credit rating

1
A REPORT
ON
CREDIT RATING
By
HARSHIT KOTHARI
Enrollment No: 12BSP0583
SMERA

2
A REPORT
ON
CREDIT RATING
By
HARSHIT KOTHARI
Enrollment No: 12BSP0583
SMERA
A report submitted in partial fulfillment of the requirements of
PGPM Program of
IBS MUMBAI

3
Contents
1. EXECUTIVE SUMMARY ..........................................................................................................................4
2. INTRODUCTION TO CREDIT RATINGS....................................................................................................5
3. HISTORY OF CREDIT RATING .................................................................................................................6
4. DEFINITION OF CREDIT RATING ............................................................................................................7
5. DETERMINANTS OF CREDIT RATINGS ...................................................................................................8
6. UTILITY OF RATINGS............................................................................................................................10
7. LIMITATION OF CREDIT RATING..........................................................................................................11
8. BANK LOAN RATINGS..........................................................................................................................12
9. INTRODUCTION TO SMERA.................................................................................................................13
10. SMERA ACCOMPLISHMENTS...........................................................................................................16
11. PRODUCTS OFFERED BY SMERA .....................................................................................................17
12. PROCESS OF RATING.......................................................................................................................19
13. APPLICABLE REGULATORY BODIES .................................................................................................22
14. CREDIT RATING ANCENCIES PRODUCT SUITE.................................................................................24
15. KIND OF INSTRUMENTS RATED.......................................................................................................25
16. ETHICS TO BE FOLLOWED BY RATING AGENCIES............................................................................26
17. FUTURE OF CREDIT RATING AGENCY..............................................................................................27
18. CONCLUSION...................................................................................................................................28
19. REFERENCES....................................................................................................................................29

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1. EXECUTIVE SUMMARY
The project began with a top down understanding of credit ratings i.e. the Rating
Business, various credit rating agencies in the business, various credit rating products.
The next phase was to understand SMEAR’s product suite and finally to work on
different Bank Loan Rating (BLR) cases which were assigned.
My role was to create a platform on the basis of which a company is rated. My prime
responsibility was to create a database of relevant information which is used by analyst
in analyzing the company and subsequently assigning rating to it.
I get this data from information provided by company. I am provided with companies’
Balance sheet, Profit and loss account, Cash flow, fund flow & other such financial
statements. Along with the data, we are required to take feedback from various
stakeholders of the company to be rated like, its bankers, auditor, supplier.
During my internship period, I have worked on cases from several industries like,
media and entertainment, commercial real estate textile etc.
A structured format is followed while creating database of information of any company.
This information is collated in pre defined Excel spread sheet format.
Looking at the Excel spread, analyst can figure out the financial position of the
company. Various ratios are calculated and posts analyzing the information, I along
with my senior analyst prepare a rating note which contains details of the company
profile, a brief analysis of its financial statements and future prospects of the company.
Rating note is finally concluded with assigning a rating to the company.
This Rating note is then presented to the Ratings committee. Rating committee
comprises of experienced and senior members from the company and other experts in
relevant field.
Analyst is required to present his case in the committee and justify his rating.
Committee members debate on various aspects of the case like, its financial position,
management, project risk, Industry risk, growth aspects etc. This discussion gives many
insights about the respective business and industry.
Post this discussion committee either passes the rating assigned by analyst if they are
satisfied with the analysis done and subsequent rating assigned or they defer the case
for next committee meet if they need some more information or analysis to be done.

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2. INTRODUCTION TO CREDIT RATINGS
Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a
country.
It is an opinion made by credit evaluators of a borrower’s potential to repay debt. Every
rating grade comes with its probability of default, which in turn assists investor/lender to
take informed investment decision. Rating is arrived after considering various financial,
non-financial parameters, past credit history and future outlook.
There are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating,
Issue based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be
classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME
Rating, MFI Rating etc.

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3. HISTORY OF CREDIT RATING
The initial rating exercise was started by Henry Poor who published financial statistics of
Railroad companies in 1860. In addition to his publishing business, John Moody (Moody’s
Investors Services) started publishing ratings for railroad bonds from the year1909.
The rating activity got a boost post Great Depression of 1933 when US Government
Controller of Currency directed the banks in USA to purchase bonds rated BBB/Baa and
above and the rest came to be known as ‘junk’ bonds. At present in US markets all
commercial bonds are invariably rated.

