There are four types of investors in the market. Investors having money but not the investment skill; Investors having money and investment skill both; Investors having investment skill but less money; and Investors possessing less money and poor investment

skill.

These who do not have enough of money but are equipped with enough of skill there are many individuals and institutions to help them by procuring funds as per need.

But those who have money to invest (either from their own resources or from borrowed ones) need guidance and advice with expert opinion as to where to invest?

What forms safer outlet both from income and get back point of view, Credit Rating Agencies(CRAs) serve this cause.

Credit Rating is a simple and easy to understand symbolic

indicator of the opinion of a credit rating agency about the

risk involved in a borrowing program of an issuer with

reference to the capability of the issuer to repay the debt

as per terms of issue. This is neither a general purpose

evaluation of the company nor a recommendation to

buy, hold or sell a debt instrument.

"A rating is an opinion on the future ability and legal

obligation of the issuer to make timely payments of

the principal and interest on a specific fixed income

security. The rating measures the probability that the

issuer will default on the security over its life, which

depending on the instrument, may be a matter of 30

days to 30 years or more. In addition long term rating

incorporate an assessment of the expected monetary

loss should default occur,“

Moody's

"Credit rating agency" is a commercial concern engaged

in the business of credit rating of any debt obligation

or of any project or program requiring finance,

whether in the form of debt or otherwise, and includes

credit rating of any financial obligation, instrument or

security, which has the purpose of providing a

potential investor or any other person any information

pertaining to the relative safety to timely payment of

interest or principal.

CRISIL Limited  ICRA Limited Credit Analysis & Research Ltd. (CARE) Fitch Ratings India Private Ltd. 

Credit Rating agencies are regulated by SEBI.

Registration with SEBI is mandatory for carrying out the rating Business.

A registration fee of Rs. 25000 should be paid to SEBI

A Credit rating agency can be promoted by: Public Financial Institution Scheduled Bank Foreign Bank operating in India with RBI

approval Foreign Credit Rating agency having at least

five years experience in rating securities Any company having a continuous net worth

of minimum 100 cores for the previous five years.

Is set up and registered as a company

Has specified rating activity as one of its main objects

in its Memorandum of Association.

Has a minimum Net worth of Rs 5 Crore.

Has adequate Infrastructure

Promoters have professional competence, financial

soundness and a general reputation of fairness and

integrity in Business transactions , to the satisfaction

of SEBI.

Has employed persons with adequate professional and

other relevant experience, as per SEBI directions.

SEBI will grant to eligible applicants a Certificate of Registration on the payment of a fee of Rs 5,00,000 subject to certain conditions.

• The CRA should enter into a written agreement with each client containing ,

o Rights and liabilities of each party w.r.t rating of securities.

o Fee chargedo A periodic review of the rating during

the tenureo Clients agreement to cooperate and

provide true, adequate and timely information.

o Disclosure by CRA to client regarding the rating assigned.

o Clients agreement to disclose the rating assigned in the offer document for the last 3 years

The CRA should continuously monitor the rating of securities rated by it during their life time .

It should disseminate information regarding newly assigned rating and its changes in the earlier ratings through press releases, websites and inform the same to stock exchanges.

• The rating agency should make public the

definitions of the concerned rating along with

symbol

• They should also state that the ratings do not

constitute recommendation to buy, sell or hold

any securities.

• It should provide the public the rational of its

rating which covers analysis of various factors

justifying the assessment as well as the risk

factors.

INPUT ANALYSIS OUTPUTInformation on :Economic/Political System RatingIndustry Analysis

Rating Local Business - ExerciseAccounting &Financial Market

The credit ratings provide an investor with critical information to enable him to take an informed investment decision based on his risk-return preferences. These also help investors to select the appropriate investment opportunities from a large range of options available.

In general the ratings are based on an in-depth study of the industry as also an evaluation of the strengths and weaknesses of the company.

Some of the factors are :- inherent protective factors marketing strategies competitive edge level of technological development

operational efficiency, competence and effectiveness of

management, hedging of risks, cash flow trends and potential, liquidity, financial flexibility, government policies, past record of debt servicing,etc.

Once a rating has been accepted by the company, CRAs continuously monitor the corporate and the rating is monitored till the life of the instrument. This process is known as surveillance. During the surveillance period, all changes affecting the company are taken into account and the rating, if necessary, is changed, upwards or downwards. In other words, a rating is valid during the life of the instrument unless it is changed.

