t ive capaci ty of t imely servic ing of

the obl iga t ions as per the te rms of the cont rac t . The

suff ixes p lus (+) or minus ( - ) a re added to the

symbols to indica te the re la t ive pos i t ion of the

inves tment wi th in the group covered by the symbol .

Appropr ia te pref ixes and suff ixes such as (FD) and

(CD) are used to denote speci f ic ins t ruments such as

f ixed deposi t s , cer t i f ica tes of deposi t s and so on.

The ra t ing symbols as the f ina l express ion of the

inves tment qual i ty of a f inancia l ins t ruments used by

the Indian ra t ing agencies are i l lus t ra ted in th is

sec t ion .

Long-term Instruments: -

Debentures and bonds are mandatory ra ted by a l l the

three ra t ing agencies , i .e . CRISIL, ICRA and CARE

CRISIL Symbols: -

Categor ies debentures in to three inves tment grades

l i s ted as under : For preference shares , the le t te rs (pf )

a re pre- f ixed and for s t ruc tured obl iga t ions , le t te rs

(so) a re af f ixed to the debenture ra t ing symbols ; The

43


s t ruc tured obl iga t ions mean procur ing of a des i rous

ra t ing by fu l f i l l ing the essent ia l formal i t ies for the

proposed ra t ing . An example of such ra t ing i s the

ra t ing by CRISIL of the secur i t iza t ion of the car

h i re-purchase rece ivables (asse t - based secur i t ies) of

the Gujara t Lease Finance Ltd which was g iven a

t r ip le A ra t ing .

(A) High Investment GradesAAA (Tr ip le A) :-

Highest Safe ty . Debentures ra ted ‘AAA’ are judged

to offer the h ighes t safe ty of t imely payment of

in teres t and pr inc ipa l . Though the c i rcumstances

providing these degrees of safe ty are l ike ly to

change, such changes as can be envisaged are most

unl ike ly to af fec t adverse ly the fundamenta l ly s t rong

pos i t ion of such i ssues .

AA (Double A): -

High Safe ty . Debentures ra ted ‘AA’ are judged to

offer h igh safe ty of t imely payment of in teres t and

pr inc ipa l . They di f fer in safe ty f rom ‘AAA’ issues

only marginal ly .

(B) Investment GradesA: Adequate Safe ty . Debentures ra ted ‘A’ are indica tor

of Offer ing adequate safe ty of t imely payment of

in teres t and pr inc ipa l . However , changes in

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ci rcumstances can adverse ly af fec t such i ssues more

than those in the h igher ra ted ca tegor ies .

BBB (Tr ip le B) : -

Modera te Safe ty . Debentures ra ted ‘BBB’ are judged

to offer suff ic ient safe ty of t imely payment of

in teres t and pr inc ipa l for the present . However ,

changing c i rcumstances are more l ike ly to lead a

weakened capaci ty to pay in teres t and repay

pr inc ipa l than for debentures in h igher ra ted

ca tegor ies .

(C) Speculat ive GradesBB (Double B) : -

Inadequate Safe ty . Debentures ra ted ‘BB’ are judged

to carry inadequate safe ty of t imely payment of

in teres t and pr inc ipa l ; whi le they are less suscept ib le

to defaul t than o ther specula t ive grade debentures in

the immedia te fu ture , the uncer ta in t ies tha t the

i ssuer faces could lead to inadequate capaci ty to

make t imely in teres t and pr inc ipa l payments .

B: High RiskDebentures ra ted ‘B’ are indica tor of having grea ter

suscept ib i l i ty to defaul t ; whi le current ly in teres t and

pr inc ipa l payments are met , adverse bus iness or

economic condi t ions would lead to lack of abi l i ty or

wi l l ingness to pay in teres t or pr inc ipa l .

C: Substant ia l Risk

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Debentures ra ted ‘C’ are judged to have fac tors

present tha t make them vulnerable to defaul t ; t imely

payment of in teres t and pr inc ipa l i s poss ib le only i f

favorable fac tors / c i rcumstances cont inue .

D: Default

Debentures ra ted ‘D’ are in defaul t and in ar rears of

in teres t / pr inc ipa l payments or a re expected to

defaul t on matur i ty . Such debentures are ext remely

specula t ive and re turns f rom these debentures may be

rea l ized only on reorganiza t ion / l iquidat ion .

Problem Faced by CRISIL

( i )The major problem faced by CRISIL was sa id to be

the non-avai labi l i ty of adequate informat ion (both

f rom pr imary and secondary sources) f rom the

company I t i s fe l t tha t avai labi l i ty of informat ion i s

a funct ion of co opera t ion f rom the c l ient and the

level of da ta base bui l t for the indust ry suppor ted by

extens ive research .

( i i )The analys ts evalua t ion i s based on informat ion

col lec ted f rom annual repor ts of companies which are

ne i ther suff ic ient nor adequate for any ra t ing work.

Bankers and audi tors a re se ldom for thcoming to

provide requis i te informat ion about the company.

