Project Report on Credit Rating Agency
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Transcript of Project Report on Credit Rating Agency
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CHAPTERI.
1. INTRODUCTION TO INDUSTRY2. INTRODUCTION TO ORGANISATION
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INTRODUCTION TO INDUSTRY
INDIAN FINANCIAL SECTOR
Introduction
India's services sector has always served the Indian economy well,
accounting for nearly 57 per cent of the gross domestic product (GDP).
Here, the financial services segment has been a significant contributor.
The financial services sector in India is dominated by commercial banks
which have more than 60 per cent share of the total assets; other segments
include mutual funds, insurance firms, non-banking institutions, cooperativesand pension funds.
The Government of India has introduced reforms to liberalise, regulate and
enhance the country's financial services industry. Presently, the country can
claim to be one of the world's most vibrant capital markets. In spite of the
challenges that are still there, the sector's future looks good.
Market size
The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is
projected to touch US$ 28.5 trillion by FY 25.
Information technology (IT) services, the largest spending segment of India's
insurance industry at Rs 4,000 crore (US$ 665.78 million) in 2014, is
anticipated to continue enjoying strong growth at 16 per cent. Category
leaders are business process outsourcing (BPO) at 25 per cent and
consulting at 21 per cent.
Investments
During FY 14, foreign institutional investors (FIIs) invested a net amount of
about Rs 80,000 crore (US$ 13.31 billion) in India's equity market, according
to data by Securities and Exchange Board of India (SEBI).
Insurance companies in India will spend about Rs 12,100 crore (US$ 2.01
billion) on IT products and services in 2014, a 12 per cent increase over the
previous year, according to Gartner Inc.
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The forecast includes spending by insurers on segments such as internal IT
(including personnel), telecommunications, hardware, software, and external
IT services. The Rs 1200 crore (US$ 202.47 million) software segment is
predicted to be the fastest growing external segment, with overall growth of
18 per cent in 2014.
The following are some of the key developments and investmentsin the
Indian financial services sector:
1. About 75 per cent of the insurance policies sold by 2020 would be in one
way or another influenced by digital channels during the pre-purchase,
purchase or renewal stages, according to a report by Boston Consulting
Group (BCG) and Google India. This report, Digital@Insurance-20X By2020, predicts that insurance sales from online channels will increase 20
times from present-day sales by 2020, and overall internet influenced
sales will reach Rs 300,000-400,000 crore (US$ 49.9-66.54 billion).
2. Export-Import Bank of India (Exim Bank) will focus more on supporting
project exports from India to South Asia, Africa and Latin America, as per
Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has
moved up the value chain by lending support to project exports so that
India earns foreign exchange. In 2012-13, Exim Bank had supported 85
project export contracts valued at Rs 24,255 crore (US$ 4.03 billion)
secured by 47 companies in 23 countries.
3. Private-sector lender IndusInd Bank will soon begin its asset
reconstruction business. It plans to partner asset reconstruction
companies (ARCs) for this venture. "I think our new initiative, which is
going to launch in the next two months, is about asset reconstruction. We
will do asset reconstruction within the bank but in tie-ups with ARCs. The
business plan is ready. We believe a huge stock of assets is coming into
the ARCs as a business area that we need to look at and we will exploit,"
said Mr Romesh Sobti, CEO and MD, IndusInd Bank.
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4. Association of Mutual Funds in India (AMFI) has reported that the mutual
fund industry's assets under management (AUM) have gone past the Rs
10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian
mutual fund industry rose to Rs 10.11 trillion (US$ 168.19 billion) in May
from Rs 9.45 trillion (US$ 157.21 billion) in April.
Government Initiatives
In an effort to enable banks to provide greater choice in insurance products
through their branches, a proposal could be made which will allow banks to
act as corporate agents and tie up with multiple insurers. A committee set up
by the Finance Ministry of India is likely to suggest this model as an
alternative to the broking model.
The Reserve Bank of India (RBI) has simplified the rules for credit to
exporters. Exporters can now receive long-term advance credit from banks
for up to 10 years to service their contracts. They have to have a satisfactory
record of three years to get payments from banks, who can adjust the
payments against future exports.
The RBI has enabled foreign investors, including foreign portfolio investors
(FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in
insurance and related activities via the automatic route. "Effective from
February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs
and NRIs up to 26 per cent under automatic route shall be permitted in
insurance sector," as per the RBI.
Road Ahead
India is among the world's top 10 economies, driven by its strong banking
and insurance sectors. The country is expected to become the fifth largest
banking sector in the world by 2020, as per a joint report by KPMG-CII. The
report anticipates bank credit to increase at a compound annual growth rate
(CAGR) of 17 per cent in the medium term which will lead to better credit
penetration.Life Insurance Council, the industry body of life insurers in India,
has also estimated a CAGR of 12-15 per cent over the next few years for thesegment.
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INDIAN BANKING SECTOR
Introduction
India is considered among the top economies in the world, with tremendous
potential for its banking sector to flourish. The last decade witnessed a
significant upsurge in transactions through ATMs, as well as internet and
mobile banking.
The country's banking industry looks set for greater transformation. With the
Indian Parliament passing the Banking Laws (Amendment) Bill in 2012, the
landscape of the sector has duly changed. The bill allows the Reserve Bank
of India (RBI) to make final guidelines on issuing new licenses, which could
lead to a greater number of banks in the country. The style of operation is
also slowly evolving with the integration of modern technology into the
banking industry.
In the next 5-10 years, the sector is expected to create up to two million new
jobs driven by the efforts of the RBI and the Government of India to expand
financial services into rural areas. Two new banks have already received
licences from the government, and the RBI's new norms will offer incentives
to banks to spot bad loans and take necessary recourse to curb the
practices of rogue borrowers.
Market size
The size of banking assets in Indiatotalled US$ 1.8 trillion in FY 13 and is
expected to touch US$ 28.5 trillion in FY 25.Bank deposits have grown at a
compound annual growth rate (CAGR) of 21.2 per cent over FY 06-13. In FY
13, total deposits were US$ 1,274.3 billion.
The revenue of Indian banks increased from US$ 11.8 billion to US$ 46.9
billion over the period 2001-2010. Profit after tax also reached US$ 12 billion
from US$ 1.4 billion in the period.
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Credit to housing sector grew at a CAGR of 11.1 per cent during the period
FY 08-13. Total banking sector credit is anticipated to grow at a CAGR of
18.1 per cent (in terms of INR) to reach US$ 2.4 trillion by 2017.
In FY 14, private sector lenders experienced significant growth in creditcards and personal loan businesses. ICICI Bank saw 141.6 per cent growth
in personal loan disbursement in FY 14, as per a report by Emkay Global
Financial Services. The bank also experienced healthy growth of 20.8 per
cent in credit card dues, according to the report. Axis Bank's personal loan
business also grew 49.8 per cent, with its credit card business expanding by
31.1 per cent.
Investments
HDFC Bank and state-owned United Bank of India plan to tap the equity
markets to raise funds to enhance capital base and lending. HDFC Bank
plans to raise Rs 10,000 crore (US$ 1.66 billion) while the board of Kolkata-
based United Bank will seek approval for raising about Rs 1,300 crore (US$
216.47 million) by selling shares to increase its capital base.
Export-Import Bank of India (Exim Bank) will increase its focus on supporting
project exports from India to South Asia, Africa and Latin America, as per Mr
Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved
up the value chain by supporting project exports so that India earns foreign
exchange. In 2012-13, Exim Bank had lent support to 85 project export
contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47
companies in 23 countries.
IndusInd Bank will soon begin its asset reconstruction business. The private-
sector lender plans to partner asset reconstruction companies (ARCs) for
this venture. "I think our new initiative, which is going to launch in the next
two months, is about asset reconstruction. We will do asset reconstruction
within the bank but in tie-ups with ARCs. The business plan is ready. We
believe a huge stock of assets is coming into the ARCs as a business area
that we need to look at and we will exploit," as per Mr Romesh Sobti, CEO
and MD, IndusInd Bank.
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Jammu and Kashmir (J&K) Bank plans to increase its presence outside
India. The bank is looking to establish branches in London and Dubai to
enhance its relationship with current customers who have business interests
in West Asia and Europe. "We have a number of business relationships in
these countries and it makes sense for us to have a presence there," as per
Mr Mushtaq Ahmad, Chairman and CEO, J&K Bank.