The suffix + or - may be used with the rating symbol to indicate the comparative position of the instrument within the group covered by the symbol. Thus MAA- lies one notch above MA+.

The CRAs maintain absolute independence from market participants to provide unbiased opinions. The ratings are a result of collective judgement of committee members. The CRA's in-house research and data base ensure that opinions are supported by objective benchmarks and peer comparison.

The factors are:- management quality, industry outlook, corporate operations and competitive

character, financial strength (both past and future).

In other words, all relevant factors affecting the corporates' earnings prospects and inherent risks are looked into. Grades are comments on the fundamentals and do not forecast the future market price or comment upon the compliance or violation of statutory guidelines relates to issues.

CRAs maintain absolute independence from market participants to provide unbiased opinions as it does not buy or sell equity. The Gradings are a result of deliberations of the committee members. Benchmarks set up by CRA's in-house research ensure that gradings are consistent.

Equity Grading gives investors timely access to independent, unbiased and dependable opinions on a company's fundamental strengths and weaknesses in form of the earnings prospects and the associated risks and, therefore, help investors design their portfolios by choosing investment options according to their risk and return preferences.

The equity grades range from ER1A to ER6C. To illustrate, an equity grade of ER3B indicates Good Earnings Prospects: Moderate Risk-Indicated fundamentally on above average position. The level, growth and quality of earnings over the medium term are of a high grade. However, changes in business/economic circumstances, as may be visualised, may moderately impair the likely earnings and underlying fundamentals.

CRAMEL model is used by the rating agencies, comprising of: -

C = Capital Adequacy R = Resource Raising Ability A = Asset Quality M = Management Quality and System

Evaluation E = Earning Potential and Prospects. L = Liquidity / Asset - Liability

Management

Management Ability [20]

Growth Potential [25]

Stability [45] Disclosure/ Reputation [10]

Total [100]

COMPANY ANALYSIS Points

・Asset for Collateral ・Attitude ・Experience

12

・Sales Growth ・Profit Growth

・Marketability

15

・History ・Net Worth

・Settlement ・Collateral ・Partners

30

・Degree of Disclosure ・Public Reputation

7

64

A. NO CAUTION SHOULD BE NEEDED 80 - 100

B. NO CAUTION SHOULD BE NEEDED AT PRESENT

65 - 79

C. MORE OR LESS CARE MAY BE NEEDED 50 - 64

D. CAUTION SHOULD BE RECOMMENDED 30 - 49

E. CAUTION SHOULD BE NEEDED 0 - 29

(all points are examples)

The first rating agency ‘Credit Rating Information Services of India Ltd. , CRISIL, was promoted jointly in 1987 jointly by the ICICI and the UTI. Other shareholders included ADB, LIC, HDFC Ltd, General Insurance Corporation of India and several other foreign and Indian Banks.

It pioneered the concept of credit rating in the country and since then has introduced new concepts in credit rating services and has diversified into related areas of information and advisory activities.

It became public in 1993. In 1996, it formed a strategic alliance with S&P rating

group.

Credit Rating Services Advisory Services Credibility first rating and

evaluation Services Training Services

The principle function of CRISIL is to rate mandated debt obligations of Indian Companies chit fund, real estate developers, LPG Kerosene dealers, NBFC, Indian states and so on.

Rating of debt obligations:◦ Debt obligation includes rupee denominated credit

instruments like debentures, preference shares, deposits, CD’s commercial papers and a structured obligations of manufacturing ,finance companies, banks, financial institutions etc.

◦ It ensures stable and healthy growth of capital market by offering credit rating which is widely acceptable. It provides increased disclosures, better accounting standards and improved financial information to the users.

◦ It reduces cost of issue by direct mobilization of resources.

◦ It protects the interest of investors by constantly monitoring the results of rated companies.

• Rating of structured obligations:– It reflects CRISIL opinion regarding the

capacity and willingness of the company to make timely payments of financial obligations on rated instruments.

• Rating of real estates developers:– CRISIL has developed framework for

rating of real estate projects. Such rating helps investors to identify their investment options

– The rating is expected to help developers mobilize funds for their projects.

– The methodology assesses a project in terms of project risk factors and developer’s risk factors.