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4. DEFINITION OF CREDIT RATING
Credit ratings are judgments about firms financial and business prospects. Credit rating is
defined ‘…as a process by which a statistical service prepares various ratings identified by
symbols which are indicators of the investment quality of the credit rated’. The credit may
be a debt instrument or equity. In case of debt, ratings are given while in the case of shares
grading is done.
It is an independent assessment of the creditworthiness of a bond or any security having
debt by a credit rating agency. It measures the probability of the timely repayment of
principal and interest of a bond. Generally, a higher credit rating would lead to a more
favorable effect on the marketability of a bond. The credit rating symbols (long term) are
generally assigned with “triple A” as the highest and “triple B” as the lowest in investment
grade. Anything below “triple B” is commonly known as a ‘junk bond’.
Credit rating is the process of assigning standard scores which summarize the probability
of issuer being able to meet its repayment obligations for a particular debt instrument in a
timely manner. Credit rating is integral to debt markets as it helps market participants to
arrive at quick estimates and opinions about various instruments. In this manner it
facilitates trading in debt and money market instruments especially in instruments other
than Government of India Securities. Credit rating is not a recommendation to buy, hold or
sell.
Rating is usually assigned to a specific instrument rather than the company as a whole. In
the Indian context, the rating is done at the instance of the issuer, which pays rating fees for
this service. If it is unsatisfied with the rating assigned to its proposed instrument, it is at
liberty not to disclose the rating given to it. There are 6 rating agencies in India. These are
as follows:
Credit rating is a dynamic concept and all the rating companies are constantly reviewing
the companies rated by them with a view to changing (either upgrading or downgrading)
the rating. They also have a system whereby they keep ratings for particular companies on
"rating watch" in case of major events, which may lead to change in rating in the near
future. Ratings are made public through periodic newsletters issued by rating companies,
which also elucidate briefly the rationale for particular ratings. In addition, they issue press
releases to all major newspapers and wire services about rating events on a regular basis.

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5. DETERMINANTS OF CREDIT RATINGS
Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a
country. It is an opinion made by credit evaluators of a borrower’s potential to repay debt.
Every rating grade comes with its probability of default, which in turn assists
investor/lender to take informed investment decision. Rating is arrived after considering
various financial, non-financial parameters, past credit history and future outlook. There
are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating, Issue
based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be
classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME
Rating, MFI Rating etc.
Business Risk: Business risk relates to the market position of the company, operating
efficiency and management quality. The key factor taken into consideration are: the nature
of the industry the company is in, the demand-supply position, cyclical/ seasonal factors
and government policies vis-à-vis the industry; and the competition it’s facing within the
industry.
Market Position: Market share the company enjoys, its competitive advantages and selling
and distribution arrangements.

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Forex Risk: Rating agencies factor forex risk by checking how company is exposed to
fluctuating exchange rates and has the company made any hedging arrangements.
Operating Efficiency: Location advantages, labor relationships, cost structure,
technological and manufacturing efficiency as compared to its competitors.
Financial Risk: Financial risk is a function of the profitability, debt leverage flexibility and
adequate cash flow. The assessment of financial risk is done on the basis of:
 Financial analysis, including accounting quality: accuracy of statement of profit,
auditors comments, valuation and depreciation policies.
 Earnings protection: Sources of future earning, profitability ratios and earnings in
relation to fixed income charges.
 Adequacy of cash flow: Sustainability of cash flows and working capital
management.
 Financial flexibility: Ability to raise funds.
Management Risk: An evaluation of the management, which is qualitative in nature and
imparts certain amount of subjective element, is done on the basis of track record of the
management; planning and control system, depth of managerial talent, succession plans.
Environmental Risk: An analysis of environment covering regulatory and operating
environment, national economic outlook, pending litigation and unpaid taxes are also
attempted.
Auditor Feed Back: Credit Rating Agencies generally ask for a feedback from client
auditors regarding the accuracy of financial statements.
Bankers Feed Back: Credit Rating Agencies ask for a feedback from client’s banker
regarding his banking conduct.
Rating thus is not based on a predetermined formula which specifies the relevant variables
and as well as weights attached to each one of them. Further the emphasis on different
aspects varies from agency to agency. Broadly the rating agencies assure itself that there is
good congruence between assets and liabilities of a company and downgrades the rating if
the quality of the assets depreciates. The rating agencies employ qualified professionals to
ensure consistency and reliability. The agencies also ensure the integrity of rating by
insulating rating from conflicts of interest.