Government Initiatives
The RBI has announced a few measures in its bi-monthly monetary policy
on June 3, 2014 which includes an increase in the foreign exchange
remittance limit to US$ 125,000 from the previous limit of US$ 75,000.
State Bank of India (SBI) has announced a one-year rural fellowship
programme 'SBI Youth for India (SBI YFI)' for 2014 to draft the country's
youth to become change agents in the country's rural regions. The
programme is for young professionals who are keen to leadthe change for a
better India.
The RBI has simplified the rules for credit to exporters. Exporters can now
receive long-term advance credit from banks for up to 10 years to service
their contracts. Exporters have to have a satisfactory record of three years to
receive payments from banks, who can adjust the payments against future
exports.
The RBI has enabled overseas investors, including foreign portfolio investors
(FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in
insurance and related activities through the automatic route.
Road Ahead
India's banking industry could become the fifth largest banking sector
globally by 2020 and the third largest by 2025. These days, banks in India
are turning their focus to servicing clients and improving their technology
infrastructure, which can help better customer experience and give them a
competitive edge. The popularity of internet and mobile banking is at an all-
time high, with customer relationship management (CRM) and data
warehousing anticipatedto drive the next wave of banking technology in the
country.
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INTRODUCTION TO THE ORGANISATION
BOB PROFILE
Bank of Baroda (BoB) is an Indian state-owned banking and financial
services company headquartered in Vadodara (earlier known as Baroda) in
Gujarat, India. It is the second-largest bank in India, after State Bank of
India, and offers a range of banking products and financial services to
corporate and retail customers through its branches and through its
specialised subsidiaries and affiliates. During FY 2012-13, Its total business
was INR 8,021 billion.[3] In addition to its headquarters in its home state of
Gujarat, it has a corporate headquarters in the Bandra Kurla Complex in
Mumbai.
Based on 2012 data, it is ranked 715 on Forbes Global 2000 list.[4][5] BoB
has total assets in excess of INR 3.58 trillion (short scale), INR 3,583 billion
(long scale), a network of 4283 branches (out of which 4172 branches[6] are
in India) and offices, and over 2000 ATMs.
The bank was founded by the Maharaja of Baroda, H. H. Sir Sayajirao
Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat.[7]The bank, along with 13 other major commercial banks of India, was
nationalised on 19 July 1969, by the Government of India and has been
designated as a profit-making public sector undertaking (PSU). Bank of
Baroda is one of the Big Four banks of India, along with State Bank of India,
ICICI Bank and Punjab National Bank.
A saga of vision and enterprise
It has been a long and eventful journey of almost a century across 25
countries. Starting in 1908 from a small building in Baroda to its new hi-rise
and hi-tech Baroda Corporate Centre in Mumbai, is a saga of vision,
enterprise, financial prudence and corporate governance.
It is a story scripted in corporate wisdom and social pride. It is a story crafted
in private capital, princely patronage and state ownership. It is a story of
ordinary bankers and their extraordinary contribution in the ascent of Bank of
Baroda to the formidable heights of corporate glory.
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It is a story that needs to be shared with all those millions of people -
customers, stakeholders, employees & the public at large - who in ample
measure, have contributed to the making of an institution.
Our mission statement
To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence.
Our Logo
Our new logo is a unique representation of a universal symbol. It comprises
dual B letterforms that hold the rays of the rising sun. We call this the
Baroda Sun.
The sun is an excellent representation of what our bank stands for. It is the
single most powerful source of light and energyits far reaching rays dispel
darkness to illuminate everything they touch. At Bank of Baroda, we seek to
be the source that will help all our stakeholders realise their goals. To our
customers, we seek to be a one-stop, reliable partner who will help them
address different financial needs. To our employees, we offer rewarding
careers and to our investors and business partners, maximum return on theirinvestment single-colour, compelling vermillion palette has been carefully
chosen, for its distinctivenes as it stands for hope and energy.
We also recognize that our bank is characterised by diversity. Our network
of branches spans geographical and cultural boundaries and rural-urban
divides. Our customers come from a wide spectrum of industries and
backgrounds. The Baroda Sun is a fitting face for our brand because it is a
universal symbol of dynamism and optimism it is meaningful for our manyaudiences and easily decoded by all.
Our new corporate brand identity is much more than a cosmetic change. It is
a signal that we recognize and are prepared for new business paradigms in
a globalised world. At the same time, we will always stay in touch with our
heritage and enduring relationships on which our bank is founded. By
adopting a symbol as simple and powerful as the Baroda Sun, we hope to
communicate both.
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THE HERITAGE
It all started with a visionary Maharaja's uncanny foresight into the future of
trade and enterprising in his country. On 20th July 1908, under the
Companies Act of 1897, and with a paid up capital of Rs 10 Lacs started the
legend that has now translated into a strong, trustworthy financial body, THE
BANK OF BARODA.
It has been a wisely orchestrated growth, involving corporate wisdom, social
pride and the vision of helping others grow, and growing itself in turn.
The founder, Maharaja Sayajirao Gaekwad, with his insight into the future,
saw "a bank of this nature will prove a beneficial agency for lending,
transmission, and deposit of money and will be a powerful factor in the
development of art, industries and commerce of the State and adjoining
territories."
THE ETHICS
Between 1913 and 1917, as many as 87 banks failed in India. Bank of
Baroda survived the crisis, mainly due to its honest and prudent leadership.
This financial integrity, business prudence, caution and an abiding care and
concern for the hard earned savings of hard working people, were to
become the central philosophy around which business decisions would be
effected. This cardinal philosophy was over years of its existence, to become
its biggest asset.
It ensured that the Bank survived the Great War years. It ensured survival
during the Great Depression. Even while big names were dragged into the
Stock Market scam and the Capital Market scam, the Bank of Baroda
continued its triumphant march along the best ethical practices.
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THE HEROES
No history is complete without mention of its heroes, mostly ordinary people,
who turn in extra-ordinary performances and contribute to building an
institution. Over the years, there have been thousands of such people. TheBank salutes these "unknown soldiers" who passionately helped to create
the legend of Bank of Baroda.
There were also the leaders, both corporate and royal, who provided the
vision and guided the Bank through trail blazing years, and departing, left
behind footprints on the sands of time. This Roll of Honor will be incomplete
without mention of men, of the stature of Maharaja Sayajirao Gaekwad,
Sampatrao Gaekwad, Ralph Whitenack, Vithaldas Thakersey, Tulsidas
Kilachand and NM Chokshi. Bank of Baroda salutes these leaders whose
vision helped to create an institution.
THE INITIATIVE
Bank of Baroda is a pioneer in various customer centric initiatives in the
Indian banking sector. Bank is amongst first in the industry to complete anall-inclusive rebranding exercise wherein various novel customer centric
initiatives were undertaken along with the change of logo. The initiatives
include setting up of specialized NRI Branches, Gen-Next Branches and
Retail Loan Factories/ SME Loan Factories with an assembly line approach
of processing loans for speedy disbursal of loans.
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The major ongoing initiatives of the Bank are detailed below:
Business Process Reengineering (BPR)
Bank had initiated a major Business Process Reengineering to give a big
boost to sales growth by enhancing customer satisfaction and by making
possible alternate channel migration thus reinventing itself to challenges of
the 21st century. Banks BPR project known as Project- Navnirmaan has
altogether 18 activities covering both the BPR and organisational
restructuring, aimed at transforming the Banks branches into modern sales
& service outlets.
The most important initiatives planned under this project include (1)
Conversion of all metro and urban branches into modern centres known as
Baroda Next branches; (2) Creation of Automated and Leaner Back Offices
like City Back Office (for automated cheque processing etc), Regional Back
Office (for faster account opening etc), Establishment of two Call Centres,
Creation of Academy of Excellence, Introduction of Frontline Automation at
select branches for customer convenience and Organisational Restructuring.
People Initiatives
Bank is endowed with a competent and motivated employee base which is
engaged in handling the extensive business operations of the Bank across
the globe. Strategic HR interventions like, according cross border and cross
cultural work exposure to its managers, hiring diverse functional specialists
to support line functionaries and complementing the technical competencies
of its people by imparting conceptual, managerial and leadership skills, gavethe Bank competitive advantage. People initiatives were blended with IR
initiatives to create an effectively harmonious workplace, where everyone
prospered.
