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A PROJECT ON

―COMPARATIVE STUDY OF CREDIT RATING PROCESS OF
CRISIL AND ICRA‖

SR NUMBER

CONTENT

PAGE NUMBER

1

Title of the Dissertation

1

2

Executive Summery

2

3

Introduction

4

4

Objectives Scope

5

5

Literature Review

7

6

Organization Profile

7

Theoretical Framework

8

DATA ANALYSIS

9

FINDINGS

10

SUGGESTION

11

COLCLUSION

12

BIBLIOGRAPHY

TITLE OF THE DISSERTATION

―COMPARATIVE STUDY OF CREDIT RATING PROCESS OF
CRISIL AND ICRA‖

EXECUTIVE SUMMARY

The project entitled “Credit Rating” gives you an insight to the most important concept in any
industry, be it service oriented or a manufacturing firm i
...
working capital
...
It measures the default probability of the borrower, and its ability to repay fully and
timely its financial debt obligations
...

Credit rating has proven itself to be effective instrument of risk assessment in countries with advanced
economy since it demonstrates transparency of an enterprise
...

In world practice, credit rating can be assigned to sovereign governments, regional and local executive
bodies, corporations, financial organizations and etc
...
Functions of Credit Rating are highlighted
...

This project has also covered the Rating Process, Rating Symbols for short term debentures n long term
bonds, Rating Methodology, of various rating agencies like CRISIL, ICRA, SMERA, ONICRA, CARE
and International Rating Agency
...
A credit
rating is generally established by a credit bureau and used by merchants, suppliers, and bankers
to determine whether a loan should be granted or credit extended
...
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 days to 30 years or more
...
"
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a
possibly unknown issuer with an informative and meaningful symbol of credit quality
...
The credit rating is thus a symbolic indicator of the current opinion
of the relative capability of the issuer to service its debt obligation in a timely fashion, with
specific reference to the instrument being rated
...


In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make
timely payments of principal and interest on a specific fixed income security
...
In addition, longterm rating incorporates an assessment of the expected monetary loss should a default occur
...
Credit
rating can be defined as an expression, through use of symbols, of the opinion about credit
quality of the issuer of security/instrument
...
It is concerned with an act of
assigning values by estimating worth or reputation of solvency, and honesty to repose trust in
a person's ability and intention to repay
...
Default
occurs whenever a security issuer is late in making one or more payments that it is legally
obligated to make
...
While many defaulted bonds ultimately
resume the payment of principal and interest, others never do, and the issuing company winds
up in bankruptcy proceedings
...
Thus, the investor who holds title to bankrupt bonds typically loses both
principal and interest
...
In fact, many investors accept the ratings assigned by credit agencies as a substitute
for their own investigation of a security's investment quality
...

3 Comparative study of credit rating process of CRISISL and ICRA

Review of literature

Pogue and Soldofsky (1969) tried to assess the importance of „Rater‟s Judgment‟ in the
determination of bond ratings as this judgment was based on much more information than
contained in readily available financial statistics by taking data set of industrial, utility and
railroad binds rated by Moody‟s from 1961 through 1966
...
The authors revealed that although
the rater‟s judgment (which is based on much more information than that contained in available
statistics) affected the bond ratings, yet the bond ratings could be better explained by the
available financial and operating statistics
...
She evaluated
the working of rating agencies in the light of experience of the rated companies and tried to
foresee the future prospects of credit rating in India
...
So, they should give
publicity to their operations
...
All the agencies should have a proper co-ordination
with one another and they should improve quality of their services
...
(1992) tried to evaluate the operations of CRISIL which include the methodology
of rating, rating process, rating symbols, etc
...
First of all, ratings were not frequently revised by the
agency as done in other countries
...
It was also
found that the agency was not engaged in rating of equity instruments, which form the major
share in public borrowing of the companies

Khan and Akbar (1993) studied the conceptual and methodological aspects of CRISIL rating as
well as the progress of its operations in India
...

They explained that methodology of CRISIL considers various factors including business
analysis, financial analysis, fundamental analysis, management evaluation, geographical
analysis, regulatory and competitive analysis
...

CRISIL should also periodically publish its revised ratings so that it could be of more help to the
investors
...
For this purpose,
the determinants of municipal bond ratings of the said agencies were studied
...
Further, they revealed that both the agencies not only attach different weights to
the specific determinants of ratings but they also had different ways of classification of bonds
...

