Credit rating


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Credit rating

  1. 1. Credit Rating INDEX EXECUTIVE SUMMERY SR. NO TOPICS PAGE NOS. 1 Introduction 1 2 Meaning of Credit Rating 3 3 Functions of Credit Rating 5 4 Benefits of Credit Rating 6 5 Regulatory Framework 9 6 Rating Process 18 7 Rating Methodology 24 8 Credit Rating Agencies in India 29 9 SEBI Guidelines 1999 39 10 Future of Credit Rating in India 40 11 Conclusion 42 12 Survey Form 43 13 Consumer Survey Report 44 14 Consumer Survey Analysis 47 15 Bibliography 48 1 T.Y.B.B.I
  2. 2. Credit Rating Objective My prime objective is to know the credit rating and the underlying rating principles and its applicability in bank. Sub – Objective To learn credit rating from the banking sector and doing report on credit rating a view from Mr. Nishikant Jha Methodology  Secondary Data Books - financial Markets & Services Financial service  Finding Study the fundamentals of credit rating concept it is recognized that creditability is the ultimate touchstone of a rating agencies success, & is built up through a period of sustained performance in the core rating area.  Learning Credit Rating Agencies based on certain principle of credit rating which should be considered while dealing with critical in all securitization programmers also found that credit rating is important tools for an investor.  INTRODUCTION 2 T.Y.B.B.I
  3. 3. Credit Rating Credit rating is, essentially, the symbolic indicator of the current opinion of the rating agency regarding the relative ability and willingness of the issuer of a financial (debt) instrument to meet the (debt) service obligation as and when they arise. It provides a relative ranking of the credit quality of the debt/financial instruments or their grading according to the investment qualities; in other words, credit rating provides a simple system of grading according to investment qualities. In other words, credit rating provides a simple system of gradation by which the relative capacities of companies (borrowers) to make timely repayment of interest and principal on particular types of debt/financial instrument can be noted. Credit rating, however, is neither a general purpose evolution of a corporate entity nor an overall assessment of the credit risk likely to be involved in all the debts/financial instrument and is intended to grade different and specific instruments in terms of the credit risk associated with the particular instruments. Although it is an opinion expressed by an independent professional organization, on the basis of a detailed study of all the relevant factors, the rating does not amount to any recommendation to buy, hold or sell an instrument as it does not take into consideration factors such as market prices, personal risk preferences of an investor and other consideration, which may influence an investor and such other considerations, which may influence an instrument decision. As a fee based financial advisory, service, credit rating is, obviously, extremely useful to investors, corporate (borrowers), banks and financial institutions. For the investors, it is expressing the underlying credit quality of an (debt) issue programs. The investor is fully informed about the company as any effect of changes in business/economic conditions on the company is evaluated and published regularly by the rating agencies. The corporate borrower can raise funds at a cheaper rate, with a good rating. It minimizes the role of ‘name recognition’ and lesser-known companies can also approach the market on the basis of their rating. Fund rating is useful to the banks and other institutions when they decide on lending and investment strategies. Although credit rating has been a long established part of the financial mechanism abroad, it is of relatively recent in the country. The first rating agency, 3 T.Y.B.B.I
  4. 4. Credit Rating the Credit Rating Information Services of India Ltd (CRISIL), was started in 1998. Initially, it played a rather subdued role, presumably because institutional investors did not require the wisdom of a rating. In the hanged scenario where corporate are increasingly dependent on the public, the removal of restrictions on interest rates and the stipulation a mandatory credit rating of a number of instruments, since 1991 by the Government/SEBI, credit rating has emerged as a critical element in the functioning of the Indian debt/financial markets. In response to the ever increasing of credit rating, two more agencies were set up, the Information and Credit Rating Services (ICRA) Ltd in 1990 and the Analysis and Research (CARE) Ltd in 1990 and 1993, respectively. The first private sector credit rating institution was set up as a joint venture between the JM Financials, Alliance Group and the international rating agency Duffs and Phelps, in 1995, known as Phelps Credit Rating India Ltd. It is now known as FITCH India Ltd. In addition to the mandated ratings, these agencies are also diversifying into other instruments/sectors. Unlike abroad, unsolicited ratings, these agencies are also diversifying into other instruments/sectors. Unlike abroad, unsolicited rating is still not done in India. Nevertheless, the increasing recognition to credit rating in the emerging financial services industry in the country marks a major transition from a corporate culture where names mattered to one where in the country marks a major transition from a corporate culture where names mattered to one where abstract gratings count. This chapter examines the present status of the credit ratings industry/system. Section 1 briefly outlines the regulatory framework in terms of the SEBI Credit Rating Agencies Regulation. This is followed by a brief profile of the credit rating agencies, namely, CRISIL, ICRA, CARE and FITCH Indian in Section 2. Sections 3- 4 respectively discuss the rating process/methodology and the rating symbols. The main points are summarized in the last Section. 4 T.Y.B.B.I
  5. 5. Credit Rating  MEANING OF CREDIT RATING To understand the earning of credit rating, let us look at some definitions offered by well-known rating agencies. Moody’s “Ratings are designed exclusively for the purpose of grading bounds according to their investment qualities” Australian ratings: “A Corporate Credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely repayment of interest and principal on a particular type of debt can be noted”. According to CRISIL, “Credit rating is an unbiased and independent option as to issuer’s capacity to meet its financial obligations. It does not constitute a recommendation to buy/sell or hold a particular security.” According to ICRA, “Ratings are opinions on the relative capability of timely servicing of corporate debt and obligations. These are not recommendations to buy or sell…neither the accuracy nor the completeness of the information is guaranteed.” From the above definitions, it is understood that: (i) Credit rating is an assessment of the capacity of an issuer of debt security, by an independent agency to pay interest and repay the principal as per the terms of issue of debt. A rating agency collects the qualitative as well as quantitative data from a company, which has to be rated and assesses the relative strength and capacity of company to honor its obligations contained in the debt instrument through out the duration of the instrument. The rating given is based on an objective judgment of a team of experts from the rating agency. 5 T.Y.B.B.I
  6. 6. Credit Rating The ratings are expressed in code number, which can be easily comprehended even by the lay investors. The ratings are the quickest way of understanding a company’s financial standing without going into the complicated financial reports. Credit rating is only guidance to the investors and not a recommendation to a particular instrument. The important element for investment decision making in debt security are:  Yield to maturity  Risk tolerance to investors and  Credit risk of the security. Clearly the focus of credit rating is on any one of these three elements viz., credit risk of the security and hence it cannot by itself be a basis for investment decision making. It is only a current opinion on the relative capacity of firms to repay debts in time. Credit rating, as it exists in India, is done for a specific debt security and not for a company as a whole. No rating agency tells that it is an indicator of a company as a whole. No rating agency tells that it is an indicator of the financial status of the company. All that a rating agency claims is that the rating symbols indicate the capacity of the company to honor the terms of contract of an instrument. A debt rating is not a one-time evaluation of credit risk, which can be regarded as valid for the entire life security. It is an on going appraisal. Changes in dynamic world of business may imply a change in the risk characteristics of the security. Hence, debt-rating agencies monitor the business and financial conditions of determine whether modification in rating is warranted. A credit rating does not credit a fiduciary relationship between the rating agency and the users of rating since there is no legal basis for such relationships. 6 T.Y.B.B.I
