1. INTRODUCTION OF CRA
India was perhaps the first amongst developing countries to set up a credit rating agency in
1988. The function of credit rating was institutionalized when RBI made it mandatory for the
issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating
compulsory for certain categories of debentures and debt instruments. In June 1994, RBI
made it mandatory for Non-Banking Financial Companies (NBFCs) to be rated. Credit rating
is optional for Public Sector Undertakings (PSUs) bonds and privately placed non-
conve11ible debentures upto Rs. 50 million. Fixed deposits of manufacturing companies also
come under the purview of optional credit rating. Securities. Credit Rating is valuable
information, widely used measure for the riskiness of the companies and bonds. It is
expensive information; costly to obtain. Credit Rating prediction is important for investors to
estimate riskiness of unrated companies and for companies to monitor the companies’ credit
rating, predict the future rating.
With the increasing market orientation of the Indian economy, investors value a systematic
assessment of two types of risks, namely “business risk” arising out of the “open economy”
and linkages between money, capital and foreign exchange markets and “payments risk”.
With a view to protect small investors, who are the main target for unlisted corporate debt in
the form of fixed deposits with companies, credit rating has been made mandatory.
The first mercantile credit agency was set up in New York in 1841 to rate the ability of
merchants to pay their financia Obligatons. Later on, it was taken over by Robert Dun. This
agency published its first rating guide in 1859. The second agency was established by Jon
Bradstreet in 1849 which was later merged with first agency to form Dun & Bradstreet in
1933, which became the owner of Moody’s Investor’s Service in1962. The history of
Moody’s can be traced back about a 100years ago. In 1900, John Moody laid stone of
Moody’s Investors Service and published his ‘Manual of Railroad Securities’.
Early 1920’s saw the expansion of credit rating industry when the Poor’s Publishing
Company published its first rating guide in 1916. Subsequently Fitch Publishing Company
and Standard Statistics Company were set up in 1924 and 1922 respectively. Poor and
Standard merged together in 1941 to form Standard and Poor’s which was subsequently
taken over by McGraw Hill in 1966. Between 1924 and 1970, no major new rating agencies
were set up. But since 1970’s, a number of credit rating agencies have been set up all over
the world including countries like Malaysia, Thailand, Korea, Australia, Pakistan and
Philippines etc. In India, CRISIL (Credit Rating and Information Services of India Ltd.) was
setup in 1987 as the first rating agency
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An independent company that evaluates the financial condition of issuers of debt
instruments and then assigns a rating that reflects its assessment of the issuer's ability to
make the debt payments. Potential investors, customers, employees and business partners
rely upon the data and objective analysis of credit rating agencies in determining the overall
strength and stability of a company.
2. WHAT IS A CREDIT RATING?
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A credit rating assesses the credit worthiness of an individual, corporation, or even a
Credit ratings are calculated from financial history and current assets and liabilities.
A credit rating tells a lender or investor the probability of the subject being able to
pay back a loan.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to
high interest rates.
Credit is important since individuals and corporations with poor credit will have
difficulty finding financing ,and will more likely have to pay more due to risk
The ratings are expressed in code numbers which can be easily comprehended by lay
Credit rating, as exists in India, is done for a specific security and for the company as
A credit rating does not create fiduciary relationship between the agency & the users.
CRA play a key role in the infrastructure of the modern financial system.
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& lenders.
This in turn increases the total supply of risk capital in the economy, leading to stronger
growth. It also opens the capital markets to categories of borrower who might otherwise
beshut out altogether: small governments, start up companies ,hospitals, and universities
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3. WHAT IS AND HOW CREDIT RATING IS
A credit rating assesses the credit worthiness of an individual, corporation, or even a country.
Credit ratings are calculated from financial history and current assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of the subject being able to
pay back a loan. However, in recent years, credit ratings have also been used to adjust
insurance premiums, determine employment eligibility, and establish the amount of a utility
or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high
interest rates or the refusal of a loan by the creditor.
In countries such as the United States, an individual's credit history is compiled and
maintained by companies called credit bureaus. In the United States, credit worthiness is
usually determined through a statistical analysis of the available credit data. A common form
of this analysis is a 3-digit credit score provided by independent financial service companies
such as the FICO credit score.
The factors which may influence a person's credit rating are:
ability to pay a loan interest
amount of credit used saving patterns
4. IMPORTANCES OF CREDIT RATING AGENCIES
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Credit Rating Agencies are the main authority to assign rate of credit for the companies who
issue debt. Any investor can measure the risk of bad debt after analysis these credit rates.
These credit rates are fixed on the basis of ability to pay back the loan.
Credit Rating Agencies are also helpful to rebuild the investor confidence which is vital to
the global capital markets.
In capital market, its importance is not less than SEBI because credit rating agencies protect
different investors from risk of financial loss by providing them upto date information of
credit rate. Many other key roles can be explain with following way:
To compare the loan on the basis of quality of credit and loan. Suppose X, Y and Z
are three companies offering debentures to investors. Credit rating agencies will
assign their credit rate because these are financial expert and assign rate on the basis
of analysis of past financial records and statements. Credit rating agency will assign
rate AAA to best of X, Y and Z and to invest AAA -credit rating company means low
risk of loss.
Not only show AAA but it show other range of credit rate like A for medium risky
company, BBB medium risky and BB high risky and speculative company.
Credit rating agencies also assist to portfolio monitoring. In portfolio monitoring,
they provide information about which investment is most secure and provide high
return of interest.
Credit quality of transparency.
Credit rating of money market securities.
5. MERITS AND DEMERITS OF CREDIT RATING
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Benefits of Credit Rating to Investors
Helps in Investment Decision :
Credit rating gives an idea to the investors about the credibility of the issuer
company, and the risk factor attached to a particular instrument. So the investors can
decide whether to invest in such companies or not. Higher the rating, the more will be the
willingness to invest in these instruments and vice-versa.
Benefits of Rating Reviews
The rating agency regularly reviews the rating given to a particular instrument. So,
the present investors can decide whether to keep the instrument or to sell it. For e.g. if the
instrument is downgraded, then the investor may decide to sell it and if the rating is
maintained or upgraded, he may decide to keep the instrument until the next rating or
Assurance of Safety
High credit rating gives assurance to the investors about the safety of the instrument
and minimum risk of bankruptcy. The companies which get a high rating for their
instruments, will try to maintain healthy financial discipline. This will protect them from
bankruptcy. So the investors will be safe.
Easy Understandability of Investment Proposal
The rating agencies gives rating symbols to the instrument, which can be easily
understood by investors. This helps them to understand the investment proposal of an
issuer company. For e.g. AAA (Triple A), given by CRISIL for debentures ensures
highest safety, whereas debentures rated D are in default or expect to default on maturity.
Choice of Instruments
Credit rating enables an investor to select a particular instrument from many
alternatives available. This choice depends upon the safety or risk of the instrument.
Saves Investor's Time and Effort
Credit ratings enable an investor to his save time and effort in analyzing the financial
strength of an issuer company. This is because the investor can depend on the rating done
by professional rating agency, in order to take an investment decision. He need not waste
his time and effort to collect and analyse the financial information about the credit
standing of the issuer company.
Benefits of Credit Rating to Company
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Improves Corporate Image :
Credit rating helps to improve the corporate image of a company. High credit
rating creates confidence and trust in the minds of the investors about the company.
Therefore, the company enjoys a good corporate image in the market.