Patnaik and Narayan (1993) explained the mechanism of credit rating in India and the
procedure adopted by credit rating agencies, viz
...
The
authors compared the rating procedure adopted by international rating agency Standard & Poor‟s
with that of CRISIL and ICRA, and explained that the approach adopted by ICRA and S&P was
the same as both gave more importance to historical rates and past performance whereas CRISIL
attached more importance to the market position, operating efficiency, professional management

and future projections of the organization
...
Further, these
agencies should work independently, and should give professional and impartial assessment of
instruments without any fear or favour

Gopal (1995) examined the practices and procedures followed by two Indian credit rating
agencies CRISIL and ICRA
...
He observed that the basic approach to rate certain instruments was similar for all the
rating agencies though they all used different terminology
...
He suggested that the rating agencies would have to
take unsolicited ratings and should publish their opinions in order to make their operations more
transparent and useful
...
The
paper explained the various factors being taken into consideration by rating agencies which
include past performance, profit turnover, cash flow and fund flow, nature of competition, etc
...
The paper also gave details of various Credit
Rating Agencies in India like CRISIL, ICRA, CARE, and ONICRA
...


Research Methodology
Description
A research method is a systematic plan for conducting research
...

Research Design:
Research design is framework of blueprint for conducting the dissertation
...
“A research
is the arrangement of condition for collections and analysis of data in a manner that aims to
combine relevance to the research purpose with economy is produced
...
The aim of research is to find out the truth that has been not been
discovered yet
...


Data Collection
Data collection is the process of gathering and measuring information on targeted variables
in an established system, which then enables one to answer relevant questions and evaluate
outcomes
...
Common sources of secondary data for social science include censuses, information
collected by government departments, organizational records and data that was originally
collected for other research purposes
...
Following the financial crisis of 1837,
Louis Tappan established the first mercantile credit agency in New York in 1841
...
Robert Dun subsequently
acquired it and its first rating guide was published in 1859
...
These two agencies were
merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's
Investors Service in 1962
...
John Moody (1868 - 1958) was a
self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs
of the investment community - as well as considerable journalistic talent
...
The manual
provided information and statistics on stocks and bonds of financial institutions, government
agencies, manufacturing, mining, utilities, and food companies
...
By 1903, circulation had exploded, and Moody‟s Manual was
known from coast to coast
...
Moody returned to the financial
market in 1909 with a new idea
...
His company would publish a book that analyzed the railroads and their
outstanding securities
...


He expressed his conclusions using letter-rating symbols adopted from the mercantile and
credit rating system that had been used by the credit-reporting firms since the late 1800s
...
In 1909,
Moody‟s Analyses of Railroad Investments described for readers the analytic principles that
Moody used to assess a railroad‟s operations, management, and finance
...
In 1913, he expanded his base of analyzed
companies, launching his evaluation of industrial companies and utilities
...
On July 1, 1914, Moody's
Investors Service was incorporated
...


Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing
Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch
Publishing Company in 1924
...
For almost 50 years, since the
setting up of Fitch Publishing in 1924, there were no major new entrants in the field of credit rating
and then in the 1970s, a number of credit rating agencies commenced operations all over the world
...
There are credit rating agencies in operation in many other countries such as
Malaysia, Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia
...
(CRISIL) was set up as the first rating
agency in 1987, followed by ICRA Ltd
...
(CARE) in 1994
...
Duff and Phelps has tied up with two Indian
NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996
...


Bond/Debenture Rating
Rating the debentures/ bonds issued by corporates, government etc
...


2
...


3
...


4
...
Commercial papers are issued
by manufacturing companies, finance companies, banks and financial institutions and rating of
these instruments is called commercial paper rating
...
Fixed Deposits Rating
Fixed deposits programmers are medium term unsecured borrowings
...


6
...


7
...


8
...
Structured obligation is generally asset-backed
security
...


9
...


BENEFITS OF CREDIT RATING`

For different classes of persons different benefits accrue from the use of rated instruments
...
Some of the benefits are:

Safeguards Against Bankruptcy

Credit rating of an instrument done by a credit rating agency gives an idea to the investors about the
degree of financial strength of the issuing company, which enables him to decide about the
investment
...


Recognition Of Risk

Credit rating provides investors with rating symbols that carry information in easily recognizable
manner for the benefit of investors to perceive the risk involved in the investment
...
The rating
symbol gives them the idea about the risk involved or the expected advantages from the investment
...
The rating agency is quite
independent of the issuer company and has no business connections or any relationship with it or its
Board of Directors, etc
...


Easy Understandability Of Investment Proposal

An investor needs no analytical knowledge on his part and can understand the rating symbol
...


Saving Of Resources

Investors rely upon credit rating
...
The
quality of credit rating done by professional experts of the credit rating agency repose confidence in
him to rely upon the rating for taking investment decisions
...
about the good investment proposal
...


Choice Of Investments

Several alternative credit rating instruments are available at a particular point of time for investing in
the capital market and the investors can make choice depending upon their own risk profile and
diversification plan
...
The credit rating agency downgrades the rating of any instrument
if subsequently the company's financial strength declines or any event takes place, which necessitates
consequent dissemination of information on its position to the investors
...


