Sapm

1. CREDIT RATING AGENCY AND THEIR
ROLE OF CREATING EFFICIENT
MARKET STRUCTURE
BY TEAM NUMBER 13

2. INTRODUCTION
According to SEBI Regulations, 1999 of the SEBI Act, 1992, Securities and
Exchange Board of India (SEBI) reserves the right to authorize and regulate credit
rating agencies across the country. CRA uses the debtor’s income and credit lines
to analyze if there is any credit risk associated or the debtor’s ability to repay the
debt. In a broader sense, these agencies evaluate and assess an individual’s or a
company’s creditworthiness.

3. • A credit rating agency (CRA) is a company that assigns credit ratings, which are
assessments of the creditworthiness of debtors, including governments and
corporations. The three largest CRAs are Moody’s Investors Service, Standard &
Poor’s, and Fitch Ratings. Together, they rate approximately 90% of the debt
issued in the global capital markets.
• The role of credit rating agencies has come into question since the 2008 global
financial crisis. Many questioned how the agencies rated certain products as
investment-grade when they later became worthless. For example, the ratings of
mortgage-backed securities (MBS) were downgraded to junk status, resulting in
large losses for investors.

4. These agencies assign letter codes and symbols to entities and instruments, such
as AA, BB, AAA, A+, B. etc. The higher the rating (AAA) of a security, and the most
lucrative investment and the lower the rating (C or D), the more speculative.

6. FUNCTION OF CREDIT RATING AGENCIES
Rate companies, state governments, local government bodies, non-profit
organization's, countries, securities, and special purpose entities and provides the
report making it easier for the lender to analyze and come to a informed decision.

7. BENEFITS OF CREDIT RATING AGENCY
• For Investors.
• Issuers of debts instruments.
• For provide rated companies.
• For brokers and financial intermediaries.
• Non disclosure of certain information.

8. CREDIT RATING AGENCIES OF INDIA
CARE
Credit Analysis and Research limited (CARE) was established in the year 1993 and
initially promoted by Unit Trust of India (UTI) Bank, Industrial Development Bank of
India (IDBI), Canara Bank and other financial institutions. Headquartered in
Mumbai, CARE is the second-largest credit rating agency in India. CARE also
enhanced its scope of business by launching a new international credit rating
agency, ‘ARC Ratings’ with four partners from Malaysia, South Africa, Brazil and
Portugal.

9. CRISIL
CRISIL stands for Credit Rating Information
Services of India Limited. Set up in 1987, it is the first CRA to find its place in India.
Standard & Poor's - one of the biggest CRAS of the world is the majority
shareholder of CRISIL. Headquartered in Mumbai, CRISIL has now become a
global analytical company that Rates companies, researches the markets and
provides risk and policy advisory services to its clients.

10. ICRA
Originally named as Investment Information and Credit Rating Agency of India
Limited, ICRA is a joint venture of Indian financial and banking service
organization's & Moody’s, which was set up back in 1991. In April of 2007, the credit
rating agency was renamed to ICRA limited and also got listed in the Bombay Stock
Exchange and National Stock Exchange. Headquartered in Gurugram, Haryana,
ICRA stands as an independent professional corporate investment information and
credit rating and advisory agency.

11. SMERA
Small and Medium Enterprises Rating Agency of India, also known as SMERA,
works solely for the benefit of Micro, Small and Medium Enterprises. It was set up in
2005 by Small Industries Development Bank of India (SIDBI) primarily, along with
Dun and Bradstreet Information Services India Private Limited (D&B) and various
public, private sector and other MNC banks of India. Headquartered in Mumbai,
SMERA has been accredited by Reserve Bank of India and registered with SEBI as
a credit rating agency in 2012.

12. HOW DO CREDIT RATING AGENCIES WORK?
Credit rating agencies evaluate and rate companies, nations, governments, or
financial instruments. They essentially provide information about the quality of fixed-
income securities and debt obligations and their issuers’ ability to repay the
principal amount and interests. In short, these credit risk ratings help retail and
institutional investors get an idea of the solvency of the borrower and its products.
They can decide whether the security in question is worth the investment on just
speculation

13. OBJECTIVES OF CREDIT RATING AGENCY
• The main objective is to provide superior and low cost info to investors for taking a decision regarding
risk return trade
• Other Objectives include which help Market participants are
• improves a healthy discipline on borrowers
• Lends greater credence to financial and other representations.
• Facilitates formulation of public guidelines on institutional Investments
• Helps merchant bankers, brokers, regulatory authorities, in discharging their functions related to debt
issues
• Encourages greater information disclosure, better accounting standards and improved financial
information (helps investors protection)
• May reduce interest costs for highly rated companies

14. METHODOLOGY OF CREDIT RATING
The process of credit rating begins with the prospective issuer approaching the
rating agency evaluation The experts in analyzing banks should be given a free
hand and they will collect data and informant and will investigate the business
strength and weaknesses in detail. The entire process of rating stands on the for of
confidentiality and hence even the most confidential business strategies, marketing
plans, future outlook etc., are revealed to the steam of analysis.

15. LITERATURE REVIEW
Choi et al. (2020) explores the effectiveness of qualitative information extracted from companies’
annual reports in predicting corporate credit ratings. Experimental results conducted by Choi et al.
(2020) from a series of multi-class classification experiments show that predictive models trained
on both financial variables and vectors extracted from management discussion and analysis data
outperform reference models trained on traditional financial variables only. Chen et al. (2020)
found that the current credit rating system cannot distinguish the distribution of recovery rates,
therefore, in this study, considering that online lending in China is much more developed than in
other countries and regions, we propose a credit rating approach for online lending platforms
using a Chinese sample. Finally, an advanced credit rating method for borrower reclassification
was developed that combines factor analysis using recovery and K-Means clustering, while this
final method allows you to clearly separate borrowers with different recovery rates by credit rating.

16. • Viswanathan et al, (2021) compared the classification learning capabilities of an
Enhanced Support Vector Machine (BSVM) algorithm with other classification
methods when predicting bank credit ratings. Further, Viswanathan et al (2021)
present that the performance of each algorithm was compared based on a single
metric, geometric mean, also known as G-Mean (GM), which typically uses
product values to represent class sensitivity, and finally the study results prove
that the proposed BSVM method is superior to other methods

17. CONCLUSION
• CRA play a key role in financial market by helping to reduce the informative
asymmetry between led and investors, on one side, and issues on the other side,
about the creditworthiness of companies Cepurate sk) or couries (sovereign risk).
CRAC wile las expanded with financial globalization and has received an additional
boost from Basel 11 which incorporates the ratings of CRA into the rules for setting
weight for credit risk.
• In making their ratings, CRAS analyze public and non-public financial and accounting
data as well as information about economic and political factors that may affect the
abilny and willingness of a government or firms to meet their obligations in a timely
manner. However, CRAs lack sparency and do not provide clear information about
their methodologies

18. • The recent bankruptcies of Enron, WorldCom, and Parmalat have prompted
legislative senting of the agencies, Criticism bar been especially directed towards
the high degres of concentration of the industry, which in the United States hus
reflected a registration and certification process in the form of NRSRO
designation biased agent new entrants. The effect of such concentration has
been the absence of the discipline enfaced by competition and a low level of
innovation.

19. THANK YOU