  7. 7. Credit Rating  FUNCTIONS OF CREDIT RATINGS The credit rating firms are supposed to do the following functions:  Superior Information: Rating by an independent and professional firm offers a superior and more reliable source of information on credit risk for three inter related risks:  It provides unbiased opinion: Due to professional resources, a rating firm has greater ability to assess the risks. It has access to lot of information, which may not be publicly available.  Low Cost Information: A rating firm, which gathers analysis, interprets and summarizes complex information in a simple and readily understood format for wide public consumption, represent a cost effective arrangement.  Basis For A Proper Risk-return Trade Off: If debt securities are rated professionally and if such ratings enjoy widespread investor acceptance and confidence, a more rational risk return trade off would be established in the capital market.  Healthy Discipline on Corporate Borrowers: Public exposure has healthy influence over the management of issue because of its desire to have a clear image.  Formulation Of Public Policy Guidelines On Institutional Investment: The public policy on the kinds of securities that are eligible for inclusion in different kinds of institutional portfolios can be developed with great confidence, if securities are rated professionally by independent agencies. 7 T.Y.B.B.I
  8. 8. Credit Rating  BENEFITS OF CREDIT RATING (i) Low Cost Information: Credit rating is a source of low cost information to investors. The collection, processing and analysis of relevant information is done by a specialized agency, which a group of investors can trust. (ii) Quick Investment Decision: In the present day complex world ratings enable investors to take quickest possible decisions based on associated ratings. (iii) Independent Investment Decision: For rated instruments, investors need not depend upon the advice of the financial intermediaries. As the rating symbol suggests the credit worthiness of the instrument and indicates the degree of risk involved in it, the investors can make direct investment decisions. (iv) Investor’s Protection: Hiring of credit agency implies that the management of the company is really to show its operations for independent scrutiny. So, the investors who are not provided with confidential can have overall assessment based on ratings. The creditable and objective rating agency can provide increased disclosure, better accounting standard and improved investor protection. 8 T.Y.B.B.I
  9. 9. Credit Rating  BENEFITS TO RATED COMPANIES  Sources Of Additional Certification: Credit rating agency provides additional information to the issuers of debt/financial instruments. A highly rated firm can enter the market with great confidence. Indian experience shows that use of rating, benefit a great deal by getting amount of money from wider audience at a lower cost.  Increase The Investors Population: A sound credit rating system given an alternative method to aim recognition as a determining factor in making investment and help to increase the population of those investing in debt obligations of the company.  Forewarns Risks: Credit rating acts as a guide to companies, which get a lower rating. It warns the management of perception of risk in the market and prompts to take steps on their operating and marketing risks and thereby changes the perception in the market.  Encourages Financial Discipline: Ratings also encourage discipline among corporate borrowers to improve their financial structure and performance to obtain better rating for their debt obligation.  Merchant Banker’s Job Mode Easy: Merchant banks and brokers will be relieved of the responsibility of guiding investors as to the risk of a particular investment. Merchant bankers and brokers, in the absence of objective information, go on the basis of name recognition in guiding their clients. With the advent of credit rating, what they would be required to do is to bring to the attention of their clients, the ratings of debt obligations. 9 T.Y.B.B.I
  10. 10. Credit Rating  Foreign Collaborations Made Easy: The foreign collaborators always ask for credit rating, while negotiating with an Indian company. Credit rating enables to identify instantly the relative credit standing of the company. The importance of credit rating is increasingly recognized in Euro-markets.  Benefits The Industry As A Whole: Relatively small and unknown companies use ratings to instill confidence in investors. High rate companies get largest amount of money at a lower cost. Thus, the industry as a whole can benefit from ratings by direct mobilization of savings from individuals rather than from intermediary lending institutions.  Low Cost Of Borrowings: A company with highly rate instrument has the opportunity to reduce the cost of borrowing by quoting interest rates on fixed deposits or debentures as the investors with low risk preference would invest in safe securities though yielding low rate of returns.  Rating As A Marketing Tool: Companies with rated instruments, use rating as a marketing tool to create better image in dealing with their customers, lenders and creditors. 10 T.Y.B.B.I
  11. 11. Credit Rating  REGULATORY FRAMEWORK Credit rating agencies are regulated by the SEBI. The main elements of its Credit Rating agencies Regulations are: • Their registration, • Their general obligations, • Restrictions on the rating of securities, • Procedure for inspection and • Action in case of default. Registration of Credit Rating Agencies: Registration with the SEBI is mandatory for carrying on the rating business. The application for the grant of the certificate of registration should be made to the SEBI in Form A (Appendix 16-A) and accompanied by a non-refundable fee of Rs.25,000. A Credit Rating Agency means a body corporate (as defined in Section 2 (7) of the Companies Act) engaged/ proposed to be engaged in the business of rating of securities offered by way of public/ rights issues. Rating is defined by the SEBI Regulations as an opinion regarding securities, expressed in the form of standard symbols/ in any other standardize form, assigned by a Credit Rating Agency and used by the issuer of such securities to comply with a requirement specified by these (SEBI) regulations. 11 T.Y.B.B.I
  12. 12. Credit Rating Promoter of Credit Rating Agency: A Credit Rating Agency (CRA) can be promoted by a:  Public Financial Institution, as defined in Section 4-A of the Companies Act,  Scheduled Bank,  Foreign Bank operating in India with RBI approval,  Foreign Credit Agency, having at least five years of experience in rating securities and  Any company incorporated under the Companies Act/ body corporate, having a continuous net worth i.e. paid-up equity capital plus free reserves (excluding reserves created out of revaluation) less accumulated losses and deferred expenditure, including miscellaneous expenses not written off a minimum of Rs. 100 Crore as per its audited annual accounts for the previous five years prior to filling of the application with the SEBI for registration. Eligibility criteria: The eligibility criteria for a rating agency are specified below: The Agency:  Is set up and registered as a company;  Has specified rating activity as one of its main objects in its Memorandum of Association;  As a minimum net worth of Rs. 5 crore;  Has adequate infrastructure;  Its promoters have professional competence, financial soundness and a general reputation of fairness and integrity in business transactions, to the satisfaction of the SEBI.  Has employed persons with adequate professional and relevant experience, as per the SEBI directions;  Is in all respects a fit and proper person for the grant of the certificate;  Applicant or its promoters, any director of the applicant or its promoters: 12 T.Y.B.B.I