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Bank launched a comprehensive leadership development program Project
UDAAN during 2010-11 with the prime objective of creating leaders for the
future. Such a massive and comprehensive leadership development effort is
unparalleled in the Indian banking industry and first of its kind for any Indian
state-owned Bank. These kinds of elaborate man management policies have
made the Bank a breeding ground for business leaders. The Bank provided
several leaders to the industry- men who went on to build other great
institutions.
New Technology Platform
Bank has made substantial progress in its end-to-end business and IT
strategy project covering the Banks domestic, overseas and subsidiary
operations. All Branches, Extension Counters in India, overseas business
and five sponsored Regional Rural Banks are on the Core Banking Solution
(CBS) platform.
Bank has been providing to its customers Internet Banking, viz., Baroda
Connect and other facilities such as online payment of direct and indirect
taxes and certain State Government taxes, utility bills, rail tickets, online
shopping, donation to temples and institutional fee payment. Bank has a
wide network of ATMs across the country and has also launched mobile
ATMs in select cities. Initiatives have been taken to provide corporate
customers with facilities like direct salary upload, trade finance and State
Tax payments etc. Bank has introduced Mobile Banking (Baroda M-connect)
and prepaid gift cards.
Bank has implemented the Global Treasury Solution in its key territories like
UK, UAE, Bahamas, Bahrain, Hong Kong, Singapore and Belgium. Bank
has taken various technological initiatives in overseas operations such as
implementation of Centralized SWIFT activity through Data Centre in
Mumbai, Payment Messaging System with Anti Money Laundering check,
Anti Money laundering Compliance and Online List Matching solution.
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While Bank implemented Transaction-based Internet Banking facility for its
customers in Uganda, Botswana, UAE, New Zealand, Kenya, Mauritius and
Seychelles, a Viewbased e-banking facility was made available in Fiji,
Oman, Tanzania and UK.
Marketing Initiatives
Ever since its rebranding in 2005, Bank has consistently promoted its major
strengths viz. large international presence; technological advancement and
superior customer service etc. Bank had introduced the sub brand BARODA
NEXT-State of the Art-Straight from the Heart to showcase how it has
utilized technology to nurture long term relationships for superior customer
experience. The sub brand has been reinforced by alternate delivery
channels such as internet banking, ATMs, mobile banking etc and robust
delivery outfits like Retail Loan Factories, SME Loan Factories, City Sales
Office etc. Banks constant endeavor to strengthen its branch/ATM network
combined with well informed staff offering personalized service at its various
touch points have enhanced customer interactions and satisfaction. Thus the
Bank has firmly positioned itself as a technologically advanced customer-
centric bank.
Corporate Social Responsibility (CSR) Initiatives
Bank has always upheld inclusive growth high on its agenda. Bank has
established 36 Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) for
imparting training to unemployed youth, free of cost for gainful selfemployment & entrepreneurship skill development and 52 Baroda Gramin
Paramarsh Kendra and for knowledge sharing, problem solving and credit
counseling for rural masses across the country, as on 31.03.2011. Bank has
also established 18 Financial Literacy and Credit Counseling Centres
(FLCC) in order to spread awareness among the rural masses on various
financial and banking services and to speed up the process of Financial
Inclusion, as on 31.03.2011.
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The Future
Revolutionary and discontinuous changes in the operating environment are
stark reminders that business success is 'impermanent'. Bank has achieved
substantial progress in technology and is continuously integrating multipleplatforms of technology to generate synergies. Bank continuously attempts
to adapt to the dynamic economic environment while engaging in long term
relationships to provide superior customer service.
Banks constant endeavor to delight its customers, which is built on its strong
fundamentals will make it stronger, more resilient and enable to achieve its
vision of to be the Most Admired Bank.
BOARD OF DIRECTORS
1. Shri P. Srinivas, Executive Director
2. Shri Ranjan Dhawan, Executive Director
3. Shri Bhuwanchandra B. Joshi, Executive Director
4. Dr. K.P. Krishnan, Director
5. Smt Surekha Marandi, Director
6. Shri Maulin Vaishnav, Director
7. Shri Surendra Singh Bhandari, Director
8. Shri Rajib Sekhar Sahoo, Director
Key Business Indicators(Rs. in Crore) 31.03.2012 31.03.2011
Total Deposits 384871.11 305439.48
Total Advances 287377.29 228676.36
Total Investments 83209.4 71260.63
Total Assets 447321.47 358397.18
Net Profit 5006.96 4241.68
Capital Adequacy Ratio (percentage)
12.95 as per Basel I 14.67 as per Basel II
13.02 as per Basel I 14.52 as per Basel II
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Net Non Performing Loans to Net Advances (percentage) 0.54 0.35
Net Interest Margin (percentage) 2.97 3.12
Business Per Employee (Lacs) 1466 1229
Dividend History (Percentage)
2012 170
2011 165
2010 150
2009 90
2008 80
2007 60
2006 50
2005 50
2004 65
2003 60
2002 40
2001 40
2000 40
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BOB NETWORK
Corporate Offices
Head Office
Suraj Plaza 1, Sayaji Ganj,
Baroda 390005
Ph: (0265) 2361852(10lines)
Fax: (0265) 2362395, 2361824, 2361806 Corporate Centre
Bank Of Baroda
Baroda Corporate Centre,
Plot No. C-26, Block G,
Bandra Kurla Complex,Bandra (East),
Mumbai 400051
Ph: (022) 6698 5000-04 (PBX)
Fax: (022) 2652 1955
Branch Network (as of 6/8/2014)
Area No. of Branches
Metro 971Urban 861
Semi-Urban 1306
Rural 1818
Total (Indian) 4956
Foreign (Overseas) 104
Total (Global) 5060
Controlling Offices
Zonal Offices 13
Regional Offices 56
Human Resources (Staff as of 01.04.2013)
Officers 17631
Clerks 16397
Sub - Staff 8186
On Contract 1
Total 42215
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SUBSIDIARIES AND JOINT VENTURES
Domestic Overseas
Subsidiary Subsidiary
BOBCARDS Ltd. Bank of Baroda (Botswana) Ltd.
BOB Capital Markets Ltd. Bank of Baroda (Kenya) Ltd.
Nainital Bank Ltd. Bank of Baroda (Uganda) Ltd.
Bank of Baroda (Guyana) Ltd.
Bank of Baroda (New Zealand) Ltd
Bank of Baroda (Tanzania) Ltd
Bank of Baroda (Trinidad & Tobago) Ltd.
Bank of Baroda (Ghana) Ltd.
Representative Offices
Bank of Baroda (Thailand)
Associate
Baroda Pioneer Asset Management Company Ltd
India First Life Insurance Company Limited
Baroda Uttar Pradesh Gramin Bank
Baroda Rajasthan Gramin Bank
Baroda Gujarat Gramin Bank
Nanital -Almora Kshetriya Gramin Bank
Jhabua-Dhar Kshetriya Gramin Bank
Indo-Zambia Bank Ltd. (Lusaka)
India International Bank Malaysia Berhad
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CHAPTERII.
3. THEORETICAL PERSPECTIVE -COMPARATIVE STUDY OF CREDITRATING SERVICE OFFERED BYCRISIL, CARE, ICRA, FITCH
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THEORETICAL PERSPECRTIVE
Raters and Ratings: Evolution and the Current State of the Art
The Raters
A credit rating agency (CRA) is a commercial concern engaged in the
business of credit rating of any debt obligation or of any project or program
requiring finance in the form of debt or otherwise. CRA is different from a
mercantile credit agency, which usually supplies general information on
corporates. It is also different from a credit bureau, which collates
information on credit record of corporates or even individuals. Nor is it a
credit-assessing agency like the credit department of a commercial bank.
The most significant aspect of credit rating is that it is an opinion made
available for public, influencing decisions by participants in financial markets.
The following information on the origin and growth of credit rating has been
collected from two sources, viz., Cantor and Packer, 1995 and ICRA, 1994.
The precursors of bond rating agencies were the mercantile credit agencies,
which rated merchants ability to pay their financial obligations. After the
financial crisis of 1837 in the US, Louis Tappan established the first
mercantile credit agency in New York in 1841. Robert Dun subsequently
acquired the agency, which first published its first ratings guide in 1859. In
1849, John Bradstreet formed another mercantile rating agency, which
published a ratings book in 1857.
In 1933, the two agencies were merged into Dun and Bradstreet, which
became the owner of Moodys Investors Service (Moodys) in 1962. Credit
goes to John Moody for introducing formally the credit rating symbols in
1909 using Aaa through C notations when Moodys started rating US
railroad bonds. Meanwhile, Henry Varnum Poor published, The History of
Railroads and Canals of the United States in 1860. The railroads were the
principal engine propelling the Industrial Revolution. In 1906, Standard
Statistics began publishing financial information on US industrial companies.