Lowers Cost of Borrowing
Companies that have high credit rating for their debt instruments will get
funds at lower costs from the market. High rating will enable the company to offer
low interest rates on fixed deposits, debentures and other debt securities. The
investors will accept low interest rates because they prefer low risk instruments. A
company with high rating for its instruments can reduce the cost of public issue to
raise funds, because it need not spend heavily on advertising for attracting investors.
Wider Audience for Borrowing
A company with high rating for its instruments can get a wider audience for
borrowing. It can approach financial institutions, banks, investing companies. This is
because the credit ratings are easily understood not only by the financial institutions
and banks, but also by the general public.
Good for Non-Popular Companies
Credit rating is beneficial to the non-popular companies, such as closely-held
companies. If the credit rating is good, the public will invest in these companies, even
if they do not know these companies.
Act as a Marketing Tool :
Credit rating not only helps to develop a good image of the company among
the investors, but also among the customers, dealers, suppliers, etc. High credit rating
can act as a marketing tool to develop confidence in the minds of customers, dealer,
Helps in Growth and Expansion
Credit rating enables a company to grow and expand. This is because better credit
rating will enable a company to get finance easily for growth and expansion.
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Demerits of Credit Rating
Possibility of Bias Exist
The information collected by the rating agency may be subject to personal bias of the
rating team. However, rating agencies try their best to provide an unbiased opinion of the
credit quality of the company and/or instrument. If not, they will not be trusted.
Improper Disclosure May Happen :
The company being rated may not disclose certain material facts to the investigating
team of the rating agency. This can affect the quality of credit rating.
Impact of Changing Environment
Rating is done based on present and past data of the company. So, it will be difficult
to predict the future financial position of the company. Many changes take place due to
changes in economic, political, social, technological, legal and other environments. All
this will affect the working of the company being rated. Therefore, rating is not a
guarantee for financial soundness of the company.
Problems for New Companies
There may be problems for new companies to collect funds from the market. This is
because, a new company may not be in a position to prove its financial soundness.
Therefore, it may receive lower credit ratings. This will make it difficult to collect funds
from the market.
Downgrading by Rating Agency
The credit-rating agencies periodically review the ratings given to a particular
instrument. If the performance of a company is not as expected, then the rating agency
will downgrade the instrument. This will affect the image of the company.
Difference in Rating :
There are cases, where different ratings are provided by various rating agencies for
the same instrument. These differences may be due to many reasons. This will create
confusion in the minds of the investor.
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6. CREDIT RATING PROCESS
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The rating process begins with the receipt of formal request from a company desirous of
having its issue obligations rated by credit rating agency. A credit rating agency constantly
monitors all ratings with reference to new political, economic and financial developments
and industry trends. The process/procedure followed by all the major credit rating agencies in
the country is almost similar and usually comprises of the following steps.
1. Rating Request
The rating process begins, with the receipt of formal request for rating from a
company desirous of having its issue obligations under proposed instrument rated by
credit rating agencies. An agreement is entered into between the rating agency and the
issuer company. The agreement spells out the terms of the rating assignment and covers
the following aspects:
• It requires the CRA (Credit Rating Agency) to keep the information
• 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.
2. Data gathering/Analysis
To get all the information necessary for analysis, ‘Credit-Rating’ agency
sends a client the letter with information requirements: a list of all the information
and documents necessary for credit rating analysis. ‘Credit-Rating’ guarantees that
your confidential information will be kept safe.
3. Management Meetings
Meetings and consultations with client company managers and officials are
very important in the process of credit rating assignment. As a rule, we need two or
three meetings. In the first meeting analysts would ask questions about financial plans
and further development prospects. This information helps us to remain objective in
assessment of client’s financial position for the long-term period.
4. Rating committee/Assignment of Rating
Rating team of the agnecy examines all the data, information and documents.
It also considers all the points presented by the client. The team then recommends the
5. Advice to the Company/ institution:
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The Company/ institution are informed about the rating proposed by the rating
If the Company/ institution feel that the rating can be improved and has
adequate reason for it, it can appeal so to the agency. Such appeal should be
substantiated with proper reasoning and justification. On appeal the agency may or
may not revise the rating.
Decision about rating publication is taken by a client individually. Client may
decide not to publish assigned rating. Even if rating is not published the procedure of
credit rating assignment remains useful as conclusions of agency analysts written in
the rating report may help to determine factors influencing client’s credibility. Their
improvement in the future may lead to credit rating upgrade. Agency may not submit
publication of upgrades/downgrades of once published rating to client’s approval.
If a client thinks that in the process of rating assignment some important
factors have not been taken into consideration, client’s authorized representatives
may appeal to rating committee within the next ten days after rating assignment. The
appeal will be accepted only if a client can bring new data and documents that are
important for rating procedure. After examination of these documents, credit rating
committee will take a decision which cannot be appealed .Appeal procedure does not
influence on client’s rights on rating publication.
9. Surveliance and Annual Review
Rating is a dynamic activity. So rating has to be monitored continuously. Also it
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7. CREDIT RATING AGENCY IN INDIA
Credit Rating Information Services of India Limited (CRISIL).
Investment Information and Credit Rating Agency of India (ICRA).
Credit Analysis & Research Limited (CARE).
Duff & Phelps Credit Rating India Private Ltd. (DCR India)
Onicra Credit Rating Agency of India limited.
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7.1. CRISIL (Credit rating and information services of India ltd.)
CRISIL, India's first credit rating agency, is incorporated, promoted by the erstwhile ICICI
Ltd, along with UTI and other financial institutions. The head office of the company is
located at mumbai and it has established offices outside india. it is a global analytical
company providing ratings ,research and risk and policy advisory services.it is the largest
credit rating agency in India. CRISIL’s majority shareholder is STANDARD and POOR’s.
WIth sustainable competitive advantage arising from their strong brand, unmatched
credibility, market leadership across businesses, and large customer base, they deliver
analysis, opinions, and solutions that make markets function better.
they defining trait is our ability to convert data and information into expert judgements and
forecasts across a wide range of domains, with deep expertise and complete objectivity.
At the core of their credibility, built up assiduously over the years, are our values: Integrity,
Independence, Analytical Rigour, Commitment and Innovation.
CRISIL launches Education Grading, beginning with business schools
CRISIL Rating enhances access to funding for SMEs; Announces 20,000th SME
CRISIL Ratings launches Solar grading
CRISIL Research launches Gold and Gilt Index
CRISIL Global Research & Analytics receives NASSCOM Exemplary Talent
CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field
of assessment service for the banks. Highly skilled members manage the agency. Ms. Roopa
Kudva who acts as the Managing Director and Chief Executive Officer of the company heads
it. The company has set up large number of committees to look after dispersal of various
services offered by the company for example, investor grievance committee, investment
committee, rating committee, allotment committee, compensation committee and so on. The
head office of the company is located at Mumbai and it has established offices outside India
CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral
specialization. CRISIL Ratings plays a leading role in the development of the debt markets
in India. CRISIL has also spearheaded the formation of the Cari CRIS, the world's first
regional credit rating agency.
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Instruments with this rating are
considered to have the highest
degree of safety regarding timely
servicing of financial obligations.
Such instruments carry lowest credit
Instruments with this rating are
considered to have high degree of
safety regarding timely servicing of
financial obligations. Such
instruments carry very low credit
Instruments with this rating are
considered to have adequate degree
of safety regarding timely servicing
of financial obligations. Such
instruments carry low credit risk.