Bond Fund ratings:◦ The rating is an opinion of the quality of bond

funds underlying portfolio holdings. They mainly focus on fixed income securities.

◦ The rating methodology takes into account the following factors i.e., credit associated with the securities, the systems and procedures followed by the funds and management quality and expertise.

• Bank loan rating: ◦ The creditworthiness of bank’s borrower is

assessed offering comments on the likelihood of repayment of loans.

◦ The methodology considers the borrowers underlying assets liquidity and risk management initiative and for NBFC quality of assets , loans and investment.

Collective investment schemes: This covers rating of collective investment

schemes offering opinion on the degree of certainty of the scheme to deliver the assured returns in terms of cash as mentioned in the offer document

Grating of health care institutions: The grading for healthcare institutions is an

opinion on the relative quality of health care delivered by the institutions to the patients. Grading is done taking into account facilities, quality , consistency in delivering the service etc. Flowing are the grades given Grade A( Very good quality), Grade B (Good Quality) , Grade C (Average Quality) and Grade D( Poor Quality)

• The CAS offers consulting services that aim at identifying and mitigating risk. The main focus of these services is transaction and policy level assignments in the area of energy, transport, banking and finance disinvestment, privatization and valuation.– Energy group services: it offers advisory

services to companies engaged in energy sector like power, coal, oil and gas. The policy level assignments Include aspects like sector reforms and structuring, regulatory framework privatization, corporate plan fuel related services.

– Transaction level assignment include project scoping and structuring, bid process management, financial viability analysis of projects, risk identification and analysis and structuring of project contacts, security package, structuring and analysis.

Transport and urban infrastructure group services: It provides financial advisory services to transport and infrastructure service provider. ◦ Policy level assignments include advice on

transport sector privatization policy of state ports, development of risk identification allocation, long term sector plans and state role.

◦ Transaction level assignments include financial viability analysis, project structuring, bid process management, negotiation of terms with successful bidders

◦ Privatization and disinvestment group: this group renders advisory services to central state governments, public sector enterprises and private sector entities interested in participating in privatization program, these services cover 3 aspects policy level, enterprise level and reforms and restructuring.

• Banking and finance group:CRISIL offers a wide range of services covering restructuring and business reengineering, credit management, investment management and portfolio insurance, equity valuation, resource mobilization studies and financial feasibility studies

• Capital Market Group:This group provides customized research and advisory assistance to meet specific transactional and strategic requirements of clients. It offers services like diagnostic evaluation for valuation of Indian partner of a foreign asset management company, technical assistance to AMFI, portfolio evaluation and portfolio analysis for leading mutual funds, composite performance ranking of domestic mutual funds, assistance to government for the development of India’s financial sector.

• Information and Credit Rating Services (ICRA) has been promoted by IFCI Ltd as the main promoter and started operations in 1991.

• Other shareholders are UTI, Banks, LIC, GIC, Exim Bank, HDFC and ILFS.

• It provides Rating, Information and Advisory services ranging from strategic consulting to risk management and regulatory practice.

• The main objectives of ICRA are to assist investors both individual and institutional in making well informed decisions

• To assist issuers in raising funds from a wider investor base.

• To enable banks, investment bankers, Brokers in placing debt with investors.

• To provide regulators with market driven systems to encourage the healthy growth of capital markets.

• It provides rating services, information services and advisory services.

ICRA rates debt instruments issued by manufacturing companies, commercial banks, NBFCs, financial institutions, PSUs and municipalities.

The instruments rated by it include bonds/ debentures, fixed deposits commercial papers and certificate of deposit. It also rates structured obligations in accordance with the terms of the structure based on risk assessment of the instrument . It rates sector specific debt obligations issued by power, telecom and infrastructure companies.

It also provides corporate governance rating , rating of claims paying ability of insurance companies, credit assessment of large medium and small scale companies to obtain assistance from banks, FIs. It also provides services of general assessment of companies.

The information services division of ICRA focuses on providing authentic data and value added products used by intermediaries, financial institutions, banks, asset managers, institutions and investors.

Value added services include equity grading providing a critical input on a company's earning prospects and inherent risks in decision making process of equity investors and equity assessment.

Other services include corporate reports, equity assessment, mandate based studies (customized research) and sector/industry specific publication.