  13. 13. Credit Rating 1) Is not involved in any legal proceedings connected with the securities market that may have an adverse on the interests of the investors, 2) Has not at any time in the past been convicted of any offence involving moral turpitude or for any economic offence [in terms of Economic offences (Inapplicability of Limitation) Act,1947].  Applicant or any person (i.e. an associate/ subsidiary/ inter-connected or group company or a company under the same management) in the past has not been, directly or indirectly: 1) Refused by the SEBI a certificate under these regulations or 2) Subject to any proceedings against contraviciting a SEBI Act/ any rules or regulations made under it. An associated person in relation to a CRA includes a person; a. Who, directly/ indirectly by himself/ in combination with relative owns/ controls shares carrying at least 10% of the voting rights of the CRA; or b. In respect of whom the CRA directly/ indirectly by itself/ in combination with other persons owns/ controls not less than 10% of the voting rights; or c. Majority of the directors who own/ control shares carrying at least 10% of the voting rights of the CRA; or d. Who is a director/ officer/ employee and also a director/ officer/ employee of the CRA. Is the one, to whom grant of certificate is in the interest of the investors and the securities market. Grant of Certificate of Registration: The SEBI will grant to eligible applicants a certificate of registration on the payment of a fee of Rs. 5,00,000, subject to the conditions specified below: A. The CRA would comply with the provisions of the SEBI Act/ regulations and guidelines/ directions/ circulars and instructions issued by the SEBI, from time to time, on the subject of credit rating; B. 1) Where any information/ particulars furnished to the SEBI by a CRA, is found to be false/ misleading in any material particulars of; has undergone change subsequent to its furnishing at the time of application, it would immediately inform SEBI in writing, and 13 T.Y.B.B.I
  14. 14. Credit Rating 2) The certificate of registration is valid for three years, renewable for subsequent three year terms on payment of a renewal fee of Rs. 3,00,000 each time. General Obligations: The general obligations of CRAS are as specified below: Code of conduct: A Credit Rating Agency should: • Make all efforts to protect the interests of the investors. • In the conduct of its business, observe high standards of integrity, dignity and fairness in the conduct of its business. • Fulfill its obligations in a prompt, ethical and professional manner. • At all time exercise due diligence, proper care and excise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process. • Have a reasonable and adequate basis for performing rating evaluations, with the support of appropriate and in depth rating researches. It should also maintain records to support its decisions. • Ensure that good corporate policies and corporate governance are in place. • Not, generally and particularly in respect of issue of securities rated by it, be party to instrumental for: a. Creation of false market; b. Price rigging or manipulation; or c. Dissemination of any unpublished price sensitive information in respect of securities, which are listed and proposed to be listed in any stock exchange, unless required, as a part of rationale for the rating accorded. Agreement with the Client: The CRA should enter into a written agreement with each client containing the following provisions: • Rights and liabilities of each party in respect of the rating of securities, • Fee to be charged, • A periodic review of the rating during the tenure of the rated instruments, 14 T.Y.B.B.I
  15. 15. Credit Rating • Client’s agreement to co-operate, in order to enable the CRA to arrive at, and maintain, a true and accurate rating of the client’s securities and in particular provide to him true, adequate and timely information for the purpose, • Disclosure by the CRA to the client regarding the rating assigned to its securities through regular methods of dissemination, irrespective of whether the rating is or not accepted by him, • Client’s agreement to disclose in the offer document: I. The rating assigned to its listed securities during the last three years, and II. Any rating that has not been accepted by it, and III. Client’s agreement to obtain a rating from at least two different CRAs for any issue of debt securities for Rs. 100 crore or more. Monitoring of Ratings: The CRA should continuously monitor the rating of securities rated by it during their lifetime. It should disseminate information regarding newly assigned ratings and changes in the earlier rating promptly through press releases and websites, and in the case of securities issued by listed companies, provide such information simultaneously to the respective regional stock exchanges and to all the stock exchanges where the securities are listed. Submission of the Information to the SEBI: Where any information is called for by the SEBI for the purposes of these regulations, including any report relating to its activities, the CRA must furnish such information: • Within the specified period; or • If no such is specified, within a reasonable period of time. • It should also, at the cost of each accounting period, furnish the SEBI with copies of its balance sheet and profit and loss account. Compliance with circulars issued by the SEBI: The CRAs have to comply with the SEBI guidelines, directions, circulars and instructions issued from time to time. 15 T.Y.B.B.I
  16. 16. Credit Rating Appointment of Compliance Officer: Every CRA should appoint a compliance officer to monitor compliance with the SEBI Act/ rules/ regulations/ modifications/ guidelines/ instructions and so on, issued by the SEBI/ Government. He should immediately and independently report any non-compliance observed by him to the SEBI. Maintenance of Books of Accounts and Records: Every CRA has to keep and maintain for a minimum period of five years, the following books of accounts, records and documents and intimate to the SEBI the place where they are maintained. • A copy of its Balance Sheet, as at the end of each accounting period. • A copy of its Profit and Loss Account for each accounting period. • A copy of the Auditor’s Report on its Account, for each accounting period. • A copy of the agreement entered into with each client. • Information supplied by each clients. • Correspondence with each client. • Ratings assigned to various securities, including up-gradation and down- gradation (if any) of the ratings so assigned. • Rating notes, considered by the rating committee. • Record of decision of the rating committee. • Letter assigning rating. • Particulars of fees charged for rating and such other records as the SEBI may specify from time to time. Steps on Auditor’s Report: Within two months from the data of the auditor’s report, the CRAs should take steps to rectify deficiencies, if any, made out in the auditor’s report, in so far as they relate to the activity of rating securities. 16 T.Y.B.B.I
  17. 17. Credit Rating Confidentially, the CRA should treat information supplied to it by the client as confidential and not disclose the same to any other person, except where such disclosure is required or permitted by or under and law in force at the time. Rating Process: The CRA should: • Specify the rating process, file a copy of the same with the SEBI for record and also file any modifications or additions made therein from time to time; • Follow, in all cases, a proper rating process; • Have professional rating committees, comprising members who are adequately qualified knowledgeable, to assign a rating, all rating decision, including those regarding changes in rating, should be taken by the rating committee; • Be staffed by analysts qualified to carry out a rating assignment; • Inform the SEBI about new rating instruments or symbols introduced by it; • Exercise, while rating a security, due diligences in order to ensure that the rating given is fair and appropriate; • Not rate securities issued by it; • Not change rating definition, as well as structure for a particular rating product, without prior information to the SEBI; • Disclose to the stock exchange concerned, through pre-releases and websites for general investor, the rating to the securities of a client after a periodic review, including changes in rating if any. Restrictions on Rating of Securities:- Restrictions on rating by CRAs relate to securities issued by Promoters and certain other entities. Securities Issued by Promoters: A CRA is prohibited from rating securities issued by its promoters, who holds 10%, or more, of its shares. If the promoter is a lending institution, its chairman/ directors/ employees cannot hold a similar position in the CRA or rating committee. However, a CRA may rate a security issued by its associate, having a common 17 T.Y.B.B.I