(B) BENEFITS OF RATING TO THE COMPANY

Company which had its credit instrument or security rated by a credit rating agency is benefited in
many ways as summarized below:

Lower Cost Of Borrowing

A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the
public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk
preference would come forward to invest in safe securities though yielding marginally lower rate of
return
...
Investors in different strata of the society could be attracted by
higher rated instrument, as the investors understand the degree of certainty about timely payment of
interest and principal on a debt instrument with better rating
...


Reduction of Cost in Public Issues

A company with higher rated instrument is able to attract the investors and with least efforts can raise
funds
...
Rating facilitates
best pricing and timing of issues
...
With better
image created though higher credit rating the company can mobilize funds from public and
instructions or banks from self-assessment of its own status, which is subject to self-discipline and
self-improvement, it can perceive and avoid sickness
...


(C) BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES

Rating is a useful tool for merchant bankers and other capital market intermediaries in the process of
planning, pricing, underwriting and placement of issues
...
The merchant bankers
are also using credit ratings for pre-packing of issues by way of securitisation/ structured obligations
...
This enables
brokers and other financial intermediaries to save time, energy, costs and manpower in convincing
their clients about investment in any particular instrument
...
In most cases, these issuers are companies, cities, non-profit organizations,
or national governments issuing debt-like securities that can be traded on a secondary market
...
(A company that issues credit scores for individual credit-worthiness is
generally called a credit bureau or consumer credit reporting agency
...
There exist more than 100 rating agencies worldwide
...
For investors, credit rating agencies increase the range of investment alternatives
and provide independent, easy-to-use measurements of relative credit risk; this generally
increases the efficiency of the market, lowering costs for both borrowers and lenders
...
It also
opens the capital markets to categories of borrower who might otherwise be shut out altogether:
small governments, startup companies, hospitals and universities
...


(2)Low Cost Information
A rating firm gathers, analyses, interprets and summarizes complex information in a simple and
readily understood formal manner
...
Investors have some idea as to what is the risk that he/she is likely to take, if
investment is done in that security
...


(5)Greater Credence to Financial and Other Representation
When a credit rating agency rates a security, its own reputation is at stake
...
As the issue complies with the demands of the
credit rating agency on a continuing basis, its financial and other representations acquire
greater credibility
...


CREDIT RATING IN INDIA
In the Indian context, the scope of credit rating is limited generally to debt, commercial
paper, fixed deposits, mutual funds and of late IPO‟s as well
...
In other words, credit quality is not general evaluation of
issuing organization, i
...
if debt of company XYZ is rated AAA and debt of company ABC is
rated BBB, then it does not mean firm XYZ is better than firm ABC
...
Rating, in a way, reflects the issuer's
strength and soundness of operations and management
...

Further, the rating will differ for different instruments to be issued by the same company,
within the same time span
...
Credit rating has been made mandatory for issuance of
the following instrument:
(1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of
debentures and bonds convertible/ redeemable beyond a period of 18 months need credit
rating
...


(3) As per the guidelines of Reserve Bank of India (RBI), Non-Banking Finance Companies
(NBFCs) having net owned funds of more than Rs
...
The minimum rating required by the NBFCs to be eligible to raise fixed
deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE
...
The three rating agencies have a common approach for such rating and the
dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk
and high risk

(5) There is a proposal for making the rating of fixed deposit programs of limited companies,
other than NBFCs also mandatory, by amendment of the companies Act 1956
...


Name of the CRA
CRISIL

Year of commencement
of Operations
1988

ICRA

1991

CARE

1993

Fitch India

1996

Brickworks

2008

CRISIL
Credit Rating Information Services of India Limited(CRISIL) has been promoted by Industrial
Credit and Investment Corporation of India Ltd
...
(UTI) as a public
limited company with its headquarters at Mumbai
...
It was the first rating agency to rate Commercial
Paper Program in 1989, debt instruments of financial institutions and banks in 1992 and asset-backed
securities in 1992
...
Its rating provides
a guide to the investors as to the risk of timely payment of interest and principal on a particular debt
instrument
...

CRISIL provides rating and risk assessment services to manufacturing companies, banks, non-banking
financial companies, and financial institutions, housing finance companies, municipal bodies and
companies in the infrastructure sector
...
As part of bank loan ratings, CRISIL also rates credit
facilities extended to borrowers by banks
...
CRISIL also assigns financial strength ratings to

insurance

companies
...
CRISIL has pioneered the rating of subsidiaries and joint ventures of
multinationals in India and has rated several multinational entities, both start-up entities as well as
players with a well-established track record in India
...
The rating agency has also developed a
methodology for credit enhancement of corporate borrowing programs through the use of partial
guarantees
...


CRISIL's Rating Process
CRISIL'S Ratings Processes in as Given Below:
1) Request of the Company
2) Assignment to Analytical Team
3) Obtaining and Processing Of Data
4) Findings Presentation
5) Communication of Decision
6) Monitoring Of Change of Rating

CRISIL'S Rating Methodology
CRISIL analyses five factors while assessing the instrument
...
Business Analysis
All the relevant information concerning the business is covered under the following subheads
...
Industry strength is evaluated within the economy considering
factors like inflation, energy requirements and availability, international competitive situation
and socio-political scenario; demand projection growth stages and maturity of markets; cost
structure of industry in domestic and international scenario; or, the government policies
toward industry
...