Instruments with this rating are
considered to have moderate degree
of safety regarding timely servicing
of financial obligations. Such
instruments carry moderate credit
Instruments with this rating are
considered to have moderate risk of
default regarding timely servicing of
Instruments with this rating are
considered to have high risk of
default regarding timely servicing of
(Very High Risk)
Instruments with this rating are
considered to have very high risk of
default regarding timely servicing of
Instruments with this rating are in
default or are expected to be in
CRISIL Risk Solutions
January 29: CRISIL, India's first credit rating agency, is incorporated,
promoted by the erstwhile ICICI Ltd, along with UTI and other
Mr. N Vaghul and Mr. Pradip Shah are CRISIL's first Chairman and
Managing Director, respectively.
January 1: CRISIL commences operations within a year of its
incorporation. The business environment is far from promising for the
one-year old - the lending rates are fixed, and India has no such thing
as a corporate bond market as yet. And, what's more, credit rating is
an idea that's far ahead of its times.
The CRISILCARD Service - providing comprehensive information
and analytical opinion on India's corporate entities - is launched.
Despite the odds, and the initial lack of market acceptance of credit
ratings, CRISIL's operations are now well established. It begins to
acquire brand identity, with a reputation for analytical rigour and
CRISIL offers technical assistance and training to help set up Rating
Agency Malaysia Berhad, and MAALOT, the Israeli securities rating
CRISIL's IPO is a whopping success - its 20, 00,000 shares, sold at a
premium of Rs.40 per share, are oversubscribed by 2.47 times.
Mr. R Ravimohan takes over as CRISIL's Managing Director.
CRISIL diversifies business portfolio with a strategic entry into
advisory services, and wins its first major mandate in the
infrastructure policy advisory domain.
In partnership with the National Stock Exchange of India Ltd
(NSEIL), CRISIL develops and launches the CRISIL500 Equity
Index, helping investors clue in on stock price movements.
CRISIL forges a strategic business alliance with Standard & Poor's
(S&P) Ratings Group. The tie-up is part of CRISIL's strategy to
develop its skills and processes.
S&P acquires a 9.68 per cent stake in CRISIL. The alliance with the
world's leading rating agency adds a new dimension to CRISIL's
methodologies. It provides CRISIL with exposure to the international
rating markets and to S&P's rating processes.
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CRISIL sets up India Index Services Ltd (IISL), a joint venture with
NSEIL, to provide a variety of indices and index-related services and
products to India's capital markets.
CRISIL's proprietary Risk Assessment Model (RAM) becomes the
banking industry standard: given the heightened regulatory focus on
the banks' risk management practices, RAM serves as a customised
credit rating model for the banks.
CRISIL acquires the business, and brand, INFAC, of Information
Products and Research Services (India) Pvt Ltd. INFAC is a leading
provider of research to India's financial sector. The acquisition
strengthens CRISIL's research business, and makes it India's leading
provider of integrated research.
CRISIL launches the CRISIL Composite Performance Ranking
(CRISIL~CPR) to provide performance evaluation standards and
investment decision support to mutual fund houses, distributors, and
CRISIL sets up subsidiary, Global Data Services of India Ltd, to
standardize published financial data for analysis.
CRISIL launches Mutual Fund Awards in association with CNBC-
TV18 - a benchmark award for India's best performing mutual funds.
CRISIL launches the CRISIL Young Thought Leader (CYTL) Award - to
attract outstanding talent and provide a platform to India's future
business leaders to showcase their views.
CRISIL sets up:
The Centre for Economic Research - to apply economic principles to
live business situations
CRISIL Market Wire - to provide real-time financial news services to
help clients make pricing- and investment-related decisions
CRISIL sets up its investment and risk management services group to
offer integrated risk management solutions and advice to banks and
CRISIL follows it up with its first overseas acquisition -
EconoMatters Ltd (later the Gas Strategies Group), a London-based
company providing natural gas related consulting, information and
training, and conference-organizing services.
CRISIL expands its global reach further with an equity investment in
the world's first regional rating agency, the Caribbean Information
and Credit Rating Services Limited (CariCRIS), which CRISIL also
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The strategic alliance with S&P since 1996 culminates in S&P's
acquiring majority control of CRISIL.
CRISIL makes its second overseas acquisition, of Irevna, thus adding
equity research to its wide canvas of work. Irevna is a leading global
equity research and analytics company.
CRISIL launches Small and Medium Enterprise (SME) Ratings to
serve the specialized needs of the SME sector.
CRISIL partners CNBC-TV18 for Emerging India Awards - the first
platform to recognize and reward the achievements of India's Small &
CRISIL launches IPO grading services to provide investors with
independent, reliable, and consistent assessments of the fundamental
strengths of new public issues.
Irevna is ranked globally as the top Investment Research Outsourcing
Firm by The Black Book of Outsourcing.
Ms. Roopa Kudva takes over as Managing Director and CEO of
CRISIL, following Mr. Ravimohan's appointment as Managing
Director and Region Head of S&P, South Asia.
CRISIL assigns India's first Bank Loan Rating under the Reserve
Bank of India's Basel-II related regulations.
The Pension Fund Regulatory and Development Authority awards
CRISIL with a prestigious mandate to assist in the selection of Fund
Managers under the New Pension Scheme.
The Black Book of Outsourcing ranks Irevna the No. 1 Financial
Services Industry Analytics Outsourcing Firm.
CRISIL launches Real Estate Awards with CNBC AWAAZ. The
award honors India's exemplary developers and builders.
CRISIL launches Complexity Levels, an initiative to strengthen
India's capital markets by providing greater transparency to investors.
CRISIL's revenues cross Rs.5 billion in 2008.
CRISIL's SME Ratings group assigns its 5000th SME rating.
CRISIL captures about half of India's bank loan rating market.
Irevna is ranked globally by The Black Book of Outsourcing as the
No. 1 Investment Research and Analytics Outsourcing Firm.
CRISIL Research launches Independent Equity Research (IER).
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CRISIL moves into a new, corporate head office - the new CRISIL
House, at Powai, Mumbai, is a state-of-the-art, green building.
CRISIL SME Ratings crosses its 15,000th SME rating.
CRISIL launches Real Estate Star Ratings.
CRISIL acquires Pipal Research, further strengthening its leadership
in the KPO industry.
CRISIL launches Education Grading, beginning with business schools
CRISIL Rating enhances access to funding for SMEs; Announces
20,000th SME Rating
CRISIL Ratings launches Solar grading
CRISIL Research launches Gold and Gilt Index
CRISIL Global Research & Analytics receives NASSCOM
Exemplary Talent Practices Award
Functions of crisil
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It is the only ratings agency in India with sectoral specialization It has played a
critical role in the development of the debt markets in India. The agency has developed
new ratings methodologies for debt instruments and innovative structures across sectors.
CRISIL Ratings provides technical know-how to clients all over the world and has helped
set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.
It provides research, analysis and forecasts on the Indian economy, industries and
companies to over 500 Indian and international clients across financial, corporate, consulting
and public sectors.
CRISIL Fund Services: It provides fund evaluation services and risk solutions to the
mutual fund industry.
The Centre for Economic Research: It applies economic principles to live business
applications and provide benchmarks and analyses for India's policy and business
Investment Research Outsourcing: CRISIL added equity research to its wide
bouquet of services, by acquiring Irevna, a leading global equity research and
analytics company. Irevna offers investment research services to the world's leading
investment banks and financial institutions.
CRISIL Infrastructure Advisory:
It provides policy, regulatory and transaction level advice to governments and
leading organizations across sectors.
Investment and Risk Management Services:
CRISIL Risk Solutions offers integrated risk management solutions and
advice to Banks and Corporates by leveraging the experience and skills of CRISIL in
the areas of credit and market risk.
7.2. ICRA ( Investment Information and Credit Rating Agency
of India Limited)
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
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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.