  18. 18. Credit Rating independent director (i.e. a director who apart from receiving remuneration as a director does not have any other material pecuniary relationship/ transaction with the company/ its management/ its subsidiaries, which in the judgment of the board of the company may affect the independences of the judgment of such director with it or rating company, if • The independent director does not participate in the discussion in the rating decision; and • the CRA makes a disclosure in the rating announcement of such associate (about the existence of common independent director) on its Board or of its rating committee and that the independent director did not participate in the rating process or in the meeting of the Board of directors or in the meeting of the rating committee, when the securities rating of the associate was discussed. Securities issued by Certain Entities: The securities of an entity cannot be rated by CRA, if it is • A borrower of its promoter, • Subsidiary of its promoter, • An associate i.e. a person holding at least 10% of the share capital of its promoter, when there are common chairman/ directors, employees common to the CRA in these entities and there are common chairman/ directors/ employees on the rating committee. It should also not rate a security issued by its associate/ subsidiary if the chairman/ director/ employee of the CRA is its rating committee and also holds a similar position in such an entity. Procedure for Inspection/ Investigation: The SEBI is empowered to appoint inspecting officers to undertake inspection/ investigation of the books of accounts/ records/ documents of the CRA; to ascertain whether they are being maintained properly; to ascertain whether the provisions of the SEBI Act/ regulations are being complied with; to investigate into complaints from the investors/ clients, whose securities are by any other person, regarding any matter having a being on the activities of the CRA and; in the interest of the securities market/ investors. 18 T.Y.B.B.I
  19. 19. Credit Rating The inspection would ordinarily not go into an examination of the appropriateness of rating assigned on merit. In case of complaints of a serious nature, however the appropriateness of the rating may also be covered by the inspection, which would be carried out either by the officers of the SEBI or independent experts with relevant experience, or a combination of both. Before ordering an inspection/ investigation, the SEBI would give at least ten days’ written notice to the CRA, except where satisfied that, in the interest of investors, no notice is required. The CRA and its directors/officers/employees are duty bound to produce, to the investigating/inspecting officer, all books/accounts/documents in their custrol as well as furnish all the statements and information required, within a reasonable/specified period. It should 1) allow the officer(s) reasonable access to the premises occupied by it/any person on his behalf, 2) make available any books/records/documents and computer data in his popssession and 3) provide copies of documents/ other relevant to the officers for the purpose of investigation/inspection. The investigation officer would be entitled to examine the record statements of officers/directors/employees of the CRA in this connection. They are bound to render all the assistance that he may require. After consideration of inspection/investigation report, the SEBT/Chairman would take such action as deemed fit and appropriate including action under the SEBT Procedure for Holding Enquiry Officer and Imposing Penalty Regulations, 2002. Action in Case of Default: The CRAs that a) fail to comply with any condition, subject to which certificates of registration had been granted, or b) contravene any of the provisions of the SEBI Act/ these regulations/any other regulation under the SEBI Act, would be dealt with in the provided under the SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty Regulations, 2002. 19 T.Y.B.B.I
  20. 20. Credit Rating  Rating Progress And Methodology The process/producer followed and the methodology used generally by CRAs in respect of mandated and other instruments are briefly outline in this Section. Rating Process/Procedure : All the four rating agencies in they country adopt a similar rating process. The country adopt a similar rating process. The steps followed by them in the rating process are illustrated with reference to: 1) new issues/instruments 2) review of rating and 3) flow chart of rating. Rating Process of New Issues : The following steps are involved in rating the issuers of instruments for the first time, before going public. • Rating Agreement and Assignment of Analytical Team • The process of rating starts with the issue of the rating request letter by the issuer of the instrument and the signing of the rating agreement. On receipt of the request, the credit rating agency (CRA) assigns an analytical team, comprising two/more analysts, one of whom would be the lead analyst and would serve as the issuer’s primary contact. The analysts who have expertise in the relevant business area are responsible for carrying out the rating assignments. Meeting with Management: Prior to meeting with the issuer, the analytical team obtain and analyses information rating to its financial statements, cash flow projections and other relevant information detailed below: • Annual report for the past five years and interim reports for past three years. • If annual reports do not include cash flow statements, then cash flow statement should be provided for the above periods; 20 T.Y.B.B.I
  21. 21. Credit Rating • If the interim reports do not contain balance sheet, these should also be provided.Two copies of the latest prospects offering statements and applications for listing on any major stock exchanges. • Consolidated financial statements for the past three fiscal years by the principal, subsidiary or division. • Two copies of the statements of projected sources and application of funds, balance sheet and operating statements for at least the three years, along with assumptions on which projections have based. • Copies of the existing loan agreement along with recent compliance letters, if any. In the case of outstanding public debt issues, copies of compliance letters required by indenture of such debt should be also furnished. • A certified of the resolution adopted by the board of the company authorizing the issuance of commercial paper and or other short-term debt instruments, including the name of authorizes signatories. • List of the banks, showing lines of credit and contact officers for each, along with duly completed short-term borrowing from them, in the prescribed format. • If applicable, the name of commercial paper of the company, the planned use of proceeds from the sale of commercial paper, the commercial paper to be used, and a specimen copy of the commercial paper note. • Biographical information on the company’s principal officers and the names of the board members. There is no prescribed format for supplying the above information. Hence, any format could be flexibly used to cover all the required information adequately. A complete brief followed by a discussion on management philosophy and plans should also be obtained. There are certain important aspects that should be known since these impact the credit quality of the instruments being rated. Discussions with management might revel more information’s, as such discussions should cover the following matters: 21 T.Y.B.B.I
