Credit ratings are evaluations of a borrower's creditworthiness and ability to repay debt. They are determined by analyzing financial history, current assets and liabilities. The three major credit rating agencies are Moody's, Standard & Poor's, and Fitch. They generate revenue from fees paid by issuers seeking ratings and from selling proprietary research. Credit ratings indicate the probability that a borrower will default, with higher ratings signaling lower risk.

1. Credit Rating

2. Credit rating
• A credit rating estimates the credit worthiness of an
individual, corporation, or even a country.
• It is an evaluation made by credit bureaus of a
borrower’s overall credit history.
• Credit ratings are calculated from financial history
and current assets and liabilities.
• Typically, a credit rating tells a lender or investor the
probability of the subject being able to pay back a
loan.

3. • Commercial credit risk is the largest and most
elementary risk faced by many banks,
• and it is a major risk for many other kinds of
financial institutions and corporations as well.

4. • many uncertain elements are involved in
determining both how likely it is that an event
of default will happen
• and how costly default will turn out to be if it
does occur.

5. • Credit rating started in USA in the late 19th
Century, when early rating agencies began
publishing financial analyses on railroad
companies.
• Gradually they expanded their reach providing
investors on obligations ranging from
corporate debt to bank deposits.

6. • In 1975, SEC established the ‘Nationally
Recognized Statistical Rating Organization’
(NRSRO) designation and named ‘Moody’s
Investor Services’, ‘Standard and Poor’s’, and
‘Fitch Ratings’ as NRSROs.
• In 2003, the SEC approved a fourth NRSRO,
‘Dominion Bond Rating Services’ (DBRS).

7. Important factors in the
assessment of NRSRO status
• 1. The organizational structure of the rating
organization
• 2. The rating organization’s financial resources (to
determine, among other things, whether it is able to
operate independently of economic pressures or
control from the companies it rates.)
• 3. The size and quality of the rating organization’s
staff (to determine if the entity is capable of
thoroughly and competently evaluating an issuer’s
credit).

8. • 4. The rating organization’s independence from the
companies it rates.
• 5. The rating organization’s rating procedures (to
determine whether it has systematic procedures
designed to produce credible and accurate ratings)
• 6. Whether the rating organization has internal
procedures to prevent the misuse of non-public
information and whether those procedures are
followed.

9. What is Credit Rating
• An opinion
• On the issuer’s capacity
• To meet its financial obligations
• On a particular issue
• In a timely manner

10. • The history of the ratings industry began in the USA
in the late 19th century with the building of the
country’s railway system.
• The debt instruments issued by the various railways
were a tempting target for risk classification for
investors.
• The precursors of bond rating agencies were the
mercantile credit agencies, which rated merchants'
ability to repay their financial obligations.

11. • In 1841, Louis Tappan established the first mercantile credit
agency in New York.
• Robert Dun, subsequently,acquired the agency and published
its first ratings guide in 1859.
• A similar mercantile rating agency was formed in 1849 by
John Bradstreet, who published a ratings book in 1857.
• In 1933, the two agencies were consolidated into Dun and
Bradstreet, which later acquired ‘Moody's Investors Service’
(in 1962).

12. • Gradually, the mercantile rating agencies
began providing ratings on other financial
instruments and securities like bonds, bank
deposits and commercial papers.
• Moody’s began by rating railroad bonds
(1909), and a year later, extended its ratings
activity to utility and industrial bonds.

13. • The Fitch Publishing Company was established
in 1924.
• Standard & Poor’s (S&P) was formed with the
merger of Poor's Publishing Company and
Standard Statistics Company in 1941.

14. • The major agencies were either independent or
owned by nonfinancial companies.
• Moody's, a subsidiary of Dun and Bradstreet,
dominated the market for commercial credit ratings.
• Standard and Poor's was a subsidiary of McGraw-Hill,
a major publishing company with a strong business
information focus.
• Fitch, initially a publishing company, was bought by
an independent investor group in 1989.

15. • Credit-rating agencies are often regarded as
the gatekeepers of the capital markets
• because of the impact of their opinions on the
structuring and pricing of financial products.

