There are four types of investors in the market.
Investors having money but not the investment skill;
Investors having money and investment skill both;
Investors having investment skill but less money; and
Investors possessing less money and poor investment skill.
These who do not have enough of money but are equipped with
enough of skill there are many individuals and institutions to help
them by procuring funds as per need.
But those who have money to invest (either from their own
resources or from borrowed ones) need guidance and advice with
expert opinion as to where to invest?
What forms safer outlet both from income and get back point of
view, Credit Rating Agencies(CRAs) serve this cause.
Credit Rating is a simple and easy to understand symbolic indicator of
the opinion of a credit rating agency about the risk involved in a
borrowing program of an issuer with reference to the capability of
the issuer to repay the debt as per terms of issue. This is neither
a general purpose evaluation of the company nor a
recommendation to buy, hold or sell a debt instrument.
"A rating is an opinion on the future ability and legal
obligation of the issuer to make timely payments of the
principal and interest on a specific fixed income security. The
rating measures the probability that the issuer will default on
the security over its life, which depending on the instrument,
may be a matter of 30 days to 30 years or more. In addition
long term rating incorporate an assessment of the expected
monetary loss should default occur,“
"Credit rating agency" is a commercial concern engaged in the
business of credit rating of any debt obligation or of any project
or program requiring finance, whether in the form of debt or
otherwise, and includes credit rating of any financial obligation,
instrument or security, which has the purpose of providing a
potential investor or any other person any information
pertaining to the relative safety to timely payment of interest or
Credit Analysis & Research Ltd. (CARE)
Fitch Ratings India Private Ltd.
Credit Rating agencies are regulated by SEBI.
Registration with SEBI is mandatory for carrying
out the rating Business.
A registration fee of Rs. 25000 should be paid to
A Credit rating agency can be promoted by:
Public Financial Institution
Foreign Bank operating in India with RBI
Foreign Credit Rating agency having at least five
years experience in rating securities
Any company having a continuous net worth of
minimum 100 cores for the previous five years.
Is set up and registered as a company
Has specified rating activity as one of its main objects in its
Memorandum of Association.
Has a minimum Net worth of Rs 5 Crore.
Has adequate Infrastructure
Promoters have professional competence, financial
soundness and a general reputation of fairness and integrity
in Business transactions , to the satisfaction of SEBI.
Has employed persons with adequate professional and other
relevant experience, as per SEBI directions.
SEBI will grant to eligible applicants a Certificate
of Registration on the payment of a fee of Rs
5,00,000 subject to certain conditions.
The CRA should enter into a written agreement
with each client containing ,
Rights and liabilities of each party w.r.t rating of
A periodic review of the rating during the tenure
Clients agreement to cooperate and provide
true, adequate and timely information.
Disclosure by CRA to client regarding the rating
Clients agreement to disclose the rating
assigned in the offer document for the last 3
The CRA should continuously monitor the rating of
securities rated by it during their life time .
It should disseminate information regarding newly
assigned rating and its changes in the earlier
ratings through press releases, websites and
inform the same to stock exchanges.
The rating agency should make public the definitions
of the concerned rating along with symbol
They should also state that the ratings do not
constitute recommendation to buy, sell or hold any
It should provide the public the rational of its rating
which covers analysis of various factors justifying the
assessment as well as the risk factors.
Information on :
Political System Rating
The credit ratings provide an investor with
critical information to enable him to take an
informed investment decision based on his
risk-return preferences. These also help
investment opportunities from a large range
of options available.
In general the ratings are based on an indepth study of the industry as also an
evaluation of the strengths and
weaknesses of the company.
Some of the factors are : inherent protective factors
level of technological development
competence and effectiveness of
hedging of risks,
cash flow trends and potential,
past record of debt servicing,etc.
Once a rating has been accepted by the
company, CRAs continuously monitor the
corporate and the rating is monitored till
the life of the instrument. This process is
known as surveillance. During the
surveillance period, all changes affecting
the company are taken into account and
the rating, if necessary, is changed,
upwards or downwards. In other words, a
rating is valid during the life of the
instrument unless it is changed.
