The document provides an overview of credit ratings in India. It defines credit ratings as an assessment of an issuer's ability to meet debt obligations. The key points covered include: - The regulatory framework for credit rating agencies in India is established by SEBI. - Credit ratings benefit both investors and companies. They provide investors with independent evaluations of credit risk and companies can access larger investor pools at lower borrowing costs. - The major credit rating agencies operating in India are CRISIL, ICRA, CARE, and FITCH Ratings India. - The rating process involves a detailed analysis of companies' financials and business to determine their relative creditworthiness. Ratings are expressed using standardized symbols

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
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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
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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,
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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.
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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.
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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.
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 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.
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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.
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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.
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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.
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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.
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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:
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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
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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,
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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.
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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.
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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
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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.
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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.
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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;
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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:
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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:
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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:
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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:
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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.
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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
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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)
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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.
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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. 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
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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
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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
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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.
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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.
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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
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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. 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. 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. 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. 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. Credit Rating
0%
20%
40%
60%
80%
100%
Series1 98% 2%
YES NO
ANALYSIS OF THE SURVEY
48 T.Y.B.B.I

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. Credit Rating
BIBLOGRAPHY
Website-
www.crisil.com
www.goggle.com
www.care.com
Books-
M.Y.Khan (financial service)
Gorden & Natrages (financial Markets & Services)
50 T.Y.B.B.I