Rating for various other corporate bonds followed in 1923.
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In 1941, Poors Publishing Company and Standard Statistics Company
merged to form Standard & Poors Corporation (S&P).S&P was a publicly
owned corporation till 1966 when its controlling interest was acquired byMcGraw Hill Incorporated which acts as the holding company. While the
rating of corporate bonds started in the early twentieth century, sovereign
ratings represent a relatively new line of business for the agencies. The first
industrial country to be rated was France, by S&P in 1959. Both Moodys
and S&P rated Venezuela, a non-industrial country, in October 1977. Fitch
IBCA entered the business of sovereign rating only in 1975.
In cases where a sovereign does not seek a rating, but a corporate entity of
such a country seeks a rating, CRAs do assign an implicit sovereign rating.
The scope of rating in 15 international arena broadened in 1960s to include
sovereign states and public agencies raising funds in international financial
markets. With the increasing number of companies and sovereigns entering
into the international capital market for raising funds, the credit rating
operations of both Moodys and S&P have expanded and, hence, they
maintain offices in major countries of the world. Besides these two worldfamous credit rating agencies in USA, there are a few more famous
agencies that offer sovereign ratings.
These are Canadian Bond Rating Service, Dominion Bond Rating Service
Ltd., Duff & Phelps Credit Rating Co., The Fitch IBCA Group, Japan Credit
Rating Agency Ltd. and Thomson Bank Watch Incorporated. While normally
CRAs assign a rating on the request of an issuer, there are occasions when
unsolicited ratings are assigned, and in many such cases, the fact that they
are unsolicited is made explicit with an asterisk.
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There is also the criticism against the structure of CRAs in USA, with an
oligopolistic market largely carved out between Moodys. S&P and Fitch.
This quest for market shares is viewed as a reason for a lack of commonality
in the rating symbols. Also, the argument put forward for maintaining the
oligopoly is that size begets experience and expertise, hence a larger
number of smaller firms is undesirable in the interests of quality standards.
All of these agencies are represented in India through their collaborations:
S&P : CRISIL Moodys : ICRAFitch : CARE (for 1 year only) Fitch : Fitch
India (formerly Duff & Phelps India) These collaborations bring in financial
capital, and more importantly, knowhow, experience, depth of expertise,
research capabilities and manpower synergies. The global orientationreceived by CRAs in India is further enhanced by two factors Affiliation to the
Association of Credit Rating Agencies in Asia (ACRAA), an ADB sponsored
body. Indian CRAs are founder members. Alignment with the IOSCO Code
of Conduct, to the extent they coincide with the SEBI Code of Conduct for
CRAs.
These collaborations, affiliations and alignments enable the Indian CRAs to
benefit from an exposure to an international environment. It is also a notablefeature that Indian CRAs, in turn, provide technical expertise and knowhow
to CRAs in Mexico and other countries in the SAARC and ASEAN regions.
This provides an emerging markets perspective. Indian CRAs have a
leadership position in Asia, behind only Japan, whose CRAs show a greater
affinity in interacting with CRAs from the developed (G7) countries. 16 As on
date, there are 5 CRAs in India:
CRISIL (est. 1988), ICRA (est. 1991), CARE (est.1993), Fitch India (formerly
Duff & Phelps India, est. 1996, taken over by Fitch in 1999), Brickworks (est.
2008). Notably, India has 5 CRAs in comparison to 3 of USA. Thus,
competition is stiffer since there are more CRAs for a financial market that is
smaller than USA in value, and hence dilutes oligopolistic power. However,
in terms of number of firms and issues, India could be a market of
considerable size.
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During the current downturn from 2008, the number of rating assignments
has increased, and to some extent, issuers have got away with discounts in
rating fees (which range from Rs.1 lakh to 2 lakhs per rating assignment).
This is evidence of a dilution of the oligopolistic power. At a smaller level,
there is SMERA (Small & Medium Rating Agency) which rates loans availed
by Small & Medium Enterprises. The rating fees are around Rs.40,000 per
assignment, which the large CRAs find to be unviable; hence such
assignments are either rejected or outsourced to smaller Chartered
Accountant firms, supplemented by a cursory telephonic verification.
The quality of personnel at SMERA or smaller agencies may not be the
same as those at the SEBI registered CRAs. Outsourcing is a matter ofpolicy and should generally be discouraged for reasons of quality as well as
privacy. Another phenomenon is the presence of Credit Information
Companies (CIC) which are recognized by the RBI through the Credit
Information Companies Regulation Act. Their services are availed by credit
granting institutions for the sanctioning and monitoring of facilities to
individuals who borrow loans, housing loans and avail of credit card facilities.
The Credit Information Bureau of India Limited (CIBIL) is one such example.
The Rating Process
In 1934, Benjamin Graham, David Dodd and Sydney Cottle wrote their book
Securities Analysis a classic work that marked the beginning of the field.
Until then, financial analysis was sketchy and bereft or analytical principles
or rigour. They also pioneered the first steps in the Quantitative School of
financial information for decisions on Securities investment. Securities
Analysis is the classic textbook used in Columbia University till this day. This
1934 classic has come to the forefront once again in recent times, indicating
how the tenets of conservative value investing protect the investor from
overpaying when investing in securities, tenets which are overlooked as
unfashionable during the periods of economic boom. The Graham approach
involves an analysis over the past 10 years to ascertain the track record of
an issuer.
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Also in parallel, during the 1930s, a notable development was the
emergence of Philip Fisher, who wrote his book Conservative Investors
Sleep Well. Thisis a recommended textbook at Stanford Business School.He stressed on the Qualitative aspects such as Management Vision and
Integrity, Marketing & 17 Sales Capabilities, Employee Morale Levels,
Product Development etc. The hallmark of this approach is the use of
informal information in addition to formal sources so as to obtain a more
complete evaluation of a companys prospects. This technique, currently
known as the process of Due Diligence Review (DDR) is critical in any
financial appraisal. With the onset of outsourcing, financial appraisal skillseems to be a dying art, viewed as a poor cousin to investment banking and
financial engineering. Thus, Philip Fishers Qualitative School neatly
complemented the Quantitative School of Graham et al.
The 1930s are known for the disillusionment of the investing public with the
quality of information disseminated by the financial community. It was also a
period in which the dissatisfaction with the accounting community was made
public. Thus, the 1930s are a period which witnessed the formation of theSEC, the imposition of the Glass-Steagall Act that separated Commercial
Banking from Investment Banking. The repeal of the Glass-Steagall Act
recently has exposed the systemic risks, seen from the downfall of Citigroup
and other banks in the USA. European banks are further weakened by a
total absence of an act similar to the Glass-SteagallAct. Academic interest
in financial analysis reemerged with studies by Edward Altman who used the
statistical technique of Multiple Discriminant Analysis (MDA), which has theability to filter data into two baskets: Safe and Default categories. It is a
scoring model (revolving around a Z-score), with different weights to different
ratios and variables. Based on the relevance of the various weights and
variables, subsequent researchers have been able to tweak the Altman Z-
Score Model to devise their own scoring models. Supplementary to such
studies, the Linear Probability Models (LPM) became popular in predicting
bond defaults.
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These models were further improved upon by the LOGIT and PROBIT
models, which are comparable. In later developments, Credit RiskMeasuring
approaches such as Credit-metrics, Loss-Given-Default (LGD) and the KMV
Models have extensively been used to measure credit default probabilities
and assign ratings and rating transitions. In particular, Moodys, and
Standard and Poor (S&P) have equipped themselves with these techniques.
A study of the sub-prime crisis in USA is illustrative of the functioning,
through a paper by Vikrant Vig et al, presented at the Conference on
Securities Markets organized by NISM in December 2008. The US CIC
compiles a score and discriminates loan applicants into two basketscredit-
worthy or otherwise. The cut-off score was 620 for obtaining a mortgageloan. It was found that most of the defaults that occurred were by applicants
who had obtained a score marginally above 620 (say, 621 to 630). This led
to the massive sub-prime crisis and its global consequences. The lesson
here is that the CIC and the applicants got around the system and weakened
the mortgage loan systemically. Abetted by lax standards of loan origination
in a quest to boost balance sheet 18 size and adventurous investment
bankers, elaborate structured obligations were created. Whereas the CICs
failed in the loan-filtering process, the CRAs failed in detecting risks in the
design of the pretty securitization structures. By analogous reasoning, it is
assumed that the maximum potential for default is by borrowers who
artificially manage to get a rating barely above the acceptable credit rating or
credit score.