The suffix + or - may be used with the
rating symbol to indicate the comparative
position of the instrument within the group
covered by the symbol. Thus MAA- lies one
notch above MA+.
The CRAs maintain absolute independence
from market participants to provide
unbiased opinions. The ratings are a result
of collective judgement of committee
members. The CRA's in-house research
and data base ensure that opinions are
supported by objective benchmarks and
The factors are: management quality,
corporate operations and competitive
strength (both past and
In other words, all relevant factors affecting
the corporates' earnings prospects and
inherent risks are looked into. Grades are
comments on the fundamentals and do not
forecast the future market price or
comment upon the compliance or violation
of statutory guidelines relates to issues.
CRAs maintain absolute independence
from market participants to provide
unbiased opinions as it does not buy or
sell equity. The Gradings are a result of
members. Benchmarks set up by CRA's
in-house research ensure that gradings
Equity Grading gives investors timely
access to independent, unbiased and
dependable opinions on a company's
fundamental strengths and weaknesses
in form of the earnings prospects and
the associated risks and, therefore, help
investors design their portfolios by
choosing investment options according
to their risk and return preferences.
The equity grades range from ER1A to
ER6C. To illustrate, an equity grade of
Prospects: Moderate Risk-Indicated
fundamentally on above average
position. The level, growth and quality
of earnings over the medium term are
of a high grade. However, changes in
business/economic circumstances, as
may be visualised, may moderately
CRAMEL model is used by the rating agencies,
comprising of: C =
Resource Raising Ability
Management Quality and System
Earning Potential and Prospects.
Liquidity / Asset - Liability
A. NO CAUTION SHOULD BE NEEDED
B. NO CAUTION SHOULD BE NEEDED AT 65
C. MORE OR LESS CARE MAY BE NEEDED
D. CAUTION SHOULD BE RECOMMENDED
E. CAUTION SHOULD BE NEEDED
(all points are examples)
The first rating agency ‘Credit Rating Information Services of
India Ltd. , CRISIL, was promoted jointly in 1987 jointly by the
ICICI and the UTI. Other shareholders included ADB, LIC,
HDFC Ltd, General Insurance Corporation of India and
several other foreign and Indian Banks.
It pioneered the concept of credit rating in the country and
since then has introduced new concepts in credit rating
services and has diversified into related areas of information
and advisory activities.
It became public in 1993.
In 1996, it formed a strategic alliance with S&P rating group.
Credit Rating Services
Credibility first rating and
The principle function of CRISIL is to rate mandated debt
obligations of Indian Companies chit fund, real estate
developers, LPG Kerosene dealers, NBFC, Indian states and
Rating of debt obligations:
◦ Debt obligation includes rupee denominated credit
instruments like debentures, preference shares, deposits,
CD’s commercial papers and a structured obligations of
manufacturing ,finance companies, banks, financial
◦ It ensures stable and healthy growth of capital market by
offering credit rating which is widely acceptable. It provides
increased disclosures, better accounting standards and
improved financial information to the users.
◦ It reduces cost of issue by direct mobilization of resources.
◦ It protects the interest of investors by constantly monitoring
the results of rated companies.
Rating of structured obligations:
– It reflects CRISIL opinion regarding the
capacity and willingness of the company to
make timely payments of financial obligations
on rated instruments.
Rating of real estates developers:
– CRISIL has developed framework for rating of
real estate projects. Such rating helps
investors to identify their investment options
– The rating is expected to help developers
mobilize funds for their projects.
– The methodology assesses a project in terms
of project risk factors and developer’s risk
Bond Fund ratings:
◦ The rating is an opinion of the quality of bond funds
underlying portfolio holdings. They mainly focus on
fixed income securities.
◦ The rating methodology takes into account the
following factors i.e., credit associated with the
securities, the systems and procedures followed by
the funds and management quality and expertise.
• Bank loan rating:
◦ The creditworthiness of bank’s borrower is assessed
offering comments on the likelihood of repayment of
◦ The methodology considers the borrowers underlying
assets liquidity and risk management initiative and for
NBFC quality of assets , loans and investment.