16. What Is a Credit Rating?
• A credit rating is an opinion of the general
creditworthiness
• of either an issuer or one of the specific issues
made by the issuer.
• The rating is based on whatever risk factors
the rating agency believes are relevant to the
likelihood that the issuer will honor the terms
of a financial contract.

17. • An example of an issuer rating is the rating of
a company (e.g., IBM) or organization (e.g.,
Fannie Mae) or a sovereign country (e.g.,
Brazil).
• An example of an issue rating is a rating for a
specific instrument of an issuer, such as Bell
South’s bond with a 6.875 percent coupon
and maturity of 2031.

18. • The risk and, therefore, the rating of an issue
will depend on how it is structured in terms of
its seniority relative to other issues in the
capital structure and in terms of its collateral
(i.e., assets pledged as security).
• Because of these structural factors, an issue
may receive a different rating than the issuer

19. The three primary rating agencies are as follows:
• 1. Moody’s Investor Service
• 2. Standard & Poor’s
• 3. Fitch

20. • Moody’s and S&P are generally considered
the most influential because they have the
widest geographical coverage.

21. • The agencies operate without government
mandate, and have remained independent
from the investment community.
• It is because of their independence and
reputation for being objective that their
opinions are accepted as credible by the
investment community.

22. Rating agencies generate their revenues from two
primary sources:
• 1. Fees from issuers that solicit ratings for their securities,
which consist of both per-issue fees and annual fees.
• The amount of the fee depends on the type and size of
security being rated and on the total number of securities of
the issuer already rated by the agency.
• For bonds and preferred stock, per-issue fees for both
Moody’s and S&P have a minimum of $25,000–$30,000 and a
maximum of 225,000–$250,000. Annual fees range from
$12,500 to $15,000.

23. • 2. The sale of research, software, and other
proprietary information.

24. • At first glance, it may seem unusual that rating
agencies are able to charge issuers to have
their credit quality scrutinized.
• In particular, why should a firm pay to get a
low or disappointing rating?
• The alternative, however, is to attempt to
issue the security with no rating, which is
tantamount to signaling the very poorest of
investment quality.

25. • Over the years, the rating agencies have established
a reputation as providing reliable assessments of risk
in the capital markets
• —so much so, that a low rating is better than no
rating in terms of the price paid for a new issue and
the level of demand for the issue.
• On the flip side, receiving a high rating works
strongly in an issuer’s favor by signaling to the
market that the issue deserves favorable pricing.

26. • Such signaling would not be credible in the
capital markets without the services of a
highly reputable third party whose livelihood
depends directly on its reputation for
accuracy and independence.

27. Rating Categories
• Ratings are constructed to represent the risk
of default; that is, a high (low) rating implies a
low (high) probability of default.
• Default refers to any event that results in the
issuer’s breaching its financial contract.

28. • Large companies with strong and stable cash
flows are likely to be rated higher than small
companies with more volatile cash flows.

29. • Investment grade refers to the safest levels of
financial securities.
• Investment-grade securities have historically
exhibited relatively low rates of default.

30. • Speculative grade, or noninvestment grade,
refers to the riskier securities.
• Debt rated BB (Ba for Moody’s) or below is
noninvestment grade, and is sometimes
referred to as “high yield” or “junk.”
• Default rates among these classes of securities
are comparatively high.

31. • Within the major rating categories (AA, A,
etc.), credit ratings are often modified to show
relative standing within a category.
• Moody’s uses numbers 1, 2, and 3, while S&P
and Fitch use plus (+) and minus (−) signs.

32. For example, the three tiers of the “triple-B” category are as
follows:
Moody's S&P Fitch
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBBIntermediate

33. Notching
• Rating agencies recognize the relative risk of
securities issued by the same firm by
“notching” the issues relative to each other.
• Debt obligations have varying degrees of risk,
depending on their priority in a company’s
capital structure.

34. • For example, senior debt has priority over
subordinated debt in bankruptcy and will
therefore receive a higher rating.
• Similarly, secured debt will receive a higher
rating over unsecured debt because of its
senior claim.