Market Position of the Company within the Industry
Market position of the company within the industry is evaluated form different angles, i
...
„
market share and stability of market share; competitive advantage through marketing and
distribution strength and weakness; marketing/support service infrastructure; diversity of
products and customers base; research and development and its linkage to product
obsolescence; quality important programme; as finally, the long term sales contract, strong
marketing position of the company within the industry attracts better grade rating
...
For
instance, the pricing or cost advantage; availability, cost, quality of raw material; availability
of labor and labor relations; integration of manufacturing operations and cost effectiveness of
plant and equipment; level of capital employed and productivity; energy cost; or finally, the
compliance to pollution control requirement on taken into consideration
...
Thus, business covers all relevant aspects as
related to business operations of the client company to assess the creditworthiness of the
company
...
Financial Analysis
Under financial analysis, all relevant aspects connected with the business and financial
position of the company is assessed in the following four important segments
...

Secondly, the Earning Potential return to long term earning potential under varying conditions
is assessed
...

Thirdly, the adequacy of the Cash Flows is appraised in relation to debt and fixed and
working capital requirements of the company
...
Fourthly, the Financial Flexibility is assessed
through financial plans in times of stress and their reliability; ability to attract capital; capital
spending flexibility; asset redeployment potential; or the debt service schedule
...
Management Evaluation
The track record of management is evaluated by observing:
 the goals and philosophies;
 strategies and ability to overcome adverse situations;
 judgment of management performance based on past operating and financial results;
 planning and control systems;
 conservatism or aggressiveness with reference to financial risk;
 depths of managerial, talents and succession plans;

 shareholding pattern and constitution/ of Board of Directors;
 relationship with shareholders;
 or mergers and acquisition considerations
...
Regulatory And Competitive Environment
CRISIL evaluates structure and regulatory framework of the financial system in which it
works
...

5
...
Liquidity management includes aspects on capital structure,
matching of assets and liabilities; or policy on liquid asset in relation to financing
commitments and maturing deposits
...
Profitability and Financial Position
includes aspects on historic profits, spreads on fund deployment, revenues on non-fund-based
services, and accretion to reserves
...

Factors listed above at serial number 1, 2, 3, are evaluated for manufacturing companies but
for finance companies, emphasis is laid in addition to above factors at serial number 4 and 5
...
Any adverse changes in circumstances are most unlikely to
affect the payments on the instrument
AA
(Double A) High Safety
Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely
payment of financial obligations
...

A
Adequate Safety
Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely
payment of financial obligations
...

BB
(Double B) Inadequate Safety
Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of
financial obligations; they are less likely to default in the immediate future than other speculative

grade instruments, but an adverse change in circumstances could lead to inadequate capacity to
make payment on financial obligations
...

C
Substantial Risk
Instruments rated 'C' are judged to have factors present that make them vulnerable to default;
timely payment of financial obligations is possible only if favorable circumstances continue
...
Such
instruments are extremely speculative and returns from these instruments may be realized only
on reorganization or liquidation
...
M' have factors present in them, which render the rating outstanding
meaningless
...


RATING SYMBOL FOR SHORT TERM INSTRUMENT

P-1 This rating indicates that the degree of safety regarding timely payment on the instrument is
very strong
...

P-3 - This rating indicates that the degree of safety regarding timely payment on the instrument is
adequate; however, the instrument is more vulnerable to the adverse effects of changing
circumstances than an instrument rated in the two higher categories
...

P-5 - This rating indicates that the instrument is expected to be in default on maturity or is in
default
...
M' have factors present in them, which render the rating outstanding
meaningless
...


ICRA
ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an
independent and professional company
...
ICRA‟s major shareholders include Moody's Investors Service
and leading Indian financial institutions and banks
...
In addition to being a leading credit rating agency
with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services
for the corporate and financial sectors, both in India and overseas, and currently offers its
services under the following banners:
ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an
independent and professional company
...
ICRA‟s major shareholders include Moody's Investors Service
and leading Indian financial institutions and banks
...
In addition to being a leading credit rating agency with
expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for
the corporate and financial sectors, both in India and overseas, and currently offers its services
under the following banners:
Rating Services Information, Grading and Research Services Advisory Services Economic
Research Outsourcing

ICRA'S Rating Process
Rating Process
Rating is an interactive process with a prospective approach
...
The
main points are described as below:

1) Rating Request
2) Rating Team
3) Information Requirements
4) Secondary Information
5) Management Meetings and Plant Visits
6) Preview Meeting
7) Rating Committee Meeting
8) Rating Communication
9) Rating Reviews
10) Surveillance

Rating Scale of ICRA
Long Term — Including Debentures Bonds, Preference Shares
LAAA: Highest Safety:
It indicates fundamentally strong position
...
There may be
circumstances adversely affecting the degree of safety but such circumstances, as may
visualized, are not likely to affect the timely payment of principal and interest as per times
...
The protective factors are strong and the
prospect of timely payment of principal and interest as per terms and interest under adverse
circumstances, as may be visualized, differs from LAAA only marginally
...
The protective
factors any adverse change in circumstances, as may be visualized, may alter the fundamental
strength and effect the timely payment of principal and interest as per terms
...
The protective factors are below average
...