ICRA’S Grading of IPO
ICRA's Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating
assessment of equity issues offered to the public. The Grade assigned to any individual IPO
is a symbolic representation of ICRA's assessment of the 'fundamentals' of the issuer
concerned on a relative grading scale. IPO Grades are assigned on a five-point point scale,
where IPO Grade 5 indicates the highest grading and IPO Grade 1 indicates the lowest
grading, i.e. a higher score indicates stronger fundamentals. An ICRA IPO Grade does not
comment on the valuation or pricing of the issue that has been graded, nor does it seek to
indicate the likely returns to shareholders from subscribing to the IPO. The emphasis of the
IPO Grading exercise is on evaluating the prospects of the industry in which the company
operates, the company's competitive strengths that would allow it to address the risks
inherent in the businesses and effectively capitalize on the opportunities available as well as
the company's financial position. In case the IPO proceeds are planned to be used to set up
projects, either Greenfield or Brownfield, ICRA evaluates the risks inherent in such projects,
The capacity of the company's management to execute the same, and the likely benefits
accruing from the successful completion of the projects in terms of profitability and returns
to shareholders. ICRA's five point IPO Grading Scale is as follows:
IPO Grade 5 Strong fundamentals
IPO Grade 4 Above-average fundamentals
IPO Grade 3 Average fundamentals
IPO Grade 2 Below-average fundamentals
IPO Grade 1 Poor fundamentals
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.
Moody's continues to be the largest single shareholder in ICRA. ICRA has a pan-
India presence and has offices in 8 locations. Apart from the four metros, it has
offices in Pune, Ahmedabad, Bangalore and Hyderabad.
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TypePublicTraded asBSE: 532835
NSE: ICRA Industry Financial services Founded 1991 Headquarters New Delhi,
India Key people Naresh Takkar, CEO Services Credit ratings
Financial consulting Operating income 1,293 million (US$25.8 million) Net income
449 million (US$8.96 million)
Subsidiaries PT. ICRA Indonesia
ICRA Lanka Limited
ICRA Management Consulting Services Limited
ICRA Techno Analytics Limited
ICRA Online Limited
7.3. CARE (Credit analysis and research limited)
CARE Ratings commenced operations in April 1993 and over nearly two decades, it has
established itself as the second-largest credit rating agency in India. With the rating volume
of debt of around Rs.33,062 bn (as on June 30, 2011) , CARE Ratings is proud of its rightful
place in the Indian capital market built around investor confidence. CARE Ratings has also
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emerged as the leading agency for covering many rating segments like that for banks, sub-
sovereigns and IPO gradings.
CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise
capital for their various requirements and assists the investors to form an informed
investment decision based on the credit risk and their own risk-return expectations. Our
rating and grading service offerings leverage our domain and analytical expertise backed by
the methodologies congruent with the international best practices. With majority
shareholding by leading domestic banks and financial institutions in India, CARE’s intrinsic
strengths have also attracted many other investors.
CARE was registered by SEBI as per Securities & Exchange Board of India Regulations
1999.Services offered by CARE The various services offered by CARE include:
With regard to rating services offered by CARE or Credit Analysis & Research Ltd, the
agency carries out rating of the following debt instruments:
In addition to rating industrial houses, Credit Analysis & Research Ltd (CARE) also does
rating of financial institution, state governments, municipalities, special purpose vehicles.
Credit Analysis & Research Ltd (CARE) also prepares credit reports. These credit reports are
availed of by different corporate houses. The credit reports worked out by CARE are
instrumental in making decisions pertaining to collaborations, joint ventures, mergers,
CARE conducts enterprise evaluations for big investors, business partners (existing partners
as well as prospective partners), managements of big companies. The Indian government's
Disinvestment Commission had availed the services of CARE for carrying out evaluation of
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state owned enterprises, which were 20 in number.
Credit Analysis & Research Ltd (CARE) also assists non banking companies and different
banks in setting up or bringing about modifications in the credit appraisal.
Reviewing Debt Market:
In order to remain abreast with the prevailing market conditions, CARE publishes a bulletin
every month. The bulletin is called Debt market review. This bulletin contains information
regarding the latest developments in the debt markets. It also publishes information regarding
changes in the economic structure of the country.
• A skeletal outline of the important services offered by Credit Analysis &
Research Ltd (CARE):
Preparing credit reports
Conducting studies in different
Different kinds of debt-
Certificates of deposits
Inter corporate deposits
Grading services IPO (initial public offer) gradings.
7.4. DCR(Duff & Phelps credit rating india limited)
It was founded in 1932 to provide high quality investment research services focused on the
utility industry. Over the decades, it evolved into a diversified financial services firm that
provides financial advisory, investment banking, credit rating and investment management
services. The investment management and credit rating businesses were acquired by Virtus
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Investment Partners and Fitch, respectively. The firm’s current management team acquired
Duff & Phelps’ financial advisory and investment banking business in 2004. The following
year, Duff & Phelps strengthened its valuation capabilities with the acquisition of Standard &
Poor's Corporate Value Consulting business
A leading global financial advisory and investment banking firm, Duff & Phelps (NYSE:
DUF) balances analytical skills, deep market insight and independence to help clients make
sound decisions. The firm provides expertise in the areas of valuation, transactions, financial
restructuring, alternative assets, disputes and taxation. With more than 1,000 employees,
Duff & Phelps serves clients from offices in North America, Europe and Asia.
Profile of Duff & Phelps Credit Rating India Private Ltd (DCR India)
Duff & Phelps Credit Rating India Private Ltd (DCR India) rated the forex debt obligations
of India as ' BBB-' or a Triple B Minus. This rating is of great importance for the economy of
India and the credibility of the national government.
This rating reflects the fact that the Indian national government is trying its best to improve
the state of Indian economy. As per the rating of DCR India, the national government of
India is trying to bring about a better economic environment through the introduction of
several economic policies and plans for the last 17 years.
Over the years India has had powerful accounts of payments. Since the decade of 1990s the
records of debt service have also been impressive. The external debt indicators of India are
also showing better patterns. All these support the rating provided by Duff & Phelps Credit
Rating India Private Ltd (DCR India).
Duff & Phelps Credit Rating India Private Ltd (DCR India) Services
The services provided by Duff & Phelps Credit Rating India Private Ltd (DCR India) are
considered to be at par with other leading providers of credit rating services in India like
Credit Rating Information Services of India Limited (CRISIL), ONICRA Credit Rating Agency of
India Ltd., Investment Information and Credit Rating Agency of India (ICRA), Operation
Research Group & Marketing & Research Group and Credit Analysis & Research Limited
Key Historical Highlights
1932 Duff & Phelps opened to provide investment research; expanded
services substantially over subsequent decades
1994 Sold credit rating and investment management business
2005 Acquired Standard & Poor's Corporate Value Consulting, which
included PwC’s legacy valuation business
2006 Acquired Chan in Capital Partners
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2007 Conducted initial public offering via NYSE
Acquired Rash & Associates
2008 Acquired Dubinsky & Company
Acquired Kane Reece Associates
Acquired Lumin Expert Group
2009 Financial advisor to the Examiner in the Lehman Brother's
Valuation advisor to the European Commission
Valuation advisor for the U.S. Congressional Oversight
Committee's Troubled Asset Relief Program (TARP)
2010 Acquired Cole & Partners, establishing a presence in Canada
Acquired Dynamic Credit Partners' U.S. consulting business
Acquired June Consulting Group
2011 Acquired Growth Capital Partners
Acquired MCR, greatly expanding our presence in the UK
Acquired RSM Richter’s financial restructuring practice in
Acquired Page mill Partners
Expert witness regarding the Mad off Estate
2012 Administrator for Rangers in the largest football club insolvency
in UK history
7.5. Onicra Credit Rating Agency of india limited
Onicra Credit Rating Agency is one of the leading Credit and Performance Rating agencies
in India. It provides ratings, risk assessment and analytical solutions to Individuals, MSMEs
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These services enable the lender or service provider to make smart, value based decisions on
the Individuals, MSMEs and corporates by providing them essential information that
includes financial, operational, productivity and 360 degree analysis, thus providing a holistic
view about the entity.