Collective investment schemes:
This covers rating of collective investment schemes
offering opinion on the degree of certainty of the scheme
to deliver the assured returns in terms of cash as
mentioned in the offer document
Grating of health care institutions:
The grading for healthcare institutions is an opinion on
the relative quality of health care delivered by the
institutions to the patients. Grading is done taking into
account facilities, quality , consistency in delivering the
service etc. Flowing are the grades given Grade A( Very
good quality), Grade B (Good Quality) , Grade C
(Average Quality) and Grade D( Poor Quality)
The CAS offers consulting services that aim at
identifying and mitigating risk. The main focus of
these services is transaction and policy level
assignments in the area of energy, transport,
banking and finance disinvestment, privatization and
– Energy group services: it offers advisory services
to companies engaged in energy sector like
power, coal, oil and gas. The policy level
assignments Include aspects like sector reforms
and structuring, regulatory framework
privatization, corporate plan fuel related services.
– Transaction level assignment include project
scoping and structuring, bid process
management, financial viability analysis of
projects, risk identification and analysis and
structuring of project contacts, security package,
structuring and analysis.
Transport and urban infrastructure group services: It
provides financial advisory services to transport and
infrastructure service provider.
◦ Policy level assignments include advice on
transport sector privatization policy of state ports,
development of risk identification allocation, long
term sector plans and state role.
◦ Transaction level assignments include financial
viability analysis, project structuring, bid process
management, negotiation of terms with successful
◦ Privatization and disinvestment group: this group
renders advisory services to central state
governments, public sector enterprises and private
sector entities interested in participating in
privatization program, these services cover 3
aspects policy level, enterprise level and reforms
Banking and finance group:
CRISIL offers a wide range of services covering
restructuring and business reengineering, credit
management, investment management and portfolio
insurance, equity valuation, resource mobilization
studies and financial feasibility studies
Capital Market Group:
This group provides customized research and advisory
assistance to meet specific transactional and strategic
requirements of clients. It offers services like diagnostic
evaluation for valuation of Indian partner of a foreign
asset management company, technical assistance to
AMFI, portfolio evaluation and portfolio analysis for
leading mutual funds, composite performance ranking
of domestic mutual funds, assistance to government for
the development of India’s financial sector.
Information and Credit Rating Services (ICRA) has been
promoted by IFCI Ltd as the main promoter and started
operations in 1991.
Other shareholders are UTI, Banks, LIC, GIC, Exim Bank,
HDFC and ILFS.
It provides Rating, Information and Advisory services ranging
from strategic consulting to risk management and regulatory
The main objectives of ICRA are to assist investors both
individual and institutional in making well informed decisions
To assist issuers in raising funds from a wider investor base.
To enable banks, investment bankers, Brokers in placing debt
To provide regulators with market driven systems to encourage
the healthy growth of capital markets.
It provides rating services, information services and advisory
ICRA rates debt instruments issued by manufacturing
companies, commercial banks, NBFCs, financial
institutions, PSUs and municipalities.
The instruments rated by it include bonds/ debentures,
fixed deposits commercial papers and certificate of
deposit. It also rates structured obligations in
accordance with the terms of the structure based on risk
assessment of the instrument . It rates sector specific
debt obligations issued by power, telecom and
It also provides corporate governance rating , rating of
claims paying ability of insurance companies, credit
assessment of large medium and small scale companies
to obtain assistance from banks, FIs. It also provides
services of general assessment of companies.
The information services division of ICRA focuses on
providing authentic data and value added products used by
intermediaries, financial institutions, banks, asset
managers, institutions and investors.
Value added services include equity grading providing a
critical input on a company's earning prospects and
inherent risks in decision making process of equity
investors and equity assessment.
Other services include corporate reports, equity
assessment, mandate based studies (customized
research) and sector/industry specific publication.
The advisory services division of ICRA offers wide ranging
management advisory services. Under advisory services
ICRA provides its understanding on the business
processes and relevant organizational issues to different
players of financial markets such as investors, issuers,
regulators, intermediaries and media.