35. • A specific example is CSX Corporation, a
transportation company headquartered in
Richmond, Virginia,
• which received a Moody’s rating for its equipment
trust certificates (secured debt) of A1, a rating of
Baa2 for its senior unsecured debt, and a Baa3 rating
for its subordinated debt.
• Its subordinated debt is said to be rated one notch
below its senior debt.

36. Rating Outlooks
• Rating agencies recognize the possibility that future
performance will deviate from initial expectations.
• Rating outlooks address this matter by focusing on scenarios
that could result in a rating change.
• For example, a security could be placed on Moody’s Review
or S&P’s CreditWatch because of a merger announcement if it
has the potential to affect, either adversely or positively, the
ability of an issuer to meet its obligations.
• Rating reviews are normally completed within 60 to 90 days
or as soon as the situation has been resolved.

37. The Rating Process
• The first step in the process is for the rating agencies
to meet with company management.
• The purpose of this meeting is to discuss the
proposed offering, the company’s operating and
financial performance and outlook, and a host of
other factors that might affect the rating.
• The company’s chief financial officer is the main
participant in these discussions, with the chief
executive officer participating in any strategy
discussions.

38. • Following this meeting, the rating agencies assign a team of individuals to
analyze the transaction.
• This team includes the relevant industry analyst and a product analyst if
the security to be rated is specialized.
• The team reviews the offering documents, financial statements, and
management’s presentation, which includes the terms of the proposed
offering, use of proceeds, historical and pro forma financial analysis,
competitive analysis, capital-expenditure plans, etc.
• The rating agency’s analysis, projections, and opinions may vary from
those of the company’s management or their investment bankers.

39. • When the rating team has finished its analysis, a
recommendation is made to an internal rating
committee that votes on the proposed rating.
• Once the rating is determined, the company is
notified and the rationale behind the rating is
explained.
• A rating is often assigned within two weeks,
depending on the nature of the proposed
transaction, the current demand for ratings by other
issuers, and the urgency of the company’s request.

40. • Both Moody’s and S&P allow the company to
respond to the rating before it is released to
the media, which gives the company the
opportunity to appeal and present additional
data supporting a higher rating.
• After the final rating is assigned, the industry
analyst tracks the company’s performance
and adjusts the rating, as appropriate, over
time.

41. • Provided there are no specific concerns or
additional issuances of securities,
• the rating agency typically conducts formal
quarterly reviews
• and meets with management at least once
annually
• to stay current with the company’s
development.

42. Rating Methodology
• Assigning a rating involves a comprehensive
review and analysis of a number of important
categories of information with respect to the
issue or issuer.

43. • Because ratings are relative measures of
default risk,
• it is not surprising that companies with
stronger financial measures have higher
ratings, on average.

44. The Role of Ratings in the Capital Markets
• Ratings provide benefits to both issuers and
investors. Issuing companies with an investment-
grade rating enjoy wide and relatively inexpensive
access to capital.
• Many investors, such as insurance companies, can
invest only a limited percentage of funds in either
speculativegrade or unrated securities.
• Thus, companies that have investment-grade ratings
expand their universe of potential investors
considerably.

45. For investors
• For investors, ratings primarily reduce uncertainty. Less
uncertainty encourages market growth and greater efficiency
and liquidity.
• Ratings also widen investors’ horizons by providing expert
analysis of issues or issuers that can be difficult for even the
most sophisticated investors to examine.
• Finally, ratings provide benchmark investment limits, so that a
pension fund, for example, can manage its risk by stipulating
a limit on the percentage of its assets that can be invested in
securities below a certain rating.

46. Standard & Poor's Sovereign Credit Ratings:
Scales and Process

47. S&P’s long-term credit-rating scale establishes a letter-
grade hierarchy.
• Ratings include “AAA” (“extremely strong”
repayment capacity);
• “AA” (“very strong”);
• “A” (“strong”);
• “BBB” (“adequate”);
• “BB” (“less vulnerable”);
• “B” (“more vulnerable”);
• “CCC” (“currently vulnerable”);

48. • “CC” (“currently highly vulnerable”);
• “R” (“under regulatory supervision owing to
its financial condition”);
• “SD” (“selective default”);
• “D” (“default”);
• and “NR” (“not rated”).