For example, the highest defaults would be in the BBB category and need a
stronger level of sanctioning procedures and scrutiny of collateral security.At the 2003 Conference by ISMA held in Madrid, one of the Hedge Fund
managers mentioned that the International Rating Agencies lagged behind
the market information. This was stated in the light of the collapse of
WorldCom and Xerox, in the aftermath of the Enron fallout. The RBI has
rightly been very critical of the role of Direct Selling Agents (DSAs) which are
ill-equipped to filter bad loan proposals due to the commission structures
that are based on commissions.
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This perverse incentive structure results directly into a moral hazard and
could pose a systemic risk. Likewise, in Mutual Funds (regulated by SEBI)
and Insurance (regulated by IRDA), cases of mis-selling are more
widespread than on evidence, due to the possibility of unreported
complaints. This could be the genesis of premature redemptions and
adverse claims. Along the same lines, tough norms need to be placed for
recognition and renewal of registration of CRAs, SMERA and CICs.
Although they operate in different segments, the basic Due Diligence
Process (DDR) remains the same. This argument is extendable to auditors
also, who are the first level in the filtering process. While there will always be
asymmetric information between the issuer/borrower vis--vis the CRA and
lender, steps need to be taken to minimize the asymmetry. Here, the DDR
skills of the personnel will be the most important risk mitigating device. CRAs
and regulators need to be doubly careful in the blind spots or grey
regulatory zones. AIG for instance, was an insurance company whose
unregulated affiliate strayed into Credit Default Swaps (CDS) that were
traded in the unregulated OTC markets. Investment losses directly hit the
capital and the vulnerability showed up after it was too late. In this regard,
complexity grading is a good step and must be factored in to expose the
heightened risks (counterparty risk) that is in addition to the basic credit risk,
since one of the counterparties in the structured obligation who may be
unregulated and hence possess inadequate risk capital. The Rating Process
was gauged firsthand through site visits to the various CRAs.
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A careful look at the right hand side (What is Not Done) reveals that there is
scope for improvement. It is no surprise, therefore, that financial markets,
which, in totality have a greatest number of surveyors and is equipped and
empowered to price even unconfirmed news into asset prices, react faster to
new information than the CRAs. By contrast, CRAs are required to be more
guarded and restrained in either upgrading or downgrading issues on
account of protocols namely, to wait for a confirmation. Until then, the
CRAs can, at best, place an issue under Rating Watch.
During the same period as this study, SEBI conducted site inspection visits
to the CRAs. It was a through, detailed inspection of the records and
procedures. It was found that the record-keeping was not sufficient,particularly proofs of CRAs visits to rated entities, minutes ofmeetings with
clients, minutes of meetings of rating committees etc. It was also observed
that a more in-depth probing by the CRAs need to be conducted.
Interactions with some rated entities confirmed these findings. Some entities
were pleasantly surprised to get an AAA within a month, after one site visit
and management interaction. Queries to the Projections were raised and
settled through email. In this regard, it was felt that CRISIL was a moreprobing than the other CRAs. Further enquiry with other rated entities
revealed that the officers of CRISIL are far superior to the other agencies;
hence it would be unfair to paint all CRAs with the same brush. However,
CRISIL also have lesser rating mandates to other CRAs since some large
entities that are rated have significant shareholding in CRISIL and ICRA. As
per the SEBI inspection reports, it is found that CRISIL has further
strengthened its systems especially after 2007.
There is a view that the ratings by S&P and Moodys are more stringent than
those of their Indian counterparts. More specifically, it is said that an AAA by
an Indian CRA could be equivalent to an AA by their US counterpart. The
table above reflects areas for improvement. Apart from this, there is another
dynamicthat of the treatment of Non-Performing Loans (NPL) as they are
called in USA, corresponding to the terminology of Non-Performing Assets
(NPA) in India. In USA, a firm that has declared itself insolvent under Goingby such an environment, the rating agencies can be as tough as possible
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without harming the future prospects of the rated entity. However, in India,
there are no such supporting devices the NPA tag will result in an enmasse
withdrawal of credit lifelines and permanently destroy the future of the rated
entity. Hence, Indian CRAs may be more cautious in confirming adverse
indications before a downgrade. It comes as no surprise, therefore, that the
markets react faster than the CRAs. However, this cannot be verified in case
of unlisted entities/instruments.
Generally, investors in such debt instruments are large Domestic Financial
Institutions (DFIs) who adopt a buy-and-hold strategy and are not affected
by short term swings in the fortunes of companies, so long as the payment
obligations are not seriously threatened. At this stage, it is more pertinent toremedy the existing lacunae in the rating processes than to focus on the
market-efficiency-versus-CRA-efficiency.
On the balance, the arguments that the financial markets respond faster to
incorporate new information into asset prices is tabulated as under: Markets
CRAs Markets are answerable to no one and are free to over-react CRAS
are responsible to the investing public and for being fair to issuers Mispricing
and volatility are inherent. Rumours are incorporated instantly
Knee jerk reactions could result in repeated re-ratings, hence rumours need
verification Markets consider all risks CRA are responsible only for credit risk
Markets factor in price corrections and market microstructure issues CRAs
factors in significant credit risks Markets have more traders and more noise.
Markets are also known to overreact, especially to short term noise. Long
term bond investors generally buy and hold longer.
Need not react immediately if long term prospects not endangered Everyone
brings news into the market, hence surveillance is more comprehensive. .
CRA surveillance teams are smaller, with limited information resources and
cannot act on unconfirmed news. Too much of re-rating also damages
credibility of both issuer and CRA Details of transactions factored instantly
CRAs get to know of bulk deals, block deals and insider trades
simultaneously or after the market trades are completed
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The table above shows that Markets, collectively, are information-superior.
However, this does not render CRAs redundant nor can the motives of
CRAs be questionable a priori. The main function of CRAs is to factor credit
risk so that the bond investors can base their judgement on factual data. The
major point is, CRAs will always trail the market, but need to take all possible
steps to improve their functioning by a comprehensive and contemporary
DDR process. Investors will be doing themselves a favour by keeping CRAs
informed of all delays/defaults as and when they occur. Investors, in turn,
could also access the files maintained by CRAs on an ongoing basis. CRAs
also need to maintain databases for further processing through advanced
applications such as Data Warehousing and Data Mining.
It is also a part of the overall Knowledge Management (KM) initiatives within
their organizations and serves as an aid to Research and Training. 23
Without any attempt to defend the CRAs, it must be stated that large
institutions in Bonds, Debentures and Loans do not react instantaneously to
adverse quarterly changes since they have sufficient collateral security and
enjoy a direct rapport with the investee/companies (issuers) so as to enforce
performance.
Moreover, in most cases, corporate debt instruments are illiquid and the
investing institutions adopt a buy-and-hold strategy. Hence, instantaneous
downgrades are not expected. The role and performance of CRAs has
resulted into a raging debate in the recent times, which have been highly
turbulent, especially after October 2008. Some of the observations and
issues raised by experts are encapsulated below for consideration during
this study. Some myths in Credit Rating need to be demystified and placedin a right, healthy perspective.
First, the myth that rating is an opinion and therefore, the CRAs are not
accountable to any failure to detect weakness. This is a loose interpretation.
A correct interpretation would be that CRAs remain accountable to the
investing public, regardless of the freedom provided to them on matters of
methodology.
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Second, the myth that the rating of an instrument is unconnected with the
standing of the issuer needs to be revisited carefully. While it is true in the
case of Structured Obligations (SO) with a maze of credit enhancements, in
the case of plain vanilla debt, the credibility and cash flow projections of the
entity are closely intertwined with the ability to honour obligations on its debt
instruments.
In general, CRAs are believed to have a good model for first time ratings.
However, the important and difficult part is to maintain the currency of the
rating throughout its tenor. This will establish whether ratings are proactive
or reactive.