The advisory services include 1.strategic consulting/
strategic practice 2. risk management (credit risk, market
risk and operations risk) 3. regulatory practice 4
transaction practice 5. information( content services).
It focuses on sectors like banking and financial services,
infrastructure sector, manufacturing and service sector,
government and regulatory authorities.
Credit Analysis and Research Ltd or CARE is
promoted by IDBI jointly with Financial Institutions,
Public/Private Sector Banks and Private Finance
It commenced its credit rating operations in October,
1993 and offers a wide range of products and
Services in the field of Credit Information and Equity
It also provides advisory services in the areas of
securitisation of transactions and structuring
It offers services like 1. Credit rating of debt
2. Advisory services like
securitization transactions, structuring financial
instruments, financing infrastructure projects and
municipal finances 3. Information services like
providing information to companies, industry and
businesses. 4. Equity research
It is the latest entrant in the credit rating Business
in the country as a joint venture between the
international credit Rating agency Duff and Phelps
and JM Financial and Alliance Group.
In addition to debt instruments, it also rates
companies and countries on request.
The process begins with issue of rating request
letter by the issuer of the instrument and signing
of the rating agreement.
CRA assigns an analytical team consisting of
two or more analysts one of whom would be the
lead analyst and serve as the primary contact.
Meeting with Management- The analytical team
obtains and analyses information relating to its
financial statements, cash flow projections and
other relevant information.
Discussion with management on management
philosophy, competitive position, financial
policies and future plans.
Discussions on financial projections based on objectives
and growth plan , risks and opportunities.
Rating committee- after meeting with the management the
analysts present their report to a rating committee which
then decides on the rating.
After the committee has assigned the rating, the rating
decision is communicated to the issuer, with reasons or
rationale supporting the rating.
Dissemination to the Public: Once the issuer accepts the
rating, the CRAs disseminate it, along with the rationale,
to the print media.
The rated company is on the surveillance
system of the CRA, and from time to time, the
earlier rating is reviewed. The CRA constantly
monitors all rating with respect to new
political ,economic, financial development and
Analysts review new information or data
available on the company. On preliminary
analysis of the new information if the analyst
feel that there is a possibility for change in the
rating then they meet with the management and
proceed with comprehensive rating analysis.
During the review monitoring or surveillance
exercise, rating analysts might become aware of
imminent events like mergers and so on, which
effect the rating and warrants a rating change.
In such a possibility, the issuer’s rating is put on
‘credit watch’ indicating the direction of a possible
change and supporting reasons for review.
Once a decision to either change or present the
rating had been made, the issue will be removed
from credit watch.
The rating methodology involves an analysis of
industry risk, issuer’s business and financial risk.
A rating is assigned after assessing all factors that
could affect the credit worthiness of the entity. The
industry analysis is done first followed by the
The main elements of rating methodology are as below
Business risk Analysis : It begins with an assessment of the
company’s environment focusing on the strength of the industry
prospects, business cycle as well as competitive factors affecting
the industry. The vulnerability of the industry to political factors is
also assessed. If a company is involved in more than one business,
each segment is analyzed separately. The main factors include
Industry Risk, Market position, operating efficiency and legal
Financial risk analysis: Financial risk is analyzed
mainly through financial ratios. Emphasis is placed on the
ability of the company to maintain /improve its future
The profitability of a company is an important determinant
of its ability to withstand business adversity. The main
measures of profitability include operating and net margins
and returns on capital. The absolute levels of these ratios,
trends and comparison of these ratios with other
competitors is analyzed. Emphasis is also laid on cash
The area analyzed are accounting quality, earnings
prospects, adequacy of cash flows financial flexibility and
interest and tax sensitivity.
Management Risk: A proper assessment od
debt protection levels requires an evaluation of
management philosophies and its strategies. The
analyst compares the company’s business
strategies and financial plans to provide insights
into a management’s ability to forecast and
implement plans. The areas analyzed include
track record of the management, planning and
control systems, evaluation of capacity to
overcome adverse situations, goals, philosophy
When rating debt instruments of financial institutions,
banks, NBFCs in addition to the financial analysis
and management evaluation the following factors are
Regulatory and competitive environment
Profitability and financial position
Interest and tax sensitivity
Rating symbols are a symbolic expression of the
opinion/assessment of the credit rating agency
regarding the investment, credit quality, grade of
the debt, obligation instrument.