LBB+, LBB, LBB-Inadequate Safety:
The timely payment of interest and principal are more likely to be affected by present or
prospective changes in business/economic circumstances
...


LBB+, LB, LB- Risk Prone:
Risk factors indicate that obligation may not be met when due
...


Adverse

changes

in

economic/business

conditions

could

result

in

inability/unwillingness to service debts on time as per terms
...

LD Default
...
Recovery is likely only on liquidation or reorganization
...

MAA+, MAA, MAA- High Safety
The prospect of timely servicing of interest and principal as per terms is high, but not as high
as in MAAA rating
...
However, debt servicing
may be affected by adverse changes in the business/economic conditions
...


Mc+, Mc, Mc- Risk Prone
Susceptibility to default high
...

Md Default
Either already in default or expected to default
...


A2+, A1 High Safety
The relative safety is marginally lower than A1

A3+, A3 Adequate Safety
The prospect of timely payment of interest and installment is adequate, but any adverse changes in
business/economic conditions may affect the fundamental strength

A4+, A4 Risk Prone
The degree of safety is low
...

A5 Default
Either already in default or expected to default
...


Short-Term Ratings
ICRA assigns short-term ratings with symbols from A1 through to A5 to debt instruments with original
maturity up to one year
...
A suffix of “+” may be attached to the rating symbols of A1 through to
A4 to indicate the relative position of the issuer within the rating category
...

ICRA assigns short-term ratings to instruments such as commercial paper, certificates of deposit, shortterm debentures, and other money market related instruments maturing within one year from the date of
issuance
...

Besides the fact that short-term instruments like commercial paper are usually on-going programs, thus
warranting a longer-term rating view, in ICRA‟s opinion, refinancing risk or an issuer‟s access to other
sources of funding, is also largely influenced by the issuer‟s longer-term credit profile
...
The following table presents a broad guidance to the linkage between
ICRA‟s short-term and long-term ratings
...
is recognized as the pioneers of the
concept of individual Credit rating in India
...
OneCare provides a platform to credit seekers and granters build long lasting
relationship
...
So, a
mandatory check is done to assess the credentials of the individual in question before extending a
loan or advance
...
We have an
in-house developed credit rating module which is customized to suit various customer
requirements
...
This evaluation helps our clients understand the value their
associates bring to their business relationships
...


SSI/SME Rating

We help Small Scale Industries that are looking for loans and financial assistance to get assessed
on their credit worthiness, financial viability and performance
...


CARE
Credit Analysis & Research Ltd
...
In all CARE has 14 shareholders
...
CARE's ratings are
recognized by the Government of India and all regulatory authorities including the Reserve Bank
of India (RBI), and the Securities and Exchange Board of India (SEBI)
...

The rating coverage has extended beyond industrial companies, to include public utilities,
financial institutions, infrastructure projects, special purpose vehicles, state governments and
municipal bodies
...
CARE is well equipped to
rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures and
Structured Obligations
...
CARE was retained by
the Disinvestment Commission, Government of India, for assistance in equity valuation of a
number of state owned companies and for suggesting divestment strategies for these companies
...
Client has the option not to accept the final rating in which case CARE will
not publish the rating or monitor it; and, finally,
(viii) If the rating is accepted by the client, CARE gives it for notification and a periodic
surveillance is undertaken by CARE
...
Long-Term And Medium Term Instrument
CARE AAA (FD)/(CD)/(SO)
Instruments carrying this rating are considered to be of the best quality, carrying negligible
investment risk
...

While the underlying assumptions may change, such changes as can be visualized are most
unlikely to impair the strong position of such instruments
...
They are
also classified as high investment grade
...
Changes in assumptions may have a
greater impact on the long-term risks may be somewhat larger
...

CARE A (FD)/(CD)/(SO)
Instruments with this rating are considered upper medium grade instruments and have many
favourable investment attributes
...

Assumptions that do

not materialize may have a greater impact as compared to the

instruments rated higher
...
They indicate sufficient safety for
payment of interest and principal, at the time of rating
...

CARE BB (FD)/(CD)/(SO)
Such instruments are considered to be speculative, with inadequate protection for interest and
principal payments
...
While interest and
principal payments are being met, adverse changes in business conditions are likely to lead to
default
...