  22. 22. Credit Rating Discussion on the management philosophy and plan should cover the financial and operating data for the past five years, and three to five years for future projections; Discussion on projections should reveal management objectives an future plans, that is, future growth plan of the company should be crystallized. These projections are supposed to reflect the “management’s” best estimates of the future financial picture of the company and incorporates the underlying economic assumption for the future as well as the growth objectives, marketing strategies, spending plans and financing needs and alternatives, financial projections by significant role in the rating process as they indicated a management plan for the future. They illustrate the financial strategies of the company terms of anticipated reliance on internal cash flow or outside funds; Discussion must help reveal the risks and opportunities that affect credit quality over the period covered under projections. Other key factors that the issuer believes will have an impact on the rating, including business segments analysis, portfolio analysis and so forth, should also be discussed. The analytical team the proceeds to have detailed meetings with company’s management. To best the interest of the investors, a direct dialogue is maintained with the issuer as this enable the CRAs to incorporate non-public information in a rating decision and also enables the rating to be forward looking. The incorporate non-public information in a rating decision and also enables the rating to be forward looking. The topic discussed during the management meeting are ranging, including competitive position, strategies, financial policies, historical performance and near and long- term financial and business outlook. Equal importance is placed on discussing the issues, business risk profile and strategies, in addition to reviewing financial data. The rating process ensures complete confidentiality of the information provided by the company. All information is kept strictly confidential by the rating group and is not used for any other purpose or by any third party other than CRAs. Rating Committee: 22 T.Y.B.B.I
  23. 23. Credit Rating After meeting with the management, the analysts present their to a rating committee, which then decides on the rating. The rating committee meeting is the only aspect of the process in which the issuer does not participate directly. The rating is arrived at after a composite assessment of all the factors concerning the issuer, with the key issues getting greater attention from the rating committee. Communication to the Issuer After the committee has assigned the rating, the rating decision is communicated to the issuer, with the reasons or rationale supporting the rating. For a rating to have value or an issuer or an investor, the CRA must have credibility. The thoroughness and transparency of its rating methodology and the integrity and fairness of its approach are important factors in establishing and maintaining credibility. The CRAs are, therefore, always willing to discuss with the management, the critical analytical factors that the committee focused on while determine the rating and also any factors that the company feels may not have been considered while assigning the rating. In the event that issuer disagrees with the rating outcome, he may appeal the decision for which new/additional information, which is material to the appeal and specifically address the concerns expressed in the rating rationale need to be submitted to the analysts. Subsequently, a not is put once again before the rating committee, where the rating may or may not undergo a change. The client has the right to reject the rating and the whole exercise is kept confidential. The rating process, from the initial management to the assignment of the rating, normally takes to four weeks. However, when required the CRAs deliver the rating decision in shorter time frames. Dissemination to the Public: Once the issuer accepts the rating, the CRAs Disseminate it along with the rationale, through the print media. Rating Review for Possible Change: 23 T.Y.B.B.I
  24. 24. Credit Rating In the case of rated instruments, the rated company is on the surveillance system of CRA and from time to time, the earlier rating is review. The CRA constantly monitors all ratings with reference to new political, economic and financial developments and industry trends. All this information is reviewed regularly to identified the companies for potential rating changes. The CRA prepares annual review proposals for the rating review committee. The following steps are necessary in the rating process for review cases. New Data of Company: Analysts review the new information or data available on the company, which might be sent to it by the company or it might have been procured thought routine channels, as strategic information under its surveillance approach. If the new information is crucial for rating decision than analysts take action to collect more information as may be available from different sources and study the same from the angle of relevance and authenticity. Rating Change: On preliminary analysis feel that there is a possibility for changing the rating, than the analysts request the issuer for a meeting with its managements and proceed with a comprehensive rating analysis the rest of the procedure of presenting the rating opinion to a rating committee and so on is the same as is followed in the cases of new issues, discuss above. Credit Rating watch: During the review monitoring or surveillance exercise, rating analysts might become aware of imminent events like mergers and so on, which affect the rating and warrants a rating change. In such a possibility, the issuer’s rating is put on ‘credit watch’ indicating the direction of possible change and supporting reasons for a review. One a decision to either change or present the rating has been made, the issue will be removed from ‘credit watch’. The duration of credit watch is for 90 days. In cash the rating is modified, the same procedure of presentation to the rating committee and so on are followed. • ‘Credit watch’ indicates four situations for changing the rating, namely: 24 T.Y.B.B.I
  25. 25. Credit Rating • “Negative” change, indicating the possibility of a downgrade; • “Positive” change, indicating an upgrade; • “Stable”, implying no change in rating and • ‘Developing’, implying an unusual situation in which the future events are so unclear that the rating may be changed either in negative or positive directions. 25 T.Y.B.B.I
  26. 26. Credit Rating  Rating Methodology The rating methodology involves an analysis of the industry risk, the issuer’s business and financial risks. A rating is assigned after assessing all the factors that could affect the credit worthiness of the entry. Typically, the industry risk assessment sets the stage for analyzing more specific company risk factors and establishing the priority of these factors in the over all evolution. For instance, if the industry is highly competitive, careful assessment of the issuer’s market position is stressed. If the company has large capital requirements, the examination of cash flow adequacy assumes importance. The ratings are based on the current information provide by the issuer or facts obtained from reliable sources. Both qualitative and quantitative criteria are employed in evaluating and monitoring the ratings. The rating methodology is illustrated below with reference to:  Manufacturing companies and  Financial services companies. Business Risk Analysis: The rating analysis being with an assessment of the company’s environment, focusing on the strength of the industry prospects, pattern of business cycles as well as the competitive factors affecting the industry prospects, pattern of business cycles as well as the competitive factors affecting the industry. The vulnerability of the industry to government controls/regulations is assessed. The nature of competition is different for different industries, based on price, product quality, distribution capabilities, image, product differentiation, services and so on. The industries characterized by a steady growth in demand, ability to maintain margins without impairing future prospects, flexibility in the timing of capital outlays, and moderate capital intensity are in a stronger position. When a company participate in a more than one business, each segment is analyzed separately. A truly diversified company does not have a single business segment is dominate, and the company’s ability to manage diverse operations is a significant factor. As part the industry analysis, key rating factors are 26 T.Y.B.B.I