A reactive approach needs to be eschewed, since it implies a hurriedly
convened meeting ex-post-facto. The track record of an issuer is important
and adds to the credibility of the issue. The past repayment track record
needs to be considered favourably, except in cases where the new debt
instruments of a very high magnitude are on offer. Timeliness and currency
of the ratings are of utmost importance especially since the investors would
like to buy or sell debt investments based on reliable information. CRAs
have an important gap-filling role between the investors and the debenturetrustees. The real test of a CRA is quick response time. As regards
projections, it is believed that very long term projections are not useful (viz.,
beyond 5 years). Rating symbols need to be placed at one central point for
reference by the general public. The meanings of the symbols need to be
clarified and placed in a comparable table.
From the investors perspective, Ratings are a fortification to their own due
diligence process, and not to be considered as a crutch or substitute to
appraisal. It is necessary for the investing community to place facts before
the CRAs and elicit responses. This will tone up the systems and operations
of the CRAs. The primary role of CRAs is rating of credit instruments. IPO
Grading was introduced on an experimental basis, mainly at the behest of
the Investors Associations. Most of the issues received poor grading ratings
and also failed to raise funds (say 1 to 2 marks on a total of 5). It is a
different matter that the turn of events and the high valuations prescribed byMerchant Bankers led to the total drying up of the IPO market post January
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2008. In view of the events in the financial markets it needs to be concluded
that the US systems are no longer the standard of reference. With all the
chronicled experience available on hand, India should now seek to create its
own standards and mechanisms in addressing the issues related to CRAs.
In the next chapter, the actual performance of CRAs is gauged by an
analysis of select data.
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CREDIT RATING AGENCIESA BRIEF VIEW
Credit Rating Information Services of India Limited (CRISIL) is a global
analytical company providing ratings, research, and risk and policy advisory
services. CRISILs majority shareholder is Standard & Poor's, a division of
McGraw-Hill Financial and provider of financial market intelligence.
CRISILs businesses can be divided into three broad categories - Ratings,
Research and Advisory. CRISIL Ratings has rated/assessed over 61,000
entities in India. Its rating capabilities span the entire range of debt
instruments and it has worked across the corporate strata, from large
corporates in the country to the SMEs.
Under Research, CRISIL Global Research & Analytics serves global
investment banks and financial institutions with high-end research, risk,
analytics, equity and credit research services. Its credit research supports 80
per cent of the global structured finance market, and over 60 per cent of the
global credit markets. The company's equity research covers over 90 per
cent of the global trading volumes and 88 per cent of the global market
capitalisation.
In India, CRISIL Research is an independent and integrated research house
and provides growth forecasts, profitability analysis, emerging trends,
expected investments, industry structure and regulatory frameworks.
CRISIL Infrastructure Advisory is a division of CRISIL Risk and Infrastructure
Solutions (CRIS) Limited, a wholly owned subsidiary of CRISIL Limited. It
helps shape policy and establish viable frameworks to improve the risk
profile of infrastructure projects. It works with government agencies in
enhancing their capacity, capabilities and internal financial viability, and
support implementation of infrastructure improvement initiatives.
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CRISIL Risk Solutions (CRS), the other division of CRIS, provides a range of
risk management tools, analytics and solutions to financial institutions,
banks, and corporates, in India, and across the world.
ICRA Limited(formerly Investment Information and Credit Rating Agency of
India Limited) was set up in 1991 by leading financial/investment institutions,
commercial banks and financial services companies as an independent and
professional Investment Information and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of
Companies (Group ICRA). ICRA is a Public Limited Company, with its
shares listed on the Bombay Stock Exchange and the National Stock
Exchange.
Alliance with Moodys Investors Service
The international Credit Rating Agency Moodys Investors Service1is ICRAs
largest shareholder. The participation of Moodys is supported by a
Technical Services Agreement, which entails Moodys providing certain high-
value technical services to ICRA. Specifically, the agreement is aimed at
benefiting ICRAs in-house research capabilities, and providing it with
access to Moodys global research base. The agreement also envisages
Moodys conducting regular training and business seminars for ICRA
analysts on various subjects to help them better understand and manage
concepts and issues relating to the development of the capital markets in
India. Besides this formal training programme, the agreement provides for
Moodys advising ICRA on Rating-products strategy, and the Ratings
business in general.
The ICRA Factor Facilitating Efficiency in Business...
ICRA information products, Ratings, and solutions reflect independent,
professional and impartial opinions, which assist businesses enhance the
quality of their decisions and help issuers access a broader investor baseand even lesser known companies approach the money and capital markets.
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The Research Factor
We strongly believe that the quality of analytical output is a derivative of an
organisations research capabilities. We have dedicated teams for Monetary,
Fiscal, Industry and Sector research, and a panel of Advisors to enhance ourin-house capabilities. Our research base enables us to maintain the highest
standards of quality and credibility.
Committed to the Development of the Financial Market
The focus of ICRA in the coming years will continue to be on developing
innovative concepts and products in a dynamic market environment,
generating and promoting wider investor awareness and interest, enhancing
efficiency and transparency in the financial market, and providing a healthier
environment for market participants and regulators.
Our Produ cts and Services are Designed to:
1. Provide information and guidance to institutional and individual
investors/creditors;
2. Enhance the ability of borrowers/issuers to access the money market and
the capital market for tapping a larger volume of resources from a widerrange of the investing public;
3. Assist the regulators in promoting transparency in the financial markets;
and
4. Provide intermediaries with a tool to improve efficiency in the funds
raising process.
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Range of Services
Rating Services
As an early entrant in the Credit Rating business, ICRA Limited (ICRA)is one of
the most experienced Credit Rating Agencies in the country today. ICRA
rates rupee-denominated debt instruments issued by manufacturing
companies, commercial banks, non-banking finance companies, financial
institutions, public sector undertakings and municipalities, among others.
ICRA also rates structured obligations and sector-specific debt obligations
such as instruments issued by Power, Telecom and Infrastructure
companies. The other services offered include Corporate Governance
Rating, Stakeholder Value and Governance Rating, Credit Risk Rating of
Debt Mutual Funds, Rating of Claims Paying Ability of Insurance
Companies, Project Finance Rating, Line of Credit Rating and Valuation of
Principal Protected-Market Linked Debentures (PP-MLD). ICRA, along with
National Small Industries Corporation Limited (NSIC), has launched a
Performance and Credit Rating Scheme for Small-Scale Enterprises in India.
The service is aimed at enabling Small and Medium Enterprises (SMEs)
improve their access to institutional credit, increase their competitiveness,
and raise their market standing.
PT ICRA Indonesia (ICRA Indo),a subsidiary of ICRA, offers a wide range
of Rating services in the Indonesian market, including Credit Rating of
rupiah-denominated debt instruments issued by corporate entities, banks,
finance companies and financial institutions, service companies and
infrastructure sector companies; Issuer Rating of corporate entities, banks,
finance companies and financial institutions, service companies,
infrastructure sector companies and small & medium sector companies;
Structured Finance Rating of asset-backed and mortgage-backed
securitization transactions, among others; Bank Loan Rating based on the
Basel II accord; Project Finance Rating; Mutual Funds and Fund House
Ratings; Municipal Bonds Rating and Claims Paying Ability Rating of
Insurance Companies.
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ICRA Lanka Limited (ICRA Lanka), a wholly-owned subsidiary of ICRA,
offers a wide range of Rating services in the Sri Lankan market, putting into
use parent ICRAs accumulated experience in the areas of Credit Rating,
Grading, and Investment Information. Its Rating focus is on entities mainly in
the financial sector, besides long-, medium-, and short-term debt
instruments issued by borrowers from various sectors of the economy.
ICRA Lanka also rates rupee-denominated debt instruments issued by
commercial banks, nonbanking finance companies, financial institutions, and
manufacturing and service companies, among others. It also rates structured
obligations and sector-specific debt obligations. The other services offered
include Corporate Governance Rating, Stakeholder Value and GovernanceRating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying
Ability of Insurance Companies, Project Finance Rating, and Line of Credit
Rating.
ICRA Nepal Limited (ICRA Nepal), a subsidiary of ICRA, offers a wide
range of Rating services in the Nepalese market. Using the accumulated
experience and technical support of its holding company, it has developed
the capability to offer a diverse range of Rating and Grading relatedservices. ICRA Nepal rates rupee-denominated long-term, medium-term and
short-term debt instruments. Its services also include Issuer Rating, Fund
Management Quality Rating and Grading of Equity Offers. The
Rating/Grading service, which is currently focused on the banking and
finance, insurance and hydro-electricity sectors, is also being offered to
manufacturing companies, infrastructure sector companies, service
companies, small and medium sector entities, and others. Further, ICRANepal is preparing to offer other products including Bank Loan/Line of Credit
Rating and Rating of Claims Paying Ability of insurance companies in the
near future.