Third party credit and performance rating and assessment helps to create “trust” between
players in markets that underpins transactions.
ONICRA plays a central and critical role in collecting and analyzing a variety of financial,
operational, industry and market information, synthesizing that information, and providing
autonomous, reliable assessments of the entity, thereby providing stakeholders with an
important input into their decision making process.
To realize our goal we have committed ourselves to providing the stakeholders with
objective, timely, independent and forward-looking credit and performance opinions. The
foundation of that dedication is embedded in several core principles — objectivity, quality,
independence, integrity and transparency.
Milestones Onicra operates as a financial services organisation. Its products and services
include Individual Credit Rating, SME rating, Employee Background Screening, Customer
Profiling & Rating (CPR), Associate Rating and IT solutions, across the telecom, banking,
health, insurance, education and auto sectors.
The company has been acknowledged as pioneers in this field by the Ministry of Finance in
the Economic Survey (1993–1994). It is recognised and empanelled by the likes of NSIC
(National Small Industries Corporation Ltd., and the IBA (Indian Banks Association), for
performance and financial ratings. The Employee Background Screening division is certified
by NASSCOM and NDMA.
The company operates with a network of over 147 branches, covering more than 500
locations pan-India with the help of over 2500 Fleet on Street personnel.
Milestone Why onicra
2012 • Conducted first of its kind study in agriculture sector
• Leadership achieved in the MSME Rating Business
• Completed 10000 MSME Ratings
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2009-11 • Launched Education Rating Business - Conducted Strength, weakness
opportunity and threat analysis (SWOT) and Training Need Analysis (TNA)
for engineering colleges under the Technical Education Quality
Improvement Program (TEQIP)
• Launched Vendor Rating Business
• Tied with State Government for Rating Business
• Launched Associate Rating Business
• Singed Memorandum of understanding with 20 Banks/Financial Institutions
2006 • Launched Rating Business
2005 • Registration with National Small Industries Corporation (Ministry of Micro,
Small and Medium Enterprises, Government of India ) to undertake Micro,
Small and Medium Enterprises Ratings
2002 • Nationwide Infrastructure set up
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The capital market regulator regulates rating agencies in most regions. In India, the capital
markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating
agencies in the country. SEBI laid down an extensive set of regulations for rating agencies in
SEBI Issued Guidelines to Credit Rating Agencies
SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for certain
transparency and disclosure norms for the Credit Rating Agencies (“CRAs”). The
major measures taken in this regard are summarized below:
CRAs should maintain records of the rating committee, including voting details and
notes of dissent, for a period of five years.
It has been made mandatory for CRAs to publish information about the historical
default rates of their rating categories and whether the default rates of these categories
have changed over time.
CRAs should ensure that its analysts do not participate in any kind of marketing and
business development, including negotiations of fees with the issuer whose securities
are being rated. Also, the employees involved in the credit rating process and their
dependants cannot own shares of the issuer.
CRAs while rating structured finance products, are barred from providing
consultancy or advisory services regarding the design of the structured finance
instrument. This prohibition would apply to the subsidiaries of CRAs too. While
publishing the ratings of structured finance products and their movements, CRAs
apart from following all the applicable requirements in case of non-structured ratings
should also disclose the track record of the originator and details of nature of
underlying assets while assigning the credit rating.
In case of unsolicited credit ratings (the credit ratings not arising out of the
agreement between the CRAs and the issuer), credit rating symbol should be
accompanied by the word “UNSOLICITED” in the same font size.
CRAs should also disclose
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1. the policies, methodology and procedures in detail followed by them regarding
solicited and unsolicited credit ratings,
2. the history of credit rating of all outstanding securities,
3. the general nature of its compensation arrangements with the issuers and
4. the details of any relationship it has with the issuer whose securities are being rated
and any of its associate of such issuer and the CRAs or its subsidiaries.
The credit rating agencies in India mainly include ICRA and CRISIL. ICRA was formerly
referred to the Investment Information and Credit Rating Agency of India Limited. Their
main function is to grade the different sector and companies in terms of performance and
offer solutions for up gradation.
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9. GUIDELINES FOR CREDIT RATING AGENCIES IN
The Securities and Exchange Board of India (Credit Rating Agencies) Regulations,
1999 offers various guidelines with regard to the registration and functioning of the
credit rating agencies in India. The registration procedure includes application for the
establishment of a credit rating agency, matching the eligibility criteria and providing
all the details required. They have to undergo the strict examination procedure with
regard to the details furnished by them. They are required to prepare internal
procedures , abidance with circulars. They are offered guidelines regarding the credit
rating procedure, by the Act. The credit rating agencies are provided with compliance
officers. They are required to show their accounting records.
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10. USES OF RATINGS
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and
governments. 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. This in turn increases the total supply of risk capital in the economy, leading to
stronger growth. It also opens the capital markets to categories of borrower who might
otherwise be shut out altogether: small governments, startup companies, hospitals, and
10.1. Ratings use by bond issuers
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Issuers rely on credit ratings as an independent verification of their own credit-worthiness
and the resultant value of the instruments they issue. In most cases, a significant bond
issuance must have at least one rating from a respected CRA for the issuance to be successful
(without such a rating, the issuance may be undersubscribed or the price offered by investors
too low for the issuer's purposes). Studies by the Bond Market Association note that many
institutional investors now prefer that a debt issuance have at least three ratings.
Issuers also use credit ratings in certain structured finance transactions. For example, a
company with a very high credit rating wishing to undertake a particularly risky research
project could create a legally separate entity with certain assets that would own and conduct
the research work. This "special purpose entity" would then assume all of the research risk
and issue its own debt securities to finance the research. The SPE's credit rating likely would
be very low, and the issuer would have to pay a high rate of return on the bonds issued.
However, this risk would not lower the parent company's overall credit rating because the
SPE would be a legally separate entity. Conversely, a company with a low credit rating might
be able to borrow on better terms if it were to form an SPE and transfer significant assets to
that subsidiary and issue secured debt securities. That way, if the venture were to fail, the
lenders would have recourse to the assets owned by the SPE. This would lower the interest
rate the SPE would need to pay as part of the debt offering.
The same issuer also may have different credit ratings for different bonds. This difference
results from the bond's structure, how it is secured, and the degree to which the bond is
subordinated to other debt. Many larger CRAs offer "credit rating advisory services" that
essentially advise an issuer on how to structure its bond offerings and SPEs so as to achieve a
given credit rating for a certain debt tranche. This creates a potential conflict of interest, of
course, as the CRA may feel obligated to provide the issuer with that given rating if the
issuer followed its advice on structuring the offering. Some CRAs avoid this conflict by
refusing to rate debt offerings for which its advisory services were sought.