CARE D (FD)/(CD)/(SO)
Such instruments are of the lowest category
...


B
...
These include:
CP - Commercial Paper and ICD - Inter-Corporate Deposits
PR-1
Instruments would have superior capacity for repayment of short-term promissory obligation
...

PR-2
Instruments would have strong capacity for repayment of short-term promissory obligations
...

PR-3
Instruments have an adequate capacity for repayment of short-term promissory obligations
...

Variability in earning and profitability may result in change in the level of debt protection
...

PR-5
The instrument is in default or is likely to be in default on maturity
...
sidbi
...
dnb
...
in/),

Credit

Information

Bureau

(India)

Limited

(CIBIL)

(http://www
...
com/) and several leading banks in the country
...

SMERA's primary objective is to provide ratings that are comprehensive, transparent and
reliable
...


Rating Process Simplified 

Based on receipt of application form, applicable rating fees and documents from the
SME, SMERA will begin its process of evaluation
...




A SMERA correspondent will contact the SME to collect a duly filled questionnaire to
facilitate the rating process
...




SMERA shall complete the evaluation exercise and provide SMERA rating within 15
business days of receipt of all documents from the SME
...
These security ratings are
reported in Moody's Bond Record, which is published monthly
...

Moody's Corporate Bond Ratings
The credit ratings assigned by Moody's to corporate bonds are listed below with the
definitions of each rating category:
AAA
Bonds, which are rated AAA, are judged to be of the best quality
...
Interest payments are
protected by a large or by an exceptionally stable margin and principal is secure
...

AA
Bonds, which are rated AA, are judged to be of high quality by all standards
...
They are rated

lower than the best bonds because margins of protection may not be as large as in AAA
securities or fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger than in AAA
securities
...
Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future
...
e
...
Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time
...

BA
Bonds, which are rated BB, are judged to have speculative elements; their future cannot be
considered as well assured
...

Uncertainty of position characterizes bonds in this class
...
Assurance
of interest and principal payments or of maintenance of other terms of the contract over any
long period of time may be small
...
Such issues may be in default and there
may be present elements of danger with respect to principal or interest
...
Such
issues are often in default or have other marked shortcomings
...


Moody's Commercial Paper Ratings
Promissory notes sold in the open market by large corporations and having an original
maturity of nine months or less are known as commercial paper
...
For these short-term issues Moody's uses the
rating symbol MIG, meaning Moody's Investment Grade
...
The rating categories are as follows:
MIG I
Loans bearing this designation are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and broad-based access
to the market for refinancing, or both
...

MIG3
Loans bearing this designation are of favorable quality, with all security elements
accounted for but lacking the undeniable strength of the preceding grades
...

MIG4
Loans bearing this designation are of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not distinctly or
predominantly

International Scale Ratings

International foreign currency ratings effectively benchmark credit quality off US
Government risk, and measure the ability of an organization to service foreign currency
obligations
...
Exceptions can arise in the case of structured finance
transactions (if there is an opportunity to pierce the sovereign cap, e
...
by trapping foreign
currency offshore)
...
Such ratings are designed to give an indication of
the relative risks only within a specific country and are not comparable across different countries
...

The rating methodologies and rating scales utilized in the accordance of both types of
ratings are very similar, but the key difference is that one scale measures the probability of
default on FOREIGN CURRENCY obligations (taking into account all sovereign risk and
currency conversion considerations), while the other measures the probability of default on
LOCAL CURRENCY obligations
...


Short Term Debt Rating Scale:
GCR's Rating Symbols and Definitions Summary
A short term debt rating rates an organisation's general unsecured creditworthiness over the short
term (i
...
over a 12 month period)
...


High Grade

Highest certainty of timely payment
...


A1

A1-

Very high certainty of timely payment
...
Risk factors are minor
...
Liquidity factors are strong and supported by good
fundamental protection factors
...


Good Grade

Good certainty of timely payment
...
Although
A2

ongoing funding needs may enlarge total financing requirements, access to capital markets is good
...


Satisfactory Grade

A3

Satisfactory liquidity and other protection factors qualify issues as to investment grade
...


Non-Investment Grade

B

Speculative investment characteristics
...
Operating factors and market access may be subject to a high degree of variation
...


Long Term Debt Rating Scale:
GCR's Rating Symbols and Definitions Summary
A long term debt rating rates the probability of default on specific long term debt instruments
over the life of the issue
...
g
...


Investment Grade

AAA

Highest credit quality
...


AA+ Very high credit quality
...
Adverse changes in business,
AA

economic or financial conditions would increase investment risk although not

AA-

significantly
...
Protection factors are good
...


A-

BBB+

Adequate protection factors and considered sufficient for prudent investment
...


BBB-

Non - Investment Grade

BB+

Below investment grade but capacity for timely repayment exists
...


BB-

Overall quality may move up or down frequently within this category
...