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Grading Services
The Grading Services offered by ICRA employ pioneering concepts and
methodologies, and include Grading of: Initial Public Offers (IPOs);
Microfinance Institutions (MFIs); Construction Entities; Real EstateDevelopers and Projects; and Maritime Training Institutes. In IPO Grading,
an ICRA-assigned IPO Grade represents a relative assessment of the
fundamentals of the issue graded in relation to the universe of other listed
equity securities in India. In MFI Grading, the focus of ICRAs grading
exercise is on evaluating the candidate institutions business and financial
risks. The Grading of Construction Entities seeks to provide an independent
opinion on the quality of performance of the entities graded. Similarly, theGrading of Real Estate Developers and Projects seeks to make property
buyers aware of the risks associated with real estate projects, and with the
developers ability to deliver in accordance with the terms agreed. In the
education sector, ICRA offers the innovative service of Grading of Maritime
Training Institutes in India. These apart, of late, ICRA has been offering the
services of Grading of Renewable Energy Service Companies (RESCOs)
and System Integrators (SI); Grading of Management Education Institutes;
Grading of Engineering Colleges/Universities; Grading of Fundamental
Strength and Recovery Prospects; Assessment of the Fundamental and
Financial Strength of Real Estate Entities (REEs) & Real Estate Projects
(REPs); and ICRA Corporate Responsibility and Sustainable-Business
Grading.
Industry Research
ICRA has re-launched its industry research service, covering over 30
segments in the corporate and financial services sectors. Given ICRAs
strong analytical capabilities across industries, the research reports provide
in-depth analysis of industry-specific issues, trends in demand-supply
factors, the competitive landscape, and medium-to-long-term outlook. The
research reports are tailored to meet the research requirements of a wide
range of participants, including banks, mutual funds, insurance companies,
venture funds and corporates.
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Equity Research Service
The ICRA Equity Research Service seeks to provide market participants with
an assessment of the fundamental earning quality of specific companies and
their current relative valuation as reflected by the prevailing price of theirequity shares. An ICRA Equity Research assessment, while not specifying
any target price for the shares evaluated, captures two key factors
fundamental earning quality and relative valuationthat influence the price
behaviour of equity shares of companies over the medium and long term. In
assessing the relative valuation of a companys equity share, the same is
benchmarked against an appropriate peer set or index. ICRA Equity
Research reports are aimed at benefiting all categories of investors,including retail investors and especially those with a longer term investment
horizon.
Consulting Services
ICRA Management Consulting Services Limited (IMaCS), a wholly-owned
subsidiary of ICRA Limited, is a multi-line management consulting firm with a
global operating footprint. IMaCS consulting services span Public Policy,
Strategy, Risk Management, and Transaction Advisory services. IMaCS
clientele includes Banks and Financial Service Companies, Corporates,
Financial Investors, Governments, Regulators, and Multilateral/Bilateral
Development Agencies. Headquartered in India, IMaCS has consulting
experience in over 45 countries across South East Asia, South Asia, West
Asia, Africa, Europe, and North America.
IMaCS offers Programme Management and other outsourcing services
through its wholly-owned subsidiary, Pragati Development Consulting
Services Limited. Software Development, Analytics & Business Intelligence
and Engineering Services
ICRA Techno Analytics Limited (ICTEAS),a wholly-owned subsidiary of
ICRA Limited, offers a complete portfolio of Information Technology (IT)
solutions to meet the dynamic needs of present-day businesses. The
services range from the development of traditional web-centric and mobile
applications to the new generation of cutting-edge analytics and business
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intelligence solutions. With many manyears of experience in data-mining and
predictive modeling, ICTEAS offers analytics solutions in multiple functional
domains such as procurement, sales, supply chain, logistics, and resource
planning. The Engineering Division of ICTEAS offers multidisciplinary
computer aided engineering design services. ICTEAS uses a mix of
onsite/offshore strategies to optimize bottom-line benefits for its customers.
It is a Microsoft Gold Partner and is ISO 9001: 2008 certified.
ICRA Sapphire Inc. (ICSAP),a wholly-owned subsidiary of ICTEAS, is
based in and operates out of Connecticut, USA. It offers US clients a full
array of leading edge Business Analytics and Software Development
services backed by offshore teams, which work out of ICTEAS, Kolkata. Thishybrid engagement model allows for seamless project management,
execution and rapid offshore scaling of teams while bringing down
development costs.
ICRA Global Capital, Inc. (IGCI) is a special purpose vehicle of ICTEAS.
IGCI has been incorporated to look after overseas investment activities.
Currently, it holds 100% equity stake in BPA Technologies, Inc.
BPA Technologies Inc. (BPA),a wholly-owned subsidiary of ICTEAS, is a
California-based global business consulting and software technology
services firm. It delivers Enterprise Content Management (ECM) solutions,
Portal and Collaboration solutions, and Comprehensive Quality Assurance
(QA) Solutions. BPA has development centres in Chennai and
Visakhapatnam. With a global delivery model, BPA offers innovative and
cost effective information management solutions to its clients across various
industries.
BPA Technologies Pte. Ltd.,a wholly-owned subsidiary of BPA, acts as a
state-of-the-art offshore delivery centre in India for software development
and QA services.
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Knowledge Process Outsourcing and Online Software
ICRA Online Limited (ICRON)is a wholly-owned subsidiary of ICRA
Limited. The company operates out of Kolkata and Mumbai.
Encouraged by the emerging dynamics of the outsourcing business, ICRON
diversified into the Knowledge Process Outsourcing business in April 2004,
with focus on the Banking, Financial Services and Insurance (BFSI) vertical.
Presently, ICRON has three lines of business (LoBs) offering data services,
research and analytics to regional and global clients. ICRON works with
banks, insurance companies, asset management companies and other
financial institutions. Timely, accurate, and affordable solutions help partners
achieve their business goals. In the Data Services segment, ICRON offers
support to its clients in the areas of data extraction, aggregation, validation,
analysis and adjustments in areas of accounts, financial management and
structured finance.
In Research, ICRON serves clients through financial research, asset-class
reports, news & event tracking, company profiles preparation, customer data
analysis, newsletters, fund profiling and financial blogging. Analytics is an
emerging business for ICRON and involves discovering patterns in data and
building predictive models. ICRON, Kolkata Division, is ISO 9001:2008 and
27001: 2005 certified through continuous focus on and adherence to quality
and data security policies and practices.
ICRA Limited (ICRA) is an Indian independent and professional investment
information and credit rating agency. It was established in 1991, and was
originally named Investment Information and Credit Rating Agency of India
Limited (IICRA India). It is second largest Indian rating company in term of
customer base. It was a joint-venture between Moody's and various Indian
commercial banks and financial services companies. The company changed
its name to ICRA Limited, and went public on 13 April 1997, with a listing on
the Bombay Stock Exchange and the National Stock Exchange.
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ICRA Credit Rating
ICRAs credit ratings are symbolic representations of its current opinion on
the relative credit risks associated with the rated debt obligations/issues.
These ratings are assigned on an Indian (that is, national or local) creditrating scale for Rupee (local currency) denominated debt obligations. ICRA
ratings may be understood as relative rankings of credit risk within India.
ICRA ratings are not designed to enable any rating comparison among
instruments across countries; rather these address the relative credit risks
within India.
ICRAs ratings (other than Structured Finance Ratings) in the investment
grade convey the relative likelihood of default, that is, the possibility of the
debt obligation not being met as promised. All other ratings, including
Structured Finance Ratings, reflect both the probability of default and the
severity of loss on default, that is, the expected loss against the rated debt
obligation.
Credit ratings apart, ICRA also assigns Corporate Governance Ratings,
besides Performance Ratings, Gradings and Rankings to mutual funds,
construction companies and hospitals.
Group Companies
There are five subsidiary of ICRA Ltd. as,
1. PT. ICRA Indonesia (ICRAIndo) www.icraindonesia.com,
2. ICRA Lanka Limited (ICRALanka) www.icralanka.com,
3. ICRA Techno Analytics Limited (ICTEAS), www.icteas.com,
4. ICRA Online Limited (ICRON)www.icraonline.com,5. IMaCs www.imacs.in.
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FITCH RATINGS INC
Fitch Ratings Inc. is a jointly owned subsidiary of Hearst
Corporation and FIMALAC SA. On April 12, 2012, Hearst
increased their stake in the Fitch Group to 50%. Previously, Hearst owned a40% stake in the company, while FIMALAC was the majority owner with
60% stake. Fitch Ratings and Fitch Solutions are part of the Fitch Group.