10.2 Ratings use by government regulatory
Regulators use credit ratings as well, or permit ratings to be used for regulatory purposes. For
example, under the Basel II agreement of the Basel Committee on Banking Supervision,
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banking regulators can allow banks to use credit ratings from certain approved CRAs (called
"ECAIs", or "External Credit Assessment Institutions") when calculating their net capital
reserve requirements. In the United States, the Securities and Exchange Commission (SEC)
permits investment banks and broker-dealers to use credit ratings from "Nationally
Recognized Statistical Rating Organizations" (NRSRO) for similar purposes. The idea is that
banks and other financial institutions should not need keep in reserve the same amount of
capital to protect the institution against (for example) a run on the bank, if the financial
institution is heavily invested in highly liquid and very "safe" securities (such as U.S.
government bonds or short-term commercial paper from very stable companies).
CRA ratings are also used for other regulatory purposes as well. The US SEC, for example,
permits certain bond issuers to use a shortened prospectus form when issuing bonds if the
issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC
regulations also require that money market funds (mutual funds that mimic the safety and
liquidity of a bank savings deposit, but without Federal Deposit Insurance Corporation
insurance) comprise only securities with a very high NRSRO rating. Likewise, insurance
regulators use credit ratings to ascertain the strength of the reserves held by insurance
In 2008, the US SEC voted unanimously to propose amendments to its rules that would
remove credit ratings as one of the conditions for companies seeking to use short-form
registration when registering securities for public sale.
This marks the first in a series of upcoming SEC proposals in accordance with Dodd-Frank
to remove references to credit ratings contained within existing Commission rules and
replace them with alternative criteria.
Under both Basel II and SEC regulations, not just any CRA's ratings can be used for
regulatory purposes. (If this were the case, it would present a moral hazard) Rather, there is a
vetting process of varying sorts. The Basel II guidelines (paragraph 91, et al.), for example,
describe certain criteria that bank regulators should look to when permitting the ratings from
a particular CRA to be used. These include "objectivity," "independence," "transparency,"
and others. Banking regulators from a number of jurisdictions have since issued their own
discussion papers on this subject, to further define how these terms will be used in practice.
(See The Committee of European Banking Supervisors Discussion Paper, or the State Bank
of Pakistan ECAI Criteria).
In the United States, since 1975, NRSRO recognition has been granted through a "No Action
Letter" sent by the SEC staff. Following this approach, if a CRA (or investment bank or
broker-dealer) were interested in using the ratings from a particular CRA for regulatory
purposes, the SEC staff would research the market to determine whether ratings from that
particular CRA are widely used and considered "reliable and credible." If the SEC staff
determines that this is the case, it sends a letter to the CRA indicating that if a regulated
entity were to rely on the CRA's ratings, the SEC staff will not recommend enforcement
action against that entity. These "No Action" letters are made public and can be relied upon
by other regulated entities, not just the entity making the original request. The SEC has since
sought to further define the criteria it uses when making this assessment, and in March 2005
published a proposed regulation to this effect.
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On September 29, 2006, US President George W. Bush signed into law the Credit Rating
Reform Act of 2006. This law requires the US Securities and Exchange Commission to
clarify how NRSRO recognition is granted, eliminates the "No Action Letter" approach and
makes NRSRO recognition a Commission (rather than SEC staff) decision, and requires
NRSROs to register with, and be regulated by, the SEC. S & P protested the Act on the
grounds that it is an unconstitutional violation of freedom of speech In the Summer of 2007
the SEC issued regulations implementing the act, requiring rating agencies to have policies to
prevent misuse of nonpublic information, disclosure of conflicts of interest and prohibitions
against "unfair practices".
Recognizing CRAs' role in capital formation, some governments have attempted to jump-
start their domestic rating-agency businesses with various kinds of regulatory relief or
encouragement. This may, however, be counterproductive, if it dulls the market mechanism
by which agencies compete, subsidizing less-capable agencies and penalizing agencies that
devote resources to higher-quality opinions
10.3 Ratings use in structured finance
Credit rating agencies may also play a key role in structured financial transactions. Unlike a
"typical" loan or bond issuance, where a borrower offers to pay a certain return on a loan,
structured financial transactions may be viewed as either a series of loans with different
characteristics, or else a number of small loans of a similar type packaged together into a
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series of "buckets" (with the "buckets" or different loans called "tranches"). Credit ratings
often determine the interest rate or price ascribed to a particular tranche, based on the quality
of loans or quality of assets contained within that grouping.
Companies involved in structured financing arrangements often consult with credit rating
agencies to help them determine how to structure the individual tranches so that each
receives a desired credit rating. For example, a firm may wish to borrow a large sum of
money by issuing debt securities. However, the amount is so large that the return investors
may demand on a single issuance would be prohibitive. Instead, it decides to issue three
separate bonds, with three separate credit ratings—A (medium low risk), BBB (medium
risk), and BB (speculative) (using Standard & Poor's rating system).
The firm expects that the effective interest rate it pays on the A-rated bonds will be much less
than the rate it must pay on the BB-rated bonds, but that, overall, the amount it must pay for
the total capital it raises will be less than it would pay if the entire amount were raised from a
single bond offering. As this transaction is devised, the firm may consult with a credit rating
agency to see how it must structure each tranche—in other words, what types of assets must
be used to secure the debt in each tranche—in order for that tranche to receive the desired
rating when it is issued.
There has been 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 CDOs issued by Credit Suisse Group added up to about
$125 million, despite being rated AAA or Aaa by Standard & Poor's, Moody's Investors
Service and Fitch Group.
The rating agencies respond that their advice constitutes only a "point in time" analysis, that
they make clear that they never promise or guarantee a certain rating to a tranche, and that
they also make clear that any change in circumstance regarding the risk factors of a particular
tranche will invalidate their analysis and result in a different credit rating. In addition, some
CRAs do not rate bond issuances upon which they have offered such advice.
Complicating matters, particularly where structured finance transactions are concerned, the
rating agencies state that their ratings are opinions (and as such, are protected free speech,
granted to them by the "personhood" of corporations) regarding the likelihood that a given
debt security will fail to be serviced over a given period of time, and not an opinion on the
volatility of that security and certainly not the wisdom of investing in that security. In the
past, most highly rated (AAA or Aaa) debt securities were characterized by low volatility and
high liquidity—in other words, the price of a highly rated bond did not fluctuate greatly day-
to-day, and sellers of such securities could easily find buyers.
However, structured transactions that involve the bundling of hundreds or thousands of
similar (and similarly rated) securities tend to concentrate similar risk in such a way that even
a slight change on a chance of default can have an enormous effect on the price of the
bundled security. This means that even though a rating agency could be correct in its opinion
that the chance of default of a structured product is very low, even a slight change in the
market's perception of the risk of that product can have a disproportionate effect on the
product's market price, with the result that an ostensibly AAA or Aaa-rated security can
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collapse in price even without there being any default (or significant chance of default). This
possibility raises significant regulatory issues because the use of ratings in securities and
banking regulation (as noted above) assumes that high ratings correspond with low volatility
and high liquidity
11. FUTURE OF CREDIT RATING IN INDIA
At present commercial paper, k bonds and debentures with maturities exceeding 18
month and fixed deposit of large non- banking companies registered with RBI are required to
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be compulsorily rated. There are moves to make rating compulsory for other types pf
borrowing such as the fixed program of manufacturing companies. In addition, the rating
agencies are expected to be called upon you enlarge volume of securitisation of debt and
structuring of customized instrument to meet the need of issuers of different class of investor.
There are number of areas where rating agencies will have to cover new ground in the
coming year. The rating of municipal bonds, state government borrowing, commericialbank
and public sector undertaking etc. will be covered in the near future. So, the outlook for the
credit rating industry is positive.