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6. UTILITY OF RATINGS
Investors have always received credit ratings with enthusiasm. But issuers do not share
the enthusiasm since they have to share their securities at higher yields if their issue gets
inferior rating.
Credit rating gives an investor a simple and easy indicator to the credit quality of the debt
instrument, the risks and likely returns, thus providing a yardstick against which the risk
inherent in an instrument can be measured. An investor uses the rating to assess the risk
level and compares the offered rate of return, which is expected rate of return (for the
given level of risk) to optimize his risk return trade- off. Ratings also provide a comparative
framework, which allows the investor to compare investment opportunities.
Credit rating also benefits the issuer. If a public offer is contemplated, the financial
manager must bear in mind the rating while determining the appropriate leverage.
Additional debt may lower the rating from an investment to a speculative grade category,
thus rendering the security ineligible for investment by many institutional investors. It may
well be that the advantages of debt outweigh the disadvantages of the lower credit rating.
Junk bonds, for instance, are a high risk and a high yield (16 to 25% in USA) instruments.
Investment may be limited in such instrument to what an investor can afford to loose.
Ratings will also affect the pricing of the issue
Ratings are used by brokers for opinions and as a service for their customers. Insurance
companies and mutual funds use them in the purchase of securities even though their own
staff prepares investment analysis. Portfolio managers also use them in security
management. Banks depend on them for their investment in commercial paper. Individual
investors depend on them for their decisions to place fixed deposits. Ratings are bound to
assume greater importance with the institutionalization of investors in the form of unit
trusts, mutual funds, pension and provident funds. The debt has shown considerable
buoyancy in 1996 not only at the wholesale level (institutional investors) but also at retail
level in view of poor offerings of equity in the primary market. This has come about largely
on account of the availability of ratings on debt instruments, which boosted investor
confidence.
Rating has impact on interest rate in case Bank Loan Rating. (BLR) If the rating is low
interest rate charged is high and vice versa.

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7. LIMITATION OF CREDIT RATING
1. Possibility of Bias Exist: The information collected by the rating agency may be subject
to personal bias of the rating team. However, rating agencies try their best to provide an
unbiased opinion of the credit quality of the company and/or instrument. If not, they will
not be trusted.
2. Improper Disclosure May Happen: The company being rated may not disclose certain
material facts to the investigating team of the rating agency. This can affect the quality of
credit rating.
3. Impact of Changing Environment: Rating is done based on present and past data of the
company. So, it will be difficult to predict the future financial position of the company.
Many changes take place due to changes in economic, political, social, technological, legal
and other environments. All this will affect the working of the company being rated.
Therefore, rating is not a guarantee for financial soundness of the company.
4. Problems for New Companies: There may be problems for new companies to collect
funds from the market. This is because, a new company may not be in a position to prove
its financial soundness. Therefore, it may receive lower credit ratings. This will make it
difficult to collect funds from the market.
5. Downgrading by Rating Agency: The credit-rating agencies periodically review the
ratings given to a particular instrument. If the performance of a company is not as
expected, then the rating agency will downgrade the instrument. This will affect the
image of the company.
6. Difference in Rating: There are cases, where different ratings are provided by various
rating agencies for the same instrument. These differences may be due to many reasons.
This will create confusion in the minds of the investor.

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8. BANK LOAN RATINGS
Bank Loan Ratings are used by banks to determine risk weights for their loan exposures, in
keeping with the Reserve Bank of India's (RBI's) April 2007 Guidelines for Implementation
of the New Capital Adequacy Framework under Basel II framework.
Bank loan rating is an opinion on the relative ability and willingness of a borrower to fulfill
obligations on specific fund-based or non-fund based facilities in a timely manner. The
primary focus is to assess the capability of an issuer to meet its debt obligations against a
specific line of credit under its respective terms & conditions.
A credit rating is not a requirement for a loan sanction or for renewal of working capital
facilities. However, a bank could insist on rating the loan/facility before sanction/renewal
of loan facilities as it would help the bank to save on capital and provide it with additional
inputs to decide on the terms of the loan.
Features
 All types of facilities (Fund based & Non fund based) are rated.
 Ratings are assigned to each facility and are linked to the tenure of the facility rated
 Ratings are published through a press release on SMERA’s website
 Ratings are kept under constant surveillance
Benefits
For Borrowers
 Better negotiating power with respect to availability and pricing of credit
 Faster turnaround time for enhancement/approvals
 Aligns borrowers with strengths and weaknesses across other rated entities
 Greater visibility amongst lenders/investors
For Bankers
 Capital relief and regulatory adherence through rating of exposure
 An independent and credible credit opinion
 Risk based pricing of facilities
 Exposure to rating knowledge across geographies and rating spectrum