The advisory services division of ICRA offers wide ranging management advisory services. Under advisory services ICRA provides its understanding on the business processes and relevant organizational issues to different players of financial markets such as investors, issuers, regulators, intermediaries and media.

The advisory services include 1.strategic consulting/ strategic practice 2. risk management (credit risk, market risk and operations risk) 3. regulatory practice 4 transaction practice 5. information( content services).

It focuses on sectors like banking and financial services, infrastructure sector, manufacturing and service sector, government and regulatory authorities.

Credit Analysis and Research Ltd or CARE is promoted by IDBI jointly with Financial Institutions, Public/Private Sector Banks and Private Finance Companies.

It commenced its credit rating operations in October, 1993 and offers a wide range of products and Services in the field of Credit Information and Equity Research.

It also provides advisory services in the areas of securitisation of transactions and structuring Financial Instruments.

It offers services like 1. Credit rating of debt instruments 2. Advisory services like securitization transactions, structuring financial instruments, financing infrastructure projects and municipal finances 3. Information services like providing information to companies, industry and businesses. 4. Equity research

It is the latest entrant in the credit rating Business in the country as a joint venture between the international credit Rating agency Duff and Phelps and JM Financial and Alliance Group.

In addition to debt instruments, it also rates companies and countries on request.

• The process begins with issue of rating request letter by the issuer of the instrument and signing of the rating agreement.

• CRA assigns an analytical team consisting of two or more analysts one of whom would be the lead analyst and serve as the primary contact.

• Meeting with Management- The analytical team obtains and analyses information relating to its financial statements, cash flow projections and other relevant information.

• Discussion with management on management philosophy, competitive position, financial policies and future plans.

Discussions on financial projections based on objectives and growth plan , risks and opportunities.

Rating committee- after meeting with the management the analysts present their report to a rating committee which then decides on the rating.

After the committee has assigned the rating, the rating decision is communicated to the issuer, with reasons or rationale supporting the rating.

Dissemination to the Public: Once the issuer accepts the rating, the CRAs disseminate it, along with the rationale, to the print media.

The rated company is on the surveillance system of the CRA, and from time to time, the earlier rating is reviewed. The CRA constantly monitors all rating with respect to new political ,economic, financial development and industry trends.

Analysts review new information or data available on the company. On preliminary analysis of the new information if the analyst feel that there is a possibility for change in the rating then they meet with the management and proceed with comprehensive rating analysis.

• During the review monitoring or surveillance exercise, rating analysts might become aware of imminent events like mergers and so on, which effect the rating and warrants a rating change.

• In such a possibility, the issuer’s rating is put on ‘credit watch’ indicating the direction of a possible change and supporting reasons for review.

• Once a decision to either change or present the rating had been made, the issue will be removed from credit watch.

The rating methodology involves an analysis of industry risk, issuer’s business and financial risk. A rating is assigned after assessing all factors that could affect the credit worthiness of the entity. The industry analysis is done first followed by the company analysis.

• The main elements of rating methodology are as below• Business risk Analysis : It begins with an assessment of

the company’s environment focusing on the strength of the industry prospects, business cycle as well as competitive factors affecting the industry. The vulnerability of the industry to political factors is also assessed. If a company is involved in more than one business, each segment is analyzed separately. The main factors include Industry Risk, Market position, operating efficiency and legal position.

Financial risk analysis: Financial risk is analyzed mainly through financial ratios. Emphasis is placed on the ability of the company to maintain /improve its future financial performance.

The profitability of a company is an important determinant of its ability to withstand business adversity. The main measures of profitability include operating and net margins and returns on capital. The absolute levels of these ratios, trends and comparison of these ratios with other competitors is analyzed. Emphasis is also laid on cash flow patterns.

The area analyzed are accounting quality, earnings prospects, adequacy of cash flows financial flexibility and interest and tax sensitivity.

Management Risk: A proper assessment od debt protection levels requires an evaluation of management philosophies and its strategies. The analyst compares the company’s business strategies and financial plans to provide insights into a management’s ability to forecast and implement plans. The areas analyzed include track record of the management, planning and control systems, evaluation of capacity to overcome adverse situations, goals, philosophy and strategies.

When rating debt instruments of financial institutions, banks, NBFCs in addition to the financial analysis and management evaluation the following factors are considered

Regulatory and competitive environment Fundamental analysis Capital adequacy Asset quality Liquidity management Profitability and financial position Interest and tax sensitivity

• Rating symbols are a symbolic expression of the opinion/assessment of the credit rating agency regarding the investment, credit quality, grade of the debt, obligation instrument.