The experience of India rating agencies so far is that about 30% of the rating are no
accepted or used. Instances are their when companies with poor rating assigned by one
company have gone to another for better rating. this raise doubt about efficiency of credit
rating agencies in serving the investors. Various constraint are faced by credit ratting
agencies. The major constraint is the low level disclosure by Indian companies. Rating
agencies have complained of inadequate access to information, poor quality of audit and long
time lags in the availability of data. The companies often do not co-operate whenever the feel
that disclosure of a particular piece of information might not be in their interest. All these act
as systematic constraint on the rating service.
The India credit rating agencies have made strategic alliance with reputed
international agencies. They adopt, to a large extent, the rating methodologies adopted by
their western counterparts the suitability of rating methods and models formulated well
developed markets in the west is highly doubtful in India condition. The rating agencies in
India have to evolve their on methodologies with in the context of macro economic
The environment that prevailed in America when first rating were assigned, prevails
in many developing countries today. The India capital market has witnessed a tremendous
growth in the past few years. Companies are relying on capital market for financing existing
operations as well as for new projects rather than on institution. In this process, the average
size of debenture issued by company, the number of companies issuing debenture end the
number of invertors have grown substantially.
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As the number of companies borrowing directly from capital market increases,
investors find that the company’s size or name is no longer a sufficient assurance of the
timely payment of interest and principal. Default by large and well known company recently
in payment of interest on fixed deposit or debenture has reinforced this belief among
investors. They felt the need for an independent and credible agencies which judges the
quality of debt obligation of different companies and assist individual and institution
investors in making investment.
In this context, the credit rating information services of India limited was in 1987.
following this, investment information and credit rating agencies of India was promoted in
1991 and credit analysis and research limited was floated in1993. all the credit rating
agencies have been approved by the RESERVE BANK OF INDIA.
Credit rating agencies have been subject to the following criticism:
Credit rating agencies do not downgrade companies promptly enough. For
example, Enron's rating remained at investment grade four days before the
company went bankrupt, despite the fact that credit rating agencies had been
aware of the company's problems for months. Or, for example, Moody's gave
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Freddie Mac preferred stock the top rating until Warren Buffett talked about
Freddie on CNBC and on the next day Moody's downgraded Freddie to one tick
above junk bonds.
Some empirical studies have documented that yield spreads
of corporate bonds start to expand as credit quality deteriorates but before a rating
downgrade, implying that the market often leads a downgrade and questioning the
informational value of credit ratings.
This has led to suggestions that, rather
than rely on CRA ratings in financial regulation, financial regulators should
instead require banks, broker-dealers and insurance firms (among others) to use
credit spreads when calculating the risk in their portfolio.
Large corporate rating agencies have been criticized for having too familiar a
relationship with company management, possibly opening themselves to undue
influence or the vulnerability of being misled.
These agencies meet frequently
in person with the management of many companies, and advise on actions the
company should take to maintain a certain rating. Furthermore, because
information about ratings changes from the larger CRAs can spread so quickly
(by word of mouth, email, etc.), the larger CRAs charge debt issuers, rather than
investors, for their ratings. This has led to accusations that these CRAs are
plagued by conflicts of interest that might inhibit them from providing accurate
and honest ratings. At the same time, more generally, the largest agencies
(Moody's and Standard & Poor's) are often seen as promoting a narrow-minded
focus on credit ratings, possibly at the expense of employees, the environment, or
long-term research and development. These accusations are not entirely
consistent: on one hand, the larger CRAs are accused of being too cozy with the
companies they rate, and on the other hand they are accused of being too focused
on a company's "bottom line" and unwilling to listen to a company's explanations
for its actions.
While often accused of being too close to company management of their existing
clients, CRAs have also been accused of engaging in heavy-handed "blackmail"
tactics in order to solicit business from new clients, and lowering ratings for those
firms . For instance, Moody's published an "unsolicited" rating of Hannover Re,
with a subsequent letter to the insurance firm indicating that "it looked forward to
the day Hannover would be willing to pay". When Hannover management
refused, Moody's continued to give Hannover Re ratings, which were downgraded
over successive years, all while making payment requests that the insurer
rebuffed. In 2004, Moody's cut Hannover's debt to junk status, and even though
the insurer's other rating agencies gave it strong marks, shareholders were
shocked by the downgrade and Hannover lost $175 million USD in market
The lowering of a credit score by a CRA can create a vicious cycle and self-
fulfilling prophecy, as not only interest rates for that company would go up, but
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other contracts with financial institutions may be affected adversely, causing an
increase in expenses and ensuing decrease in credit worthiness. In some cases,
large loans to companies contain a clause that makes the loan due in full if the
companies' credit rating is lowered beyond a certain point (usually a "speculative"
or "junk bond" rating). The purpose of these "ratings triggers" is to ensure that the
bank is able to lay claim to a weak company's assets before the company declares
bankruptcy and a receiver is appointed to divide up the claims against the
company. The effect of such ratings triggers, however, can be devastating: under
a worst-case scenario, once the company's debt is downgraded by a CRA, the
company's loans become due in full; since the troubled company likely is
incapable of paying all of these loans in full at once, it is forced into bankruptcy
(a so-called "death spiral"). These rating triggers were instrumental in the collapse
of Enron. Since that time, major agencies have put extra effort into detecting these
triggers and discouraging their use, and the U.S. Securities and Exchange
Commission requires that public companies in the United States disclose their
Agencies are sometimes accused of being oligopolists, because barriers to market
entry are high and rating agency business is itself reputation-based (and the
finance industry pays little attention to a rating that is not widely recognized). Of
the large agencies, only Moody's is a separate, publicly held corporation that
discloses its financial results without dilution by non-ratings businesses, and its
high profit margins (which at times have been greater than 50 percent of gross
margin) can be construed as consistent with the type of returns one might expect
in an industry which has high barriers to entry.
Credit Rating Agencies have made errors of judgment in rating structured
products, particularly in assigning AAA ratings to structured debt, which in a
large number of cases has subsequently been downgraded or defaulted. The actual
method by which Moody's rates CDOs has also come under scrutiny. If default
models are biased to include arbitrary default data and "Ratings Factors are biased
low compared to the true level of expected defaults, the Moody’s [method] will
not generate an appropriate level of average defaults in its default distribution
process. As a result, the perceived default probability of rated tranches from a
high yield CDO will be incorrectly biased downward, providing a false sense of
confidence to rating agencies and investors." Little has been done by rating
agencies to address these shortcomings indicating a lack of incentive for quality
ratings of credit in the modern CRA industry. This has led to problems for several
banks whose capital requirements depend on the rating of the structured assets
they hold, as well as large losses in the banking industry. AAA rated mortgage
securities trading at only 80 cents on the dollar, implying a greater than 20%
chance of default, and 8.9% of AAA rated structured CDOs are being considered
for downgrade by Fitch, which expects most to downgrade to an average of BBB
to BB-. These levels of reassessment are surprising for AAA rated bonds, which
have the same rating class as US government bonds. Most rating agencies do not
draw a distinction between AAA on structured finance and AAA on corporate or
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government bonds (though their ratings releases typically describe the type of
security being rated). Many banks, such as AIG, made the mistake of not holding
enough capital in reserve in the event of downgrades to their CDO portfolio. The
structure of the Basel II agreements meant that CDOs capital requirement rose
'exponentially'. This made CDO portfolios vulnerable to multiple downgrades,
essentially precipitating a large margin call. For example under Basel II, a AAA
rated securitization requires capital allocation of only 0.6%, a BBB requires 4.8%,
a BB requires 34%, whilst a BB(-) securitization requires a 52% allocation. For a
number of reasons (frequently having to do with inadequate staff expertise and the
costs that risk management programs entail), many institutional investors relied
solely on the ratings agencies rather than conducting their own analysis of the
risks these instruments posed. (As an example of the complexity involved in
analyzing some CDOs, the Aquarius CDO structure has 51 issues behind the cash
CDO component of the structure and another 129 issues that serve as reference
entities for $1.4 billion in CDS contracts for a total of 180. In a sample of just 40
of these, they had on average 6500 loans at origination. Projecting that number to
all 180 issues implies that the Aquarius CDO has exposure to about 1.2 million
loans.) Pimco founder William Gross urged investors to ignore rating agency
judgments, describing the agencies as "an idiot savant with a full command of the
mathematics, but no idea of how to apply them.”