  27. 27. Credit Rating identified into key to success and areas of vulnerability. The main industry and business assessed include:  Industry Risk Nature and basis of competition, key success factors, demand and supply position, structure of industry, cyclical/seasonal factors, government policies and so on.  Market Position of the Issuing Entity Within the Industry Market share, competitive advantages, selling and distribution arrangements, product and customer diversity and so on.  Operating Efficiency of the Borrowing Entity Location advantages, labour relationships, cost structure, technological advantages and manufacturing efficiency as compared to competitors and so on.  Legal Position Terms of the issue document/prospectus, trustees and their responsibilities, system for timely payment and for protection against fraud/forgery and so on. While the CRAs do not have a minimum size for any given leave, the size of the company is a critical factor in the rating decision as smaller companies are more vulnerable to business cycle swing as compared to larger companies. In general, small companies are more concentrated in terms of product, number of customers and geography and, consequently, lack the benefits of diversification that can benefit larger firms. If the company being rated is a subsidiary or an affiliate, controlled by/has strong links with a dominant parent company, then the rating includes an analysis of the parent company’s credit quality. The parent company’s credit quality could have an impact on the issuer’s own credit quality. 27 T.Y.B.B.I
  28. 28. Credit Rating  Financial Risk Analysis After evaluating the issuer’s competitive position and operating environment, the analysts proceed to analysts the financial strength of the issuer. Financial risk is analyzed largely through quantitative means, particularly by using financial rations. While the past financial performance. As ratings rely on audited data (the rating process does not entail auditing a company’s financial record), the analysis of the financial beings with a view of accounting quality. The purposes is to determine whether ration and statistics derived from financial statement can be used to accurately measure a company’s performance and its position, relative to both its group and the larger universe of companies. The profitability of a company is an important determinant of its ability to withstand business adversity, as well as generate capital internally. The main measure of profitability studied operating and net margins and return on capital employed. The absolute levels of these ration, trends in movement of the ration as well as comparison of the ration with other competitors analyzed. As a rating exercise is a forward looking exercise, greater emphasis is laid on the future, rather than past earning capability of the issuer. Emphasis is also laid on an analysts of cash flow patterns, as it provides a better indicator of the issuer’s debt servicing capability, compared to reported earning. A cash flow analysis reveals the usage of cash for different purposes, and, consequently, the extent of cash available for servicing. The future debt claims on the issuer as well as the issuer’s ability to raise capital is also assessed in order to arrive at level of the issuer’s of the financial flexibility. The a eras considered in financial analysis include:  Accounting Quality Overstatement/understatement of profits, auditors qualifications, method recognition, inventory valuation and depreciation policies, off-balance sheet liabilities. 28 T.Y.B.B.I
  29. 29. Credit Rating  Earning Prospects Sources of furniture earnings growth, profitability rations, earnings in relation to fixed income charges and so on.  Adequacy of Cash Flows In relation to debt and working needs, stability 0of cash flows, capital spending flexibility, working capital management and so on.  Financial Flexibility Alternatives financing plans in times of stress, ability to raise funds, asset deployment potential and so on.  Interest and Tax Sensitivity Exposures to interest rate changes, tax law changes, hedging against potential and so on.  Management Risk A proper assessment of debt protection levels requires an evaluation of the managements philosophies and its strategies. The analysts compares the company’s business strategies and financial plans(over a period of time) to provide insight into management’s abilities, with respect to forecasting and implementing of plans.  Specific areas reviewed include: i) Track record of the management: Planning and control system, depth of managerial talent, succession plans; (ii) Evaluation of capacity to overcome adverse situation and Goals, philosophy and strategies.  Financial Service Sector When rating debt instruments of financial institutions, banks and no banking finance companies, in addition to the financial analysis and management evaluation outlined above, the assessment also lays emphasis on the following factors: 29 T.Y.B.B.I
  30. 30. Credit Rating  Regulatory and Competitive Environment a. Structure and regulatory framework of the financial system; b.Trend in regulation/deregulation and their impact on the company/institution.  Fundamental Analysis Fundamental analysis should include: o Capital Adequacy Assessment of the true net worth of the issuer, its adequacy in relation to the volume of business and the risk profile of the assets. o Resources overview of funding sources; funding profiles; cost and tenor of various sources of funds. o Asset quality of the issuer’s credit risk management; system for monitoring credit; sector risk exposure to individual borrowers, management of problem credits and so on. o Liquidity Management Capital structure; term matching of assets and liabilities; policy on liquid assets in relation to financing commitments and maturing deposits. o Profitability and financial position historic profits; spreads on funds deployments; revenues on no fund based services; accretion to reserves and so on. o Interest and Tax Sensitivity Exposure to interest rate changes; tax law changes and heading against interest rate. The summary of information to be submitted by manufacturing and financial companies for rating assignment is given in Appendix 16-B and Appendix 16-C respectively. 30 T.Y.B.B.I
  31. 31. Credit Rating  CREDIT RATING AGENCIES IN INDIA Currently, there are five credit rating agencies in India:  Credit Rating Information Service Ltd.(CRISIL)  Investment Information and Credit Rating Agency of India (ICRA)  Credit Analysis and Research (CARE)  Duff Phelps Credit Rating Pvt. Ltd. (DCR INDIA)  Onida Individual Credit Rating Agency Ltd. (ONICRA). CREDIT RATING INFORMATION SERVICE LIMITED Credit Rating Information Service Limited (CRISIL) the first credit agency was floated on January 1, 1988. it was started jointly by ICICI and UTI with an equity capital of rs.4crores. Each of them holds 18% of the capital. The other promoters are Asian Development Bank (15%), the LIC and GIC and its subsidiaries and the SBI (5%each), the housing Finance Development Corporation (6.2%), nine public sector banks (19.25%) and 10 foreign bank (7.55%). The principal objective of CRISIL is to rate the debt obligation of Indian companies. Its rating guides investors about the risk of timely payment of interest and principal on a particular debt instrument. CRISIL has five offices one each in Mumbai, Delhi, Kolkata, Chennai and Bangalore. 31 T.Y.B.B.I