49. • Ratings of BBB and above are considered
investment grade,
• while ratings of BB and below are non-
investment grade, or “speculative” grade.

50. Short-term credit ratings
• Short-term credit ratings also consist of letter
grades, but according to a simpler scale
including
• “A-1” (“strong” repayment capacity);
• “A-2” (“satisfactory”);
• “A-3” (“adequate”);
• “B” (“more vulnerable”);
• “C” (“currently highly vulnerable”);

51. • “R” (“under regulatory supervision”);
• “SD” (“selective default”);
• “D” (“default”); and “NR” (“not rated”).

52. Rating Outlook
• A rating Outlook “assesses the potential direction of
a long-term credit rating over the intermediate to
longer term,” addressing “any changes in the
economic and/or fundamental business conditions.”
• Outlook categories include “Positive” (rating “may be
raised”); “Negative” (“may be lowered”); “Stable”
(“not likely to change”); “Developing” (“may be
raised or lowered”); and “NM” (“not meaningful”).
• However, an Outlook “is not necessarily a precursor
of a rating change or future CreditWatch action

53. CreditWatch
• The CreditWatch service “highlights the potential direction of
a short- or long-term rating,” addressing “identifiable events
and short-term trends” resulting in “special surveillance,”
which in the case of sovereigns might include referenda or
regulatory actions.
• Essentially, a CreditWatch listing means that a noteworthy
event has occurred and “additional information is necessary
to evaluate the current rating.”
• CreditWatch designations include “positive” (rating “may be
raised”); “negative” (“may be lowered”); and “developing”
(“may be raised, lowered, or affirmed”).

54. • As with a rating Outlook, a CreditWatch listing
“does not mean a rating change is inevitable,”
and
• conversely, “rating changes may occur
without the ratings having first appeared on
CreditWatch.”

55. Standard & Poor's Rating Process
• A sovereign seeking a rating establishes a formal
relationship with S&P by executing a written
agreement governing the rating process.
• S&P sends information regarding its ratings criteria
and requests a preliminary set of information from
the sovereign.

56. • The analysts review the various economic and
financial data made available to them (at least
five years’ worth), budget and economic
projections,
• and any available longer-term projections, as
well as any analyses on the country “by
organizations such as the IMF [International
Monetary Fund] and the World Bank

57. • Typically, a team of two analysts (possibly more if
language presents an issue, or if private-sector
ratings are being done simultaneously)
• visits a country for three to four days, meeting with
representatives of the finance ministry, central bank,
and other governmental agencies,
• as well as “individuals and organizations outside the
government who are well informed about economic
and political trends in the country.”

58. • Upon completion of their meetings and
analyses, the analysts prepare a report for
submission to the “rating committee,” which
discusses the report and votes on the
eventual rating.
• This report generally includes all of the
components of the eventual rating package in
draft form.

59. • Once the committee has arrived at a rating
the sovereign is notified of the decision,
• and if the government accepts the rating, then
S&P issues it to the public

60. • The sovereign can appeal the rating once,
typically providing new information or arguing
that certain factors should be weighted
differently,
• in which case the committee process is
repeated for a final, unappealable decision

61. • The rating committee considers both
“quantitative and qualitative” factors in
arriving at a rating decision.
• The process involves ranking the sovereign by
a one-to-six scale (one being the best) with
respect to each of 10 “analytical categories,”
though there is “no exact formula for
combining the scores to determine ratings.”

62. • Specific analytical categories include
• political risk;
• income and economic structure;
• economic growth prospects;
• fiscal flexibility;
• general government debt burden;
• off-budget and contingent liabilities;

63. • monetary flexibility;
• external liquidity;
• public-sector external debt burden;
• and private sector external debt burden.

64. • The issue of political risk, a fundamentally
qualitative issue, “distinguishes sovereigns
from most other types of issuers”;
• a sovereign has significant latitude simply to
choose not to repay even when able, leaving
creditors with “limited legal redress.”