Many of the structured financial products that they were responsible for rating,
consisted of lower quality 'BBB' rated loans, but were, when pooled together into
CDOs, assigned an AAA rating. The strength of the CDO was not wholly
dependent on the strength of the underlying loans, but in fact the structure
assigned to the CDO in question. CDOs are usually paid out in a 'waterfall' style
fashion, where income received gets paid out first to the highest tranches, with the
remaining income flowing down to the lower quality tranches i.e. <AAA. CDOs
were typically structured such that AAA tranches which were to receive first lien
(claim) on the BBB rated loans cash flows, and losses would trickle up from the
lowest quality tranches first. Cash flow was well insulated even against heavy
levels of home owner defaults. Credit rating agencies only accounted for a ~5%
decline in national housing prices at worst, allowing for a confidence in rating the
many of these CDOs that had poor underlying loan qualities as AAA. It did not
help that an incestuous relationship between financial institutions and the credit
agencies developed such that, banks began to leverage the credit ratings off one
another and 'shop' around amongst the three big credit agencies until they found
the best ratings for their CDOs. Often they would add and remove loans of
various quality until they met the minimum standards for a desired rating, usually,
AAA rating. Often the fees on such ratings were $300,000 - $500,000, but ran up
to $1 million.
It has also been suggested that the credit agencies are conflicted in assigning
sovereign credit ratings since they have a political incentive to show they do not
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need stricter regulation by being overly critical in their assessment of
governments they regulate.
Attempts to regulate more strictly credit rating agencies in the wake of the
European sovereign debt crisis have been rather unsuccessful. Some European
financial regulation experts have argued that the hastily drafted, unevenly
transposed in national law, and poorly enforced EU rule on rating agencies
(Règlement CE n° 1060/2009) has had little effect on the way financial analysts
and economists interpret data or potential conflict of interests created by the
complex contractual arrangements between credit rating agencies and their
13.RATING METHODOLOGY FOR PRIMARY
The RBI norms stipulate a minimum capital of Rs. 500 million for the standalone PD
operations and a Capital Adequacy Ratio (CAR) of 15% of the risk-weighted assets.
Currently, all PDs meet the norm on CAR easily as the assets held by them are
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primarily in government securities, which carry zero credit risk weight. The ratio
would become important when the debt markets widen and the PDs increase their
corporate debt (non-government securities) exposure, which have a 100% credit risk
weight age associated with it. ICRA analyses the financial capability of a PD in terms
of Net worth or own funds. ICRA expects the capital requirements to increase with
increase in the scale of operations of the PD. Also, in view of the inherent risks in a
PD business, a high net worth acts as a buffer. ICRA, while placing high importance,
views the networth of a PD as a very strong buffer against insolvency.
2. Market Risk
The market risk, one of the inherent risks in the PD business, is expressed by the
decline in the market value of its assets. ICRA analyses the portfolio of the PD and
subjects the same to stress analysis under varying interest rate scenarios. As the
potential loss is determined by the duration of the portfolio, ICRA studies the above
stress test for different duration and the gearing levels of the PD. ICRA views the net
worth to potential loss as an important ratio while evaluating the PD. In case of
erosion of the above cover, ICRA expects the PDs to scale down its operations or
infuse more capital in form of equity. ICRA also studies the market risk models used
by the PD, if any, for their operations and evaluates the PDs contingency plans.
3. Credit Risk
Since the PDs primarily deal in government securities, the credit risk is negligible.
However, with the PDs gradually increasing their exposure to corporate debt paper to
its improve yields and margins, the credit risk would assume a greater importance.
ICRA evaluates the internal norms and the control systems used to measure the credit
risk by the PD.
4. Funding and Leverage
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Currently the funding profile for a PDs is skewed in favour of call money and
repo borrowings. As a PD is basically a trader, it borrows from the short-term call
market and deploys them in government securities, thereby earning an interest spread.
With the borrowings on call money and repo being repriced daily and the associated
volatility with the call markets, a lower leverage would mitigate the interest rate risks
for the PD on the liability side. ICRA expects the PDs funding profile to change in
favour of the term money market once the debt market in the country deepens. A
higher proportion of the own funds in the funding profile provides comfort.
5. Management and Systems
This is one of the important factors while evaluating the risk profile of a PD.
Currently as most of the PDs are backed by strong promoters, ICRA factors in the
implicit support of the parent while evaluating the PD. ICRA views a stable and
experienced management to manage the interest rate and liquidity risk profile of the
business better. The ability of the management to retain key operating personnel is an
important factor in this line of business. ICRA also evaluates the internal operating
guidelines and risk management systems such as the prudential norms and Value at
Risk (VAR) set in place by the management. The adherence and efficient usage of
such systems by the management are construed as a comforting factor. ICRA
appreciates that due to external market environment, there could be periods when the
internal norms were breached. ICRA studies and analyses such nstances and the
actions taken by the PD to rectify the same. In addition, ICRA evaluates PDs
performance as regards conformity regulatory norms in respect of
the primary market and secondary market operations in terms of bidding
commitments and turnover ratios. Though confirming to these norms are not a
problem for the PDs currently with a fewer number of PD operating and steadily
growing government borrowings programmes, ICRA feels that this could become
important with entry of more players in the PD business and the any changes in the
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The financial performance of a PD is largely dependent on external environment
such as the economic cycle, government borrowing programme and the interest rates
movements. The profitability is seen over a meaningful period of time to understand
the income stability of a PD with respect to its peers. While considering the
performance of the PD in terms of revenues, gearing and Return on Networth, ICRA
notes the profitability is dependent on the aggressiveness of the PD. The ability of the
management to quickly adapt to the changing environment provides comfort in form
of a relatively lower volatility in income. There are low liquidity risks for a PDs as
most of their assets are in government securities, which are highly liquid. As their
main business revolves around trading, their investments in non government
securities are usually in instruments that carry high credit rating (rating of LAA and
equivalent and above). The growing repo market for government securities and
likely introduction of repo on corporate bonds further alleviates any liquidity
concerns of a PD operation
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Credit rating as an industry has passed through several cycles and phases, and will
continue to evolve going forward. Running through all of these, however, is one common
thread, which serves as the key determinant of success in the industry:
In the sense of recognition by the market, credibility is theulitimate touchstone of a
rating agency’s success, and is built up through a period of sustained performance in the core
rating area. Some key factor feeding into credibility are:
• Independence and objectivity- signals of the agency’s freedom from bias.
• Integrity- freedom from influence, the capacity to stick to the correct decision even
in the face of business consideration.
• Analytical rigor- the cultivation of analytical strength in the bedrock of accuracy
and progress in any rating agency, and is the strongest guarantee of sustainable
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M. Y .Khan (financial service)
Gorden & Natrages (financial Markets & Services)
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