  32. 32. Credit Rating Rating Methodology of CRISIL: CRISIL commences a rating exercise at the request of a company. In accordance with industry practice all over the world, the methodology involves an analysis of the past performance of the company and assessment of its prospects. The first analysis relates to the past performance of the company however, the past is viewed not as a guide, but to understand why the company performed in the way it did, what problem it faced and what the management response to these problem was. To assess the future prospects, CRISIL studies the industry or industries in which the company operates and the company’s position within the industry. IT also makes evaluation of the management and cash flow projection of the company and identifies the key issues concerning the company. The industry is studied by analyzing demand and supply growth, nature and basis of competition, government policy for the company and the effect of change in government policing on the future of the company. The position of the company with industry is studied to understand how the company would fare in the future. CRISIL, therefore, looks at the operating efficiency in terms of lavational advantage, raw material , power and lab our situation; its cost structure as compare to that of its nearest competitors and the company’s market position in terms of its market share, product strength, selling and distribution arrangement, competitive advantage, customer delivery etc. CRISIL, evaluate the management of the company with reference to its track record, the recruitment and training system, planning and control system, depth of managerial talents and succession plans, goals for the company, the philosophy of doing bossiness, attitudes towards taking business risks and the strategies for the company. The tenacity, determination and the drive of the management to overcome problem as they arise in the company is yet another factor accessed by the CRISIL. 32 T.Y.B.B.I
  33. 33. Credit Rating Then, CRISIL makes its own assessment of cash flow and the degree of comfort available from the cash flows to meet cash need of the company for capital expenditure, working capital growth and the debt servicing obligation, its assesses the company’s ability to raise fund quickly in various ways in times of necessity to meet the requirement of servicing debt. The rating process seeks to identify the key issues concerning the company. For instance, if a company is putting up a new project, the key, issue in the rating is the likelihood of timely completion of the project the rating a composite assessment of all this factor with the key issue. Getting greater attention for the rating agency. In evaluating the ratings, CRISIL employs both quality criteria . the judgment made by the CRISIL is necessarily subjective and the quantities analysis is meant to assist in making best possible overall qualitative judgment. CRISIL employs multi-layered decision – making process in assigning ratting. when its receive a request for rating its assign two teams on the job. the first team meet the official and make and assessment of the industry, company, and management. The second team is also require to makes its own of the industry. Then the first team interact with back team the finding of the interaction are presented simultaneously in a detail note to the branch. Internal committee comprising at least three senior analysts of CRISIL and an internal committee of six senior executive and thereafter the note is presented with the recommended rating to the rating committee comprising six directors of the company who are not connected with any shareholders of CRISIL.the rating committee members are chosen carefully so that they do not have any links with industries or investment agencies connected with the units being rated. This multi-layered process ensures that no individuals decides on ratings and that prejudices and biases are eliminated. The evaluations of the company is made on a confidential basis, the rating process ensures complete confidentiality of information that may be provided by the company. 33 T.Y.B.B.I
  34. 34. Credit Rating  CREDIT RATING SYMBOLS ISSUED BY CRISIL: CRISIL uses the conventional rating symbols used in the USA and widely accepted in many other countries. The following table shows the investment-wise ratings symbols assigned by CRISIL and the meaning of each ratings from the angle of safety to the investors. CRISIL DEBENTURES RATING SYMBOL • CRISIL may apply ‘+’(plus) Or ‘–‘ (minus) sign for rating from AA to C to reflect comparative standing within the categories. • The contents within parenthesis are a guide to the pronunciation of the rating symbols. • Preference shares ratings symbols are identical to the debentures rating symbols except the letter ‘pf’ are prefixed to the rating symbols, e.g., pf AAA (“pf triple A”). CRISIL FIXED DEPOSIT RATING SYMBOL • CRISIL may apply ‘+’(plus) Or ‘–‘ (minus) sign for rating from FAAA to FC to indicate the relative position with the rating category. • The contents within parenthesis are a guide to the pronunciation of the rating symbols. CREDIT RATING FOR SHORT TERM INSTRUMENTS Rating Symbols Indication P-1 Very strong P-2 Strong P-3 Adequate P-4 Minimal P-5 Expected to be in default on maturity or in default (Each ratings indicates that the degree of safety regarding timely payment on the instrument is shown above the symbol) 34 T.Y.B.B.I
  35. 35. Credit Rating Notes:- • CRISIL may apply ‘+’ (plus) sign for rating from PO-1 to P-3 to reflect a comparatively higher standing within the category. • CRISIL monitors the rating its assign constantly. the ratings may be upgraded, down graded or with drawn depending upon new information or development concerning the company whose debt obligation so rated. it has right to widely disseminate the ratings through the media, through its own publication or through any other methods. 35 T.Y.B.B.I
  36. 36. Credit Rating  OPERATION OF CRISIL DURING 1994-95 CRISIL rated 379instruments covering a debt volume of rupees34544 crores. The cumulative number of instrument rates by the CRISIL since its inception in January 1988,till the end of march 1995 has been 1305 and the value of instrument covered has been Rs 78151 crores. The CRISIL has published CRISIL bond yield tables to provide handy reference to investor for determining yield-to-maturity on a debenture given price of debenture, its coupon its maturity period. During 1990-91, CRISIL started a quarterly publication called CRISIL RATING SCAN containing rating by CRISIL during quarter and which using the rating their rating report contains details of rating instrument, rationale for rating assign brief detail of the business of the borrower and the key issue involved in the rating. CRISIL RATING SCAN also includes details of rating in use, rating reviewed during the quarter the instrument which have been places under “rating watch” and rating symbol with definition. “CRISIL CARD” service was developed by CRISIL during the year 1990-91. the service provide details about the company such business tagged in shareholding pattern, key management personnel, plant location, equity share record, analyzed profit and also account and balance sheet foot the last four years, accounting practices, key financial ratio, raw material consumption, major competitor major lenders excerpts from the directors report and events after the balance sheet date. CRISIL has won international recognition. It is one of the four international companies shortlist by the Asian development banks for being appointed as consultant for setting up credit rating organization in Thailand. The CRISIL has set up an information company in collaboration with Extel Financial Limited of the U.K. called CRISIL Information Limited. The company has an equity capital of Rs. 50 lakes of which EXTEL and CRISIL have contributed 26% 36 T.Y.B.B.I
  37. 37. Credit Rating each and the balance is paid by the employees. CRISIL Information Limited provides a wide range of information based on published data. Standard and spoor’s rating service, a global rating agency from the USA, has form strategic alliance with CRISIL for providing analytical and business development co-operation. CRISIL has so far rated a cumulative debt volume exceeding $ 30billion covering 1500-debt instrument covering 1000 companies. 1) Investment Information and Credit Rating Agency of India (IICRA): The IICRA was set up by industrial finance corporation of India in 16th January 1991. It is a public limited company with an authorized share capital of Rs.101 cores. The initial paid up capital of Rs. 3.50crores is subscribed by IFC, UTI, LIC, GIC, SBI and 17 other banks. IICRA started operation from 15th march 1991. During 1994-95, IICRA rated 212 debt instrument covering volume of Rs. 5345crores. The cumulative number of instrument rated since its inception till March 1995 has been 485 covering a total debt volume of Rs. 17638crores. IICR RAATINGS SCALE Long term including debenture bond and preference shares LAAA : Highest Safety LAA : High Safety LA : Adequate Safety LBBB : Moderate Safety LBB : Inadequate Safety LB : Risk Prone LC : Substantial Risk LD : Default, Extremely Speculative 37 T.Y.B.B.I