CRISIL rating symbols: The rating symbols of
CRISIL with respect debentures, fixed deposits,
short term instruments(CPs), credit assessment,
structured obligations, bond funds, bank loans,
collective investment schemes, Indian states, real
estate developers are as follows.
High Investment Grade:
AAA-(Triple A ) Highest security- Offer the highest safety
against payment of interest and principal
AA(Double A) High Safety - Offer high safety against
payment of interest and principal.
A- Adequate safety- Offer adequate safety against
payment of interest and principal. In adverse conditions
might affect such issues.
BBB(Triple B)- Moderate safety- Offer sufficient safety
against payment of interest and principal. Circumstances
may lead to weakened capacity to pay interest and
BB(Double B)- Inadequate safety- These instruments
carry inadequate safety of timely payment of interest
B( High risk)- Instruments rated B have greater risk of
C( Substantial risk)- Risk of default. Repayment can
only be expected in favorable conditions.
D (Default) Such instruments are extremely speculative
and default risk is highest.
FAAA( F triple A)- Highest safety
FAA( F- double A)- High safety
FA- Adequate safety
FB- Inadequate safety
FC- High Risk
It indicates the capability of entity to repay the
interest and principal as per the terms of the
contract. The rating symbols are as below 1-Very strong capability
2,3,4- Strong capability
5,6,7- Adequate capability
8,9,10- Inadequate capability
11,12,13 –Poor capability
High investment grades:
AAA(SO)- Highest safety
AA(SO)- high safety
A(SO) –Adequate safety
BBB(SO)- Moderate safety
BB(SO)- Inadequate safety
B(SO) – High Risk
C (SO)- Substantial risk)
D (SO)- Default
AAAf – Very Strong Protection against losses
AAf - Strong Protection against losses
Af- Adequate Protection against losses
BBBf- Moderate Protection against losses
BBf - Inadequate Protection against losses
Cf – vulnerable to credit defaults.
BLR-1: strong likelihood of repayment of interest
and principal on bank loan
BLR-2: good likelihood of repayment of interest
and principal on bank loan
BLR-3: satisfactory likelihood of repayment of
interest and principal on bank loan
BLR-4: moderate likelihood of repayment of
interest and principal on bank loan
BLR-5: sub standard , vulnerable to loss
BLR-6: High likelihood of loss
GRADE I (high certainty of assured returns)
GRADE II (adequate certainty of assured returns)
GRADE III (moderate certainty of assured returns)
GRADE IV ( Inadequate certainty of assured
GRADE V (high uncertainty of assured returns)
Rating of the states by the CRISIL represents a
landmark in the diversification of the rating
Business in the country.
It has already rated several states.
While assessing a state, CRISIL considers two
The Economic Risk and
The Political Risk
Economic structure of the state and its finances
Whether revenue and expenditure patterns are
Degree of dependence on Central support
Tax policy of the state
Performance of Public sector undertakings and
their effect on the state’s finances.
Relations between the state and the Centre and
its impact on transfer of resources as well as
centre’s influence on political stability in the
Various political parties in the state, their
economic policies and their effect on the state’s
Quality of the current leadership and
Ability of the Government to take decisions that
are politically difficult.
Rating pertains to particular project and not to the
company as a whole. It assigns ratings after assessing the
factors that could affect the ability of the developer to meet
agreed specifications in terms of quality and time as well
as the ability to transfer clear titles to customers. Ratings
are based on project risk analysis and developer risk
Project risk analysis : The quality of legal title in respect of
the property constructed, quality of construction and
timeliness of delivery of the completed unit is assessed.
Developer risk analysis: The track record of the developer,
existing financial statements, financial flexibility and
management evaluation are considered with rating the
position of developer.
PA1- Highest Ability to build the project
PA2- High Ability to build the project
PA3- Adequate Ability to build the project
PA1- Inadequate Ability to build the project
PA1- Inability to build the project