Fitch Ratings is dual-headquartered in New York, USA, and London, UK. It
was one of the three nationally recognized statistical rating organizations
(NRSRO) designated by the U.S. Securities and Exchange Commission in
1975, together with Moody's and Standard & Poor's, and the three are
commonly known as the "Big Three credit rating agencies".
The firm was founded by John Knowles Fitch on December 24, 1913 in New
York City as the Fitch Publishing Company. It merged with London-based
IBCA Limited in December 1997. In 2000 Fitch acquired both Chicago-based
Duff & Phelps Credit Rating Co. (April) and Thomson Financial BankWatch
(December). Fitch Ratings is the smallest of the "big three" NRSROs,
covering a more limited share of the market than S&P and Moody's, though
it has grown with acquisitions and frequently positions itself as a "tie-
breaker" when the other two agencies have ratings similar, but not equal, in
scale. In September 2011, Fitch Group announced the sale of Algorithmics
(risk analytics software) to IBM for $387 million. The deal closed on October
21, 2011.
Long-term credit ratings
Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale
from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by
S&P. (Moody's also uses a similar scale, but names the categories
differently.) Like S&P, Fitch also uses intermediate +/- modifiers for each
category between AA and CCC (e.g., AA+, AA, AA-, A+, A, A-, BBB+, BBB,
BBB-, etc.).
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Investment grade
AAA: the best quality companies, reliable and stable
AA: quality companies, a bit higher risk than AAA
A: economic situation can affect finance
BBB: medium class companies, which are satisfactory at the moment
Non-investment grade
BB: more prone to changes in the economy
B: financial situation varies noticeably
CCC: currently vulnerable and dependent on favorable economic
conditions to meet its commitments
CC: highly vulnerable, very speculative bonds
C: highly vulnerable, perhaps in bankruptcy or in arrears but still
continuing to pay out on obligations
D: has defaulted on obligations and Fitch believes that it will generally
default on most or all obligations
NR: not publicly rated
Short-term credit ratings
Fitch's short-term ratings indicate the potential level of default within a 12-
month period.
F1+ : best quality grade, indicating exceptionally strong capacity of obligor
to meet its financial commitment
F1: best quality grade, indicating strong capacity of obligor to meet its
financial commitment
F2: good quality grade with satisfactory capacity of obligor to meet its
financial commitment
F3: fair quality grade with adequate capacity of obligor to meet its financial
commitment but near term adverse conditions could impact the obligor's
commitments
B: of speculative nature and obligor has minimal capacity to meet its
commitment and vulnerability to short term adverse changes in financial
and economic conditions
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C: possibility of default is high and the financial commitment of the obligor
are dependent upon sustained, favorable business and economic
conditions
D: the obligor is in default as it has failed on its financial commitments.
Fitch Solutions
Launched in 2008, Fitch Solutions offers a range of fixed-income products
and professional development services for financial professionals. The firm
also distributes Fitch Ratings' proprietary credit ratings, research, financial
data, and analytical tools.
Fitch Learning
Fitch Learning is a financial services training and development firm.
Previously named 7city Learning, it was acquired by Fitch Group in January
2013. 7city Learning merged with Fitch's existing training business to form
Fitch Learning. The company offers professional certifications, tailored
training and short courses to a range of financial institutions and individuals.
Criticism
Credit rating agencies such as Fitch Ratings have been subject to criticism
in the wake of large losses in the collateralized debt obligation (CDO) market
that occurred despite being assigned top ratings by the CRAs. For instance,
losses on $340.7 million worth of collateralized debt obligations (CDO)
issued by Credit Suisse Group added up to about $125 million, despite being
rated AAA by Fitch. However, differently from the other agencies, Fitch has
been warning the market on the constant proportion debt obligations
(CPDO) with an early and pre-crisis report highlighting the dangers of
CPDO's.
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CHAPTERIII.
5. RESEARCH METHODOLOGY
6. ANALYSIS & INTERPRETATION
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RESEARCH METHODOLOGY
5.1 RESEARCH METHODOLOGY - DEFINED
a. Research is the systematic investigation to establish facts or collectinformation on a pre-decided subject.
b. Methodology is the specification of the system of principles and
techniques used in a particular discipline.
5.2 TITLE OF THE STUDY: -
Comparative Analysis of Credit Rating services offered by CRISIL,
CARE, ICRA, FITCH and to Study reasons as to why external rating
does not find favour with SME segment
5.3 DURATION OF THE STUDY: - The duration of the project training was
45 days undertaken to accomplish the title and objective.
Define the problem and research objective
Develop the research plan
Collect the information
Analyze the information
Finding & Recommendations
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5.4 OBJECTIVE OF THE STUDY
1. To evaluate the comparative analysis of various credit rating agencies viz
CRISIL, CARE, FITCH, ICRA etc.
2. To study the corporate atmosphere in the concerned banking organisation
and to gain the understanding of the conceptual knowledge pertaining to the
credit ratings.
3. To find out the probable causes and reasons as to why external credit rating
is not effective and favourable with SME segment.
5.5 TYPE OF RESEARCH DESIGN
Research design involves a general plan of how to go about answering the
research questions set keeping in mind the research objective.
5.6 METHOD OF SELECTING SAMPLE
SECONDARY SOURCES: -
For the completion of the research it was important that the secondary data
should be supplemented by primary data originated specifically for theresearch in hand. The primary data was gathered through questionnaires.
My research findings are based on information collected from filled
questionnaires. The main sources of secondary data were: -
PRIMARY DATA COLLECTION METHOD
Method used to collect primary data is: Questionnaire
QuestionnaireMethod: For the purpose of the study survey was conducted
across different areas of Jaipur city. The Questionnaire (a sample copy is
attached) was prepared according to the objectives of the project and was
administered accordingly. The data gathered through this exercise became
the primary data.
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SAMPLING ERRORS
While interpreting the results I kept in mind the potential errors. Two sources
of errors are random sampling error, which arises due to the fact that the
sample may not be a true representative of the population, and non-
sampling error which comes up because of faulty coding, untruthful
responses, respondent fatigue etc.
QUESTIONNAIRE DEVELOPMENT PROCESS
In order to gather primary data, I used structured questionnaires, prepared in
advance to elicit the necessary response from the respondents.
Questionnaires help to facilitate communication and know the perceptions of
the respondents clearly. The following points were kept in mind while
structuring the questionnaire.
Content of the questions: the questions had been framed keeping in mind
the objective of the research. Type of questions:the questionnaire consists
of open-ended, closed-ended, dichotomous and multiple-choice questions.
Further I made use of likert scale to get a more vivid response. Wording of
the questions:the questions are such that they are easy to understand and
the respondents do not have any hesitation in answering the questions.
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ASSESSMENT OF LONG TERM PERFORMANCE OF CREDIT
RATING AGENCIES IN INDIA
CRAs: Relevance and Perspective
The study is a proactive initiative, with a view to assess the preparedness of
the CRAs to communicate signals and reduce the informational asymmetries
that generally exist between issuers and investors. CRAs have been rating
instruments and subjecting them to periodic review, sometimes necessitating
a transition to a lower or higher grade. The timeliness of the transition is also
a matter of informational asymmetry.
Thus far, CRAs have obtained the approval of SEBI, giving them the status
of approved rating agencies. The RBI also has put regulations in place with
reference to credit rating agencies and credit information companies. There
are five Credit Rating Agencies registered with SEBI, viz. CRISIL, ICRA,
CARE, Fitch and Brickworks. Of this, CRISIL has been the oldest, having
been in operation since 1988 followed by ICRA (1991), CARE (1994), Duff &
Phelps, subsequently taken over by Fitch (1999) and Brickworks (2008).
This makes it an opportune time to assess the quality of services that the
CRAs have been rendering to the investing community in risk mitigation.
SEBI put in place the Regulations for CRAs in 1999 this has been followed
by a Code of Conduct for CRAs.
The desire for this study is truly proactive since its pre-dates the outbreak of
the sub-prime type of crisisof a scale and magnitude witnessed in USA and
Western Europe. In those countries, CRAs are facing the heat for the high
ratings for complex structures, laced with enhancements, through
guarantees, by entities that ultimately did not have sufficient risk capital. This
left several i