65. • S&P has identified certain “key economic and political risks”
that weigh heavily on the analysis:
• (1) political institutions and trends, and particularly “their
impact on the effectiveness and transparency of the policy
environment”;
• (2) economic structure and growth prospects;
• (3) government revenue flexibility and expenditure pressures,
deficits and the debt burden, and contingent liabilities;
• (4) Foreign exchange position

66. Corporate debacles
• A wave of corporate scandals emerged in the United States
between late 2001 and the end of 2002.
• Hundreds of public corporations restated their financial
statements, scores were sued by the SEC, and some
executives were criminally prosecuted.
• The failures of Enron and WorldCom, revealed a complete
breakdown in all systems of internal control and external
monitoring.
• The collapse of two mammoth organizations within a few
months of each other undermined the credibility of U.S.
credit rating agencies.

67. • Until four days before Enron declared
bankruptcy on December 2, 2001, its debt was
rated as “investment grade” by the major
credit rating agencies.
• But its debt was actually in junk status.

68. • Even more than Enron, WorldCom was a skyrocket
that soared and then plunged.
• By 2001, WorldCom’s situation had deteriorated, its
stock prices had fallen and several underwriters,
mainly the commercial banks, downgraded their
internal credit ratings,
• but the rating agencies had rated WorldCom’s debt
as investment-grade even three months before the
company filed for bankruptcy.

69. • These scandals caused a lot of criticism and
public outcry against the efficiency of the
rating agencies.

70. RATING AGENCIES

71. The External Agency Rating Process
• The issuance of bonds by corporations is a
twentieth-century phenomenon.
• Soon after bonds began to be issued,
companies such as Moody’s (1909), Standard
& Poor’s (1916), and other agencies started to
offer independent assessments of how likely it
was that particular bonds would repay
investors in the way they were intended to
do.

72. • Over the last 30 years,
• the introduction of new financial products has
led to the development of
• new methodologies and criteria for credit
rating:
• Standard & Poor’s (S&P) was the first rating
company to rate mortgage-backed bonds
(1975), mutual funds (1983), and asset-backed
securities (1985).

73. • A credit rating is not, in general, an
investment recommendation for a given
security.
• When rating a security, a rating agency
focuses more on the potential downside loss
than on the potential upside gain.

74. In the words of S&P
• “A credit rating is S&P’s opinion
• of the general creditworthiness of an obligor,
or the creditworthiness of an
• obligor with respect to a particular debt
security or other financial obligation,
• based on relevant risk factors.

75. In Moody’s words
• a rating is, “an opinion on the future ability
• and legal obligation of an issuer to make
timely payments of principal
• and interest on a specific fixed income
security.”

76. • S&P and Moody’s have
• access to a corporation’s internal information,
and since they are considered
• to have expertise in credit rating and are
generally regarded as unbiased
• evaluators, their ratings are widely accepted
by
• market participants and regulatory agencies.

77. • Financial institutions, when
• required by their regulators to hold
investment-grade bonds, use the ratings
• of credit agencies such as S&P and Moody’s to
determine which bonds
• are of investment grade.

78. There are two main classes of ratings
• With issuer credit ratings, the
• rating is an opinion on the obligor’s overall
capacity to meet its financial
• obligations. In the issuer credit rating category
are counterparty ratings,
• corporate credit ratings, and sovereign credit
ratings.

79. • Another class of
• rating is issue-specific credit ratings. In this case,
the rating agency makes
• a distinction, in its rating system and symbols,
between long-term and
• short-term credits. The short-term ratings apply
to commercial paper (CP),
• certificates of deposit (CD), and put bonds.
• The rating is of a specific issue, and not the
issuer.

80. • In rating a specific issue, the attributes of the
issuer, as well as the specific terms of the
issue, the quality
• of the collateral, and the creditworthiness of
the guarantors, are taken
• into account.