B

Financial protection factors will fluctuate widely according to economic cycles, industry

B-

conditions and/or company fortunes
...
Considerable uncertainty exists as to timely payment of
principal or interest
...


DD

Defaulted debt obligations
...


GCR's Rating Symbols and Definitions Summary
Such ratings are exclusively accorded to insurance/reinsurance companies and rate the
probability of timeously honoring policyholder obligations over the medium term (i
...
over the
next 2 to 3 years)

AAA

Highest claims paying ability
...


AA+ Very high claims paying ability
...
Risk is modest, but may
AA

vary slightly over time due to economic and/or underwriting conditions
...
Protection factors are above average although there is an expectation

A

of variability in risk over time due to economic and/or underwriting conditions
...
Protection factors are adequate although there is considerable

BBB

variability in risk over time due to economic and/or underwriting conditions
...
The ability of these organisations to discharge obligations is

BB

considered moderate and thereby not well safeguarded in the event of adverse future changes in

BB-

economic and/or underwriting conditions
...
Judged to be speculative to a high degree
...


DISADVANTAGE OF RATING SYSTEMS
Biased Rating and Misrepresentations
In the absence of quality rating, credit rating is a curse for the capital market industry,
carrying out detailed analysis of the company, should have no links with the company or the
persons interested in the company so that their reports impartial and judicious
recommendations for rating committee
...
In such cases, the investor
cannot get information about the riskiness of instrument and hence is at loss
...
Prediction of the company's health through rating is momentary and anything
can happen after assignment of rating symbols to the company
...
Many
changes take place in economic environment, political situation, government policy
framework, which directly affect the working of a company
...
In such cases, quality of rating suffers and renders the rating
unreliable
...

Independent views should be formed by the public using the rating symbol
...


Reflection of Temporary Adverse Conditions
Time factor affects rating
...
For
example, company in a particular industry might be temporarily in adverse condition but it is
given a low rating
...

Difference In Rating Of Two Agencies
Rating done by the two different credit rating agencies for the same instrument of the
same issuer company in many cases would not be identical
...

Conservative Rating
Default by an investment-grade firm is seen as the most costly error for the agency
...
The downgrades
may look self-fulfilling, but in fact, investors rationally ignore them, as they actually convey
no information about the relative quality of firms

DATA ANALYSIS –
CRISIL

CRISIL pioneered credit rating in India in 1987, and emerged a leader with independent,
analytical rigor and innovation
...
We‟ve
not only set business standards but also instituted several innovations with best practices
...

Issuers and borrowers leverage our ratings for enhancing their access to funding, widening range
of funding alternatives, and optimizing cost of funds
...
CRISIL‟s ratings act as benchmarks for pricing and trading of debt instruments for
markets at large
...
CRISIL‟s analysis of each credit is carried out by a multi-member
rating team
...
It is conducted within the framework of clearly
delineated rating criteria
...
The rating committee
approach entails credit assessment of an entity by a group of experienced professionals, thereby
ensuring objectivity of the rating
...
Thereafter, the rating agreement is signed
and the fees are collected from the issuer
...
When this process is completed, an analytical team is assigned the responsibility of analyzing the
issuer‟s credit risk profile
...
This enables CRISIL to incorporate non-public information into its rating
decision and also helps it arrive at forward-looking ratings
...
Discussions during
management interactions are wide-ranging, covering competitive position, strategy, financial
policy, historical performance, and near and long-term financial and business prospects
...
CRISIL‟s ratings are not based solely on financial
projections made by the issuer or the management‟s outlook
...


Rating committee and assignment of ratings
After the interaction with the issuer‟s management, CRISIL‟s analysts prepare a report detailing
their assessment of business risk, financial risk, and management risks associated with the issuer
...
The report is then presented to the rating committee
...
The rating committee comprises
experienced professionals who bring with them extensive experience in credit assessment
...
The Rating Committee Meeting (RCM) process ensures objectivity of the rating, as the
decision results from the collective thinking of a group of experienced professionals
...
If CRISIL and the issuer have
any common directors, such directors do not participate in the RCM or rating process
...


Communicating the rating to the issuer
On finalisation of a rating at the RCM, the rating decision is communicated to the issuer
...
This is to assist the issuer in understanding the key analytical factors that
have been assessed for arriving at the rating decision
...
If, on the other hand, the issuer disagrees
with the rating decision, it can appeal for a fresh look at the rating assigned
...
Such information must be material to the appeal, and should
ideally address areas that have been highlighted as factors constraining the rating in the rating

rationale
...
It may or may not
change the rating, depending on the facts of the case
...

Recently, SEBI1 has mandated CRAs to publish such unaccepted credit ratings on their website
...
Rating information is also updated online on www
...
com, the CRISIL website, in the
form of a rating rationale, which provides information about the company, rated instrument,
assigned rating and outlook, rationale for assigning the rating, applicable criteria, etc
...
crisilratings
...
The publication of the CRR ensures transparency in CRISIL‟s
ratings methodologies and assumptions and also enables investors to understand how CRISIL
arrives at a rating
...