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( i i i )The ra t ing analys ts fee l tha t the comple te

informat ion i s not provided by the companies . There

ne i ther proper f low of informat ion nor the adequate

t ransparency which make the proper ra t ings by the

analys ts d i f f icul t . I t needs specia l ment ion tha t

ra t ing analys ts cannot be expected to do a jus t ice

unless the ra t ing agencies have access to the re l iable

da ta to car ry out an unbiased and fa i r ra t ing process .

( ivOne of the main problems faced by credi t ra t ing

had been tha t the f i rms were under no Obl iga t ion

not i f ies the ra t ing g iven to them as i t was

d iscre t ionary . As such, f i rms which are d issa t i s f ied

wi th the ra t ing ass igned by an agency are under no

obl iga t ion to publ ish such a ra t ing .

Rat ing analys ts a lso face speci f ic problems re la t ing

to ra t ing of d i f ferent ins t ruments . The es t imat ion of

drawing powers and shor t - te rm vola t i l i ty of cash-

f low in commercia l paper , deposi t s renewal ra tes in

case of f ixed deposi t problem regarding uncer ta in ty

about fu ture goals and s t ra tegies of the f i rms .

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DRAWBACKS OF CREDIT RATING

In spi te of the advantages tha t the ra t ing offers ,

severa l drawbacks are :

( i ) The ra t ings process to a t tempts to provide

guidance to inves tors / c redi tors in

de termining the r i sks associa ted wi th the

ins t rument / c redi t obl iga t ion . I t does not

a t tempt to provide a recommendat ion and

does not take in to account fac tors l ike

market pr ices , personal r i sk / reward

preferences tha t might inf luence inves tment

dec is ion .

( i i ) The ra t ing process i s based on cer ta in

pr imi t ives . The agency, for ins tance , does not

perform an audi t . Ins tead, i t has to re ly

sole ly on informat ion provided by the i ssuer .

Consequent ly , to the extent tha t the

informat ion provided i s inaccura te and

incomple te , the ra t ings process i s

compromised.

( i i i ) To the extent tha t a cer ta in ins t rument of a

speci f ic company a t t rac ts a lower ra t ing , the

company has an incent ive to shop around for

the bes t poss ib le ra t ing , compromis ing the

authent ic i ty of the ra t ing process i t se l f .

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SEBI GUIDELINES FOR CREDIT RATING

Disclosure of unaccepted ra t ing to inves tors has

been made Compulsory .

I t has been made mandatory to obta in dual ra t ings

f rom di f ferent recognized agencies for a l l publ ic

and r ight i ssues of debt ins t ruments gra ter than

or equal to RS. 100 corers . Accordingly

d isc losure and inves tor protec t ion guidel ines

have been amended.

Rat ing agencies have been debarred f rom ra t ing

debt ins t ruments of the i r promoter ins t i tu t ions .

Rest r ic t ions have been imposed on ra t ing a debt

ins t rument of a corpora te f i rm i f i t has any

common di rec tor wi th the ra t ing agency’s

promoter ins t i tu t ion . The guidel ines cover even

the borrowers of the i r bodies .

Rat ing agencies are most ly promoted by la rge

f inancia l ins t i tu t ions or f i rms. This can cause an

evaluat ion b ias as these ra t ing agencies can not

a f ford to g ive correc t ra t ing to the weaker

companies s ince these are par t of the f i rms

sponsor ing ra t ing agencies so tha t SEBI guidel ine

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which speci f ies tha t no credi t ra t ing agency shal l

ra te a secur i ty i ssued by i t s promoter .

Rat ing in India has been made compulsory for any

company tha t chooses to ra ise money through a

publ ic i ssue of debentures wi th convers ion,

commercia l papers ,

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CONCLUSION

The out look for the credi t ra t ing indust ry i s pos i t ive .

Credi t ra t ings a leading ro le in the development of

the debt markets in India . The Rat ing Cr i te r ia &

Product Development Centre , responsib le for pol icy

research , new product development and ra t ings '

qual i ty assurance , has developed new ra t ings

methodologies . There are number of a reas where

ra t ing agencies wi l l have to cover new ground in the

coming fu ture . The ra t ing of munic ipa l bond, s ta te

government borrowing, commercia l banks and publ ic

sec tor under taking e tc , wi l l be covered in the near

fu ture . Credi t ra t ing p lay very impor tant ro le in

in ternat ional landing. The impor tance of c redi t ra t ing

i s be ing increas ingly recognized in the Euro-markets .

Rat ing i s market ing too which indica te re la t ive

capaci t ies of companies to make t imely repayment of

in teres t and pr inc ipa l on debt . CRISIL inspi res t rus t

and conf idence across indust ry for upholding va lues

tha t serve as tenets across the Group Companies . The

Indian credi t ra t ing agencies have made s t ra tegic

a l l iance wi th reputed in ternat ional agencies .

Agencies are adopt ing la rge extent the ra t ing

methodologies which adopted by western

counterpar ts .

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So , I here by concluded tha t c redi t ra t ing in India

having br ight fu ture .

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Credit rating in india

Economy & Finance

Transcript of Credit rating in india