81. • The rating process includes quantitative, qualitative, and
legal analyses.
• The quantitative analysis is mainly financial analysis and is
based on
• The firm’s financial reports. The qualitative analysis is
concerned with the
• quality of management; it includes a thorough review of
the firm’s competitiveness
• within its industry as well as the expected growth of the
industry
• and its vulnerability to business cycles, technological
changes,
• regulatory changes, and labor relations.

82. Process of rating an industrial
company
• The analyst works through sovereign and
macroeconomic
• issues, industry outlook, and regulatory
trends, to specific attributes
• (including quality of management, operating
position, and financial
• position), and eventually to the issue-specific
structure of the financial instrument.

83. • The assessment of management, which is
subjective in nature, investigates
• how likely it is that management will achieve
operational success
• and takes the temperature of its tolerance for
risk. The rating process
• includes meetings with the management of
the issuer to review operating
• And financial plans, policies, and strategies.

84. • All the information is reviewed
• and discussed by a rating committee with
appropriate expertise in the relevant
• industry, which then votes on the
recommendation. The issuer can
• appeal the rating before it is made public by
supplying new information.
• The rating decision is usually issued four to six
weeks after the agency is
• asked to rate a debt issue.

85. Moody’s Rating Analysis of an
Industrial Company
• Issue Structure
• Company Structure
• Operating/Financial Position
• Management Quality
• Industry/Regulatory Trends
• Sovereign/Macroeconomic Analysis

86. • Usually the ratings are reviewed once a year
based on new financial
• reports, new business information, and review
meetings with management.
• A “credit watch” or “rating review” notice is
issued if there is reason to
• believe that the review may lead to a credit
rating change. A change of
• rating has to be approved by the rating
committee.

87. Credit Ratings by S&P and Moody’s
• Standard & Poor’s (S&P) is one of the world’s
major rating agencies, operating in more than
50 countries.
• Moody’s operates mainly in the United States
but has many branches internationally

88. • Issues rated in the four highest categories
(i.e., AAA, AA, A, and BBB for S&P
• and Aaa, Aa, A, and Baa for Moody’s)
• are generally considered to be of investment
grade.

89. • Some financial institutions,
• for special or approved investment programs, are
required to invest only
• in bonds or debt instruments that are of
investment grade. Obligations
• rated BB, B, CCC, CC, and C by S&P (Ba, B, Caa,
Ca, and C by Moody’s)
• are regarded as having significant speculative
characteristics. BB (Ba in
• Moody’s) is the least risky, and C is the most
risky.

90. • S&P uses plus or minus signs to modify its AA to CCC ratings
in
• order to indicate the relative standing of a credit within the
major rating
• categories. Similarly, Moody’s applies numerical modifiers
1, 2, and 3 in
• each generic rating classification from Aa through Caa. The
modifier 1,
• for example, indicates that the obligation ranks at the
higher end of its
• generic rating category; thus B1 in Moody’s rating system is
a ranking
• equivalent to B! in S&P’s rating system.

91. How accurate are agency ratings
• based on data from the period 1981 to 2004
• the lower the rating, the higher the cumulative
• default rates. The Aaa and Aa bonds experienced
very low default
• rates; after 10 years, less than 1 percent of the
issues had defaulted.
• Approximately 35 percent of the B-rated issues,
however, had defaulted
• after 10 years.

92. • Historical data seem to offer a general
validation of agency ratings.
• But they are useful for another reason: they
allows risk analysts to attach
• an objective likelihood of default to any
company that has been rated by
• an agency or that has been rated by banks in a
manner thought to be equivalent
• to an agency rating.

93. • While the major rating agencies use similar methods
and approaches to rate debt,
• they sometimes come up with different ratings for the
same debt investment.
• Academic studies of the credit rating industry have
shown that only just over half of the firms rated AA or
Aa and AAA or Aaa in a large sample were rated the
same by the two top agencies.
• The same study found that smaller agencies tend to
rate debt issues higher than or the same
• as S&P and Moody’s; only rarely do they award a lower
rating

94. DEBT RATING AND MIGRATION
• Bankruptcy, whether defined as a legal or an
economic event, usually marks
• the end of a corporation in its current form. It
is a discrete event, yet it is
• also the final point in a continuous process—
the moment when it is finally
• recognized that a firm cannot meet its
financial obligations.