• CRISIL rating symbols: The rating symbols of CRISIL with respect debentures, fixed deposits, short term instruments(CPs), credit assessment, structured obligations, bond funds, bank loans, collective investment schemes, Indian states, real estate developers are as follows.

High Investment Grade: AAA-(Triple A ) Highest security- Offer the highest

safety against payment of interest and principal AA(Double A) High Safety - Offer high safety

against payment of interest and principal. A- Adequate safety- Offer adequate safety against

payment of interest and principal. In adverse conditions might affect such issues.

BBB(Triple B)- Moderate safety- Offer sufficient safety against payment of interest and principal. Circumstances may lead to weakened capacity to pay interest and principal.

Speculative grades BB(Double B)- Inadequate safety- These

instruments carry inadequate safety of timely payment of interest and principal.

B( High risk)- Instruments rated B have greater risk of default.

C( Substantial risk)- Risk of default. Repayment can only be expected in favorable conditions.

D (Default) Such instruments are extremely speculative and default risk is highest.

FAAA( F triple A)- Highest safety FAA( F- double A)- High safety FA- Adequate safety FB- Inadequate safety FC- High Risk FD- Default

P-1 (highest safety) P-2 (High Safety) P-3( Adequate safety) P-4(Inadequate safety) P_5 (default)

It indicates the capability of entity to repay the interest and principal as per the terms of the contract. The rating symbols are as below-

1-Very strong capability 2,3,4- Strong capability 5,6,7- Adequate capability 8,9,10- Inadequate capability 11,12,13 –Poor capability 14- Default

• High investment grades:• AAA(SO)- Highest safety• AA(SO)- high safety• Investment grades:• A(SO) –Adequate safety• BBB(SO)- Moderate safety• Speculative grades:• BB(SO)- Inadequate safety• B(SO) – High Risk• C (SO)- Substantial risk)• D (SO)- Default

AAAf – Very Strong Protection against losses AAf - Strong Protection against losses Af- Adequate Protection against losses BBBf- Moderate Protection against losses BBf - Inadequate Protection against losses Cf – vulnerable to credit defaults.

BLR-1: strong likelihood of repayment of interest and principal on bank loan

BLR-2: good likelihood of repayment of interest and principal on bank loan

BLR-3: satisfactory likelihood of repayment of interest and principal on bank loan

BLR-4: moderate likelihood of repayment of interest and principal on bank loan

BLR-5: sub standard , vulnerable to loss BLR-6: High likelihood of loss

GRADE I (high certainty of assured returns) GRADE II (adequate certainty of assured

returns) GRADE III (moderate certainty of assured

returns) GRADE IV ( Inadequate certainty of assured

returns) GRADE V (high uncertainty of assured

returns)

Rating of the states by the CRISIL represents a landmark in the diversification of the rating Business in the country.

It has already rated several states. While assessing a state, CRISIL considers

two basic factors: The Economic Risk and The Political Risk

Economic structure of the state and its finances

Macroeconomic performance Infrastructure Sector studies Whether revenue and expenditure

patterns are sustainable. Deficit Management Degree of dependence on Central support Tax policy of the state Performance of Public sector undertakings

and their effect on the state’s finances.

Relations between the state and the Centre and its impact on transfer of resources as well as centre’s influence on political stability in the state.

Various political parties in the state, their economic policies and their effect on the state’s policies.

Quality of the current leadership and administration

Ability of the Government to take decisions that are politically difficult.

Rating pertains to particular project and not to the company as a whole. It assigns ratings after assessing the factors that could affect the ability of the developer to meet agreed specifications in terms of quality and time as well as the ability to transfer clear titles to customers. Ratings are based on project risk analysis and developer risk analysis

Project risk analysis : The quality of legal title in respect of the property constructed, quality of construction and timeliness of delivery of the completed unit is assessed.

Developer risk analysis: The track record of the developer, existing financial statements, financial flexibility and management evaluation are considered with rating the position of developer.

PA1- Highest Ability to build the project PA2- High Ability to build the project PA3- Adequate Ability to build the project PA1- Inadequate Ability to build the project PA1- Inability to build the project