Timeframe
From the initial management meeting to the assignment of rating, the rating process can take up
to four weeks, but CRISIL sometimes arrives at rating decisions in shorter timeframes to meet
urgent requirements
...
After a rating has been assigned, CRISIL
continues to monitor2 the performance of the issuer and the economic environment in which it
operates
...
CRISIL‟s analysts maintain
periodic contact with the issuer and ensure that financial and other information are shared with
CRISIL regularly
...
These interactions essentially focus on developments over the period since the last
interaction, and the outlook for the coming year
...
CRISIL‟s policy for withdrawal of ratings stipulates that ratings on
securities/facilities that have scheduled repayment dates (such as bonds, or term loans), may be
withdrawn only on redemption/maturity of the rated facilities
...
In such instances, CRISIL relies on independent confirmation from the
banks or auditors or any other independent sources on whether the obligations have been repaid
in full
...
CRISIL‟s withdrawal policy is
in line with the recent SEBI circular titled „Enhanced Standards for Credit Rating Agencies
(CRAs)‟ that is applicable for all Credit Rating Agencies
...
However, in rare cases, the monitoring of
rated entity might become difficult because of the entity‟s non-cooperation
...
CRISIL rates the non-cooperative issuer on the
basis of best available information till the lifetime of the instrument
...
In such
cases, the rating symbol will be accompanied by „Issuer did not cooperate; based on best
available information‟
...


Confidentiality
A substantial portion of the information shared by the company is highly sensitive, and is
provided by the issuer only for the purpose of arriving at the rating
...
CRISIL doesn‟t disseminate confidential information about entities it rates
...
All CRISIL employees are required to sign a
confidentiality agreement
...
For further details on CRISIL‟s confidentiality policy,
please refer to the section under highlighted policies on the website
...
A credit rating

agency constantly monitors all ratings with reference to new political, economic and financial
developments and industry trends
...

1
...
An agreement is entered into between the rating agency and the issuer company
...
It requires the CRA (Credit Rating Agency) to keep the information confidential
...
It gives right to the issuer company to accept or not to accept the rating
...
It requires the
issuer company to provide all material information to the CRA for rating and subsequent
surveillance
...
Assignment to analytical team:
On receipt of the above request, the CRA assigns the job to an analytical team
...

3
...

The analytical team obtains the requisite information from the client company
...
These requirements are derived from the experience of the issuers business and
broadly confirms to all the aspects which have a bearing on the rating
...

4
...
Plants visits facilitate understanding of
the production process, assess the state of equipment and main facilities, evaluate the quality
of technical personnel and form an opinion on the key variables that influence level, quality
and cost of production
...
The topics discussed during the management meeting are
wide ranging including competitive position, strategies, financial policies, historical
performance, risk profile and strategies in addition to reviewing financial data
...
Presentation of findings:
After completing the analysis, the findings are discussed at length in the Internal
Committee, comprising senior analysts of the credit rating agency
...
An opinion on the rating is also formed
...


6
...
The rating committee meeting is the
only aspect of the process in which the issuer does not participate directly
...

7
...
The ratings which are not accepted are either rejected or
reviewed in the light of additional facts provided by the issuer
...

8
...

9
...
The CRA constantly monitors all ratings
with reference to new political, economic and financial developments and industry trends
...
Any
changes in the rating are made public through published reports by CRAs
...

The rating methodology involves an analysis of all the factors affecting the creditworthiness of
an issuer company e
...
business, financial and industry characteristics, operational efficiency,
management quality, competitive position of the issuer and commitment to new projects etc
...
The company‟s ability to service the debt obligations over the
tenure of the instrument being rated is also evaluated
...

While assessing the instrument, the following are the main factors that are analysed into detail
by the credit rating agencies
...
Business Risk Analysis
2
...
Management Evaluation
4
...
Regulatory and Competitive Environment
6
...


India‟s second credit rating agency
(Investment Information and Credit
Rating
Agency)
...


India‟s second credit rating agency
(Investment Information and Credit
Rating
Agency)
...


Services
offered by

-

Instruments
and Products
Rated by the
credit rating
agencies

Credit rating services
Advisory services
Credibility first rating and
evaluation services
Training services
...

2) Credit rating process will guide investor to take proper decision while investing
...


CONCLUSION
The outlook for the credit rating industry is positive
...
There are number of areas where
rating agencies will have to cover new ground in the coming future
...
The importance of credit rating is being increasingly
recognized in the Euro-markets
...
Credit rating companies
inspires trust and confidence across industry for upholding values that serve as tenets across the
Group Companies
...
Agencies are adopting large extent the rating methodologies which
adopted by western counterparts
...
crisil
...
stretcher
...
careratings
...
onicra
...
care
...
careratings
...
in



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