95. • credit agencies do not focus simply on default.
At discrete
• points in time, they revise their credit ratings
of corporate bonds. This evolution
• of credit quality is very important for an
investor holding a portfolio
• of corporate bonds.

96. Credit Rating Agencies in India

97. There are four Credit Rating
agencies in India
• CRISIL
• ICRA
• CARE and
• Fitch India

98. Regulatory Framework
• Credit Rating agencies are regulated by SEBI.
• Registration with SEBI is mandatory for
carrying out the rating Business.

99. Promoter
• A Credit rating agency can be promoted by:
• Public Financial Institution
• Scheduled Bank
• Foreign Bank operating in India with RBI approval
• Foreign Credit Rating agency having at least five
years experience in rating securities
• Any company having a continous net worth of
minimum 100 crores for the previous five years.

100. Eligibility Criteria
• 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.

101. Grant of Certificate of Registration
• 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.

102. CRISIL
• The first rating agency ‘Credit Rating
Information Services of India Ltd. , CRISIL, was
promoted jointly in 1987 jointly by the ICICI
and the UTI.

103. ICRA Ltd
• 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 practice.

104. CARE Ltd.
• Credit Analysis and Research Ltd or CARE is promoted by IDBI
jointly with Financial Institutions, Public/Private Sector Banks
and Private Finance Companies.
• 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 Research.
• It also provides advisory services in the areas of securitisation
of transactions and structuring Financial Instruments.

105. Fitch Ratings India Ltd.
• 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.

106. Rating Process
• 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.

107. • Meeting with Management
• Obtains and analyses information
• Analysts present their report to a rating
committee
• After the committee has assigned the rating,
the rating decision is communicated to the
issuer, with reasons or rationale supporting
the rating.

108. • Dissemination to the Public: Once the issuer
accepts the rating, the CRAs disseminate it,
along with the rationale, to the print media.

109. Rating Review for a possible
change:
• The rated company is on the surveillance
system of the CRA, and from time to time, the
earlier rating is reviewed.
• Analysts review new information or data
available on the company.

110. Rating change
• Ts feel that there is a possibility of On
preliminary analysis of the new data, if the
analysts feel that there is a possibility of
changing the rating, then the analysts request
the issuer for a meeting with its management
and proceed with a comprehensive rating
analysis.

111. Credit Rating Watch
• 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.

112. Rating Methodology
• Business Analysis in terms of Industry Risk,
Market position, operating efficiency and legal
position.
• Financial analysis on the basis of
consideration of accounting quality, earnings
protection and adequacy of cash flows.
• Management Evaluation.
• Regulatory Environment.

113. Credit Rating of Indian States
• 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
basic factors:
• The Economic Risk and
• The Political Risk

114. Economic Risk
• Economic structure of the state and its
finances
• Macroeconomic performance
• Infrastructure
• Sector studies
• Whether revenue and expenditure patterns
are sustainable.
• Deficit Management

115. • Degree of dependence on Central support
• Tax policy of the state
• Performance of Public sector undertakings
and their effect on the state’s finances.

116. Political Risk
• 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 state.
• Various political parties in the state, their
economic policies and their effect on the
state’s policies.

117. • Quality of the current leadership and
administration
• Ability of the Government to take decisions
that are politically difficult.

118. Questions for Revision
• What is Credit Rating ? Describe how it started
and evolved ?
• How do rating agencies generate their
revenue ?
• What is meant by
– Investment grade securities
– Speculative grade securities

119. • Write a short Note on
– Rating Process
– Rating outlook
– Credit watch
• Describe briefly the regulatory framework for
credit rating agencies in India ? Describe some
of the important eligibility criteria for a rating
agency ?

120. • What is the methodology followed by Rating
agencies in India for Industry ? What are the basic
factors considered while assessing a state ?
• Write short Notes on
– CRISIL
– ICRA
– CARE
– Fitch Ratings India

121. The End