  38. 38. Credit Rating Notes: • The rating symbol group together similar (but not necessarily identical concern in terms of there relative capability of timely serving of debts/obligation. As per terms of contract, i.e. the relative degree of safety risk) • The sign (+) or (-) may be used after rating symbol to indicate the comparative position of the company within the group covered by the symbol. • The letter ‘P’ in parenthesis after the rating symbols indicate that the debt instrument is being to raise resources by a new company for financing a new project and the rating assumes successful completion of the project. • The rating symbols for different instrument of the same company need not necessarily be the same. IICRA FIXED DEPOSIT SYMBOLS IICRA CREDIT ASSESSMENT SYMBOLS MAAA Highest Safety 1. Very Strong Capacity MAA+ Highest Safety 2. Very Strong Capacity MAA High Safety 3. Strong Capacity MAA- High Safety 4. Strong Capacity MA+ High Safety 5. Strong Capacity MA Adequate Safety 6. Adequate Capacity MA- Adequate Safety 7. Adequate Capacity MB+ Adequate Safety 8. Adequate Capacity MB Inadequate Safety 9. Adequate Capacity MB- Inadequate Safety 10. Adequate Capacity MC+ High Risk 11. Poor Capacity MC High Risk 12. Poor Capacity MC- High Risk 13. Poor Capacity MD Default 14. Default 38 T.Y.B.B.I
  39. 39. Credit Rating 3) CREDIT ANALYSIS AND RESEARCH LIMITED (CARE): The CARE was promoted in 1993 jointly with investment companies, banks and finance companies. Services offered by CARE are : • Credit rating • Information service • Equity research • Rating of parallel market of LPG kerosene. Since its inception till the end of March 1995, CARE has rated 249-debt instrument covering a total debt volume of Rs. 9729crores. SI. NO. Investment Grade CARE For Long terms debt instruments Highest Safety CARE AAA High Safety CARE AA Adequate Safety CARE A Inadequate Safety CARE BB High Risk CARE B For Medium Terms Debt Instruments 1. Highest Safety CARE AAA 2. High Safety CARE AA 3. Adequate Safety CARE A 4. Inadequate Safety CARE BB 5. High Risk CARE C For Short term Debt Instrument 1. Highest Safety PR1 2. High Safety PR2 3. Adequate Safety PR3 4. Inadequate Safety PR4 5. High Risk PR5 39 T.Y.B.B.I
  40. 40. Credit Rating 4) Duff and Phelps Credit Rating India Private Limited (DCR): The Duffs and Phelps is a leading international credit rating agency. The J.M.Financial and Alliance Group in joint venture with Duffs and Phelps has now set- up DCR in India. Its main objective its to give credit rating to debt instrument. On special request it may undertake rating of companies and countries as well. The popular symbol employed by DCR is DI, D2, D3, etc. depending upon the credit status. For Example, the RBI has stipulated a minimum credit rating of D-2 DCR India for the purpose of issuing commercial paper by instrument paper by instruction. 5) Onida Individual Credit Rating Agency LTD (ONICRA) : Almost all credit rating agency established in India undertake credit analysis work of corporate bodies only. Unlike this agency, the ONICRA LTD. Has taken up the individual borrowers. It has been sponsored by the Onida Finance LTD. In all credit trancation relating to credit cards, housing finance, rental/H.P. agreement, personal loan etc., it become imperative that one should know the quantum of default risk associate with such transaction before entering into those transaction. It is where the ONICRA comes into picture. It does not rate the individual as such but the risk associate with entering into those credit transaction with that individual at a certain period. Thus, it help the user of this rating to know risks associate with credit transaction while dealing with individual. It is gaining popularity among financial institution. 40 T.Y.B.B.I
  41. 41. Credit Rating  SEBI GUIDELINES 1999 • No credit agencies shall rate a security issued by its promoters. • it has barred rating agencies from rating securities issued by any borrower, subsidiary of the promoter if it has a chairman, director, employee of any such firm. • Dual rating is compulsory for public and right issue of debt instrument of Rs. 100crores or more. • SEBI has decide to incorporate a clause in the listing agreement of stock exchange requiring to corporate with agencies by providing correct information. Refusal to do so may lead to bridge of contract between rating agencies and client. • The issues would required to incorporate an undertaking in their offer document promising necessary cooperation with they rating agency in providing factual information. • It is also suggested that a penal clause be introduced in the listing agreement of the information provide is proved to be incorrect at a later stage, to protect investor interest. • The net worth of rating agencies has been fixed at Rs.5crores. • Rating agencies can choose their methodology of operation but self regulatory mechanism will give a better maturity status for agencies. • No chairman, director or employee of the promoter shall be a chairman, director or employee of the CRA or its rating committee. Promoter of a CRA is a person who holds more than 107 of holding of the CRA. • Period of validity of registration shall be 3 years. 41 T.Y.B.B.I
  42. 42. Credit Rating  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 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 environment 42 T.Y.B.B.I
  43. 43. Credit Rating 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. 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. 43 T.Y.B.B.I
  44. 44. Credit Rating  Conclusion 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: credibility. 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 business success. 44 T.Y.B.B.I
  45. 45. Credit Rating SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS Survey for project on Credit Rating NAME: ___________________________________________ AGE: _____________________________________________ DESIGNATION: ___________________________________ SIGNATURE: _____________________________________ CONTACT NO: ____________________________________ 1) Do you invest in securities? Yes No 2) Are you aware of Credit Rating? Yes No 3) Are you aware of different credit rating agency in India? Yes No 4) Before you invest in a company do you check its credit rating? Yes No 5) For what purpose do you check the credit rating of a company? Profitability Security Both of the the above 6) Do you think credit rating is important? Yes No Comments: Project Guide: Prof. Nishikant Jha Signature: Survey Conducted By Girish Agarwal T.Y.BBI Roll No: 01 CUSTOMER SURVEY REPORT 45 T.Y.B.B.I
  46. 46. Credit Rating 1) Do you invest in securities? 0% 10% 20% 30% 40% 50% 60% 70% 80% Series1 78% 22% YES NO 2) Are you aware of credit rating? 0% 20% 40% 60% 80% Series1 76% 24% YES NO 3) Are you aware of different credit rating agencies in India? 46 T.Y.B.B.I
  47. 47. Credit Rating 0% 20% 40% 60% 80% Series1 62% 38% YES NO 4) Before you invest in a company do you check it’s credit rating? 0% 20% 40% 60% 80% Series1 76% 24% YES NO 5) Do you think credit rating is important? 47 T.Y.B.B.I
  48. 48. Credit Rating 0% 20% 40% 60% 80% 100% Series1 98% 2% YES NO ANALYSIS OF THE SURVEY 48 T.Y.B.B.I
  49. 49. Credit Rating Analysis is done to understand better, the concept of credit rating to the customer. The purpose of analysing was to know the customer satisfaction, awareness about the credit rating done by the credit rating agency in India. Questionnaire method was used to asked question to the customer. From this we came to know the customer’s view about the credit rating. We know in today’s generation most of the people are investing their money in shares, debentures and other instruments. Therefore, it is very important to see the rating of the company. The sample size of the survey was taken to be 45. Out of 45, 20 questions were asked to business person, 15 to servicemen and 15 students or other categories for getting information about the credit rating. I overview of the answer, which I got from the customers is that many of them know about the credit rating and they also think that it is a very important concept who is investing in a financial instrument. 49 T.Y.B.B.I
  50. 50. Credit Rating BIBLOGRAPHY Website- Books- M.Y.Khan (financial service) Gorden & Natrages (financial Markets & Services) 50 T.Y.B.B.I