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9. INTRODUCTION TO SMERA
SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI, Dun &
Bradstreet Information Services India Private Limited (D&B) and several leading banks in
the country. SMERA is the country's first Rating agency that focuses primarily on the Indian
MSME segment.
SMERA's primary objective is to provide Ratings that are comprehensive, transparent and
reliable. This would facilitate greater and easier flow of credit from the banking sector to
MSMEs.
SMERA has also been registered under Securities and Exchange Board of India (Credit
Rating Agencies) Regulations, 1999 making it only the sixth rating agency in India to rate
issues such as IPO, bonds, commercial papers, security receipts and others.
SMERA has also been granted approval as an eligible Credit Rating Agency for ratings bank
loans.

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Rating Scale
LONG TERM RATING
SMERA ‘AAA’
Instruments with this rating are considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such instruments carry
lowest credit risk.
SMERA ‘AA’
Instruments with this rating are considered to have high degree of safety
regarding timely servicing of financial obligations. Such instruments carry very
low credit risk
SMERA ‘A’
Instruments with this rating are considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such instruments carry low
credit risk
SMERA ‘BBB’
Instruments with this rating are considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such instruments carry
moderate credit risk
SMERA ‘BB’
Instruments with this rating are considered to have moderate risk of default
regarding timely servicing of financial obligations
SMERA ‘B’
Instruments with this rating are considered to have high risk of default
SMERA ‘C’
Instruments with this rating are considered to have very high risk of default
SMERA ‘D’ Instruments with this rating are in default or are expected to be in default soon

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SHORT TERM RATING
SMERA ‘A1’
Instruments with this rating are considered to have very strong degree of
safety regarding timely payment of financial obligations. Such instruments
carry lowest credit risk.
SMERA ‘A2’
Instruments with this rating are considered to have strong degree of safety
regarding timely payment of financial obligations. Such instruments carry
low credit risk.
SMERA ‘A3’
Instruments with this rating are considered to have moderate degree of
carry higher credit risk as compared to instruments rated in the two higher
categories.
SMERA ‘A4’
Instruments with this rating are considered to have minimal degree of
carry very high credit risk and are susceptible to default.
SMERA ‘D’
Instruments with this rating are in default or expected to be in default on
maturity.
SMERA may apply '+' (plus) or '-' (minus) signs to its ratings assigned to indicate their
relative standing within the category.

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10. SMERA ACCOMPLISHMENTS
1) SMERA has pioneered SME ratings in the country and has till date completed over 22000
ratings across sectors and geographies on a PAN – India basis. SMERA Ratings have gained
wide acceptability and are now an integral part of the risk assessment process within the
lending and investing community.
2) The Association of Development Financing Institutions in Asia and the Pacific (ADFIAP)
has awarded SIDBI with "Outstanding Development Project Award" for setting up SMERA.
The award was given under the SME Development Category during the 30th ADFIAP
Annual Meeting held on May 10, 2007 at Hanoi, Vietnam.
3) SMERA has also been registered under Securities and Exchange Board of India (Credit
Rating Agencies) Regulations, 1999 making it only the sixth rating agency in India to rate
issues such as IPO, bonds, commercial papers, security receipts and others.
4) RBI has recently approved SMERA as an eligible External Credit Assessment Institution
(ECAI) under the Basel norms. RBI’s approval paves way for SMERA to offer its services in
the bank loan space under Basel II norms.

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11. PRODUCTS OFFERED BY SMERA
 MSME Ratings.
Micro, Small and Medium Enterprise Rating is a comprehensive and an independent
third-party evaluation of the MSME. It takes into account the financial position and
several qualitative parameters of the MSME that has bearing on credit worthiness of
the entity.
 Greenfield & Brownfield
Greenfield project means to start a project without the need to consider any prior
work. & Brownfield means project to start a project based on prior work or to
rebuild (engineer) a product from an existing one.
It is an independent, third party assessment of risk involved in viability of
operations post project completion. The assessment takes into account construction
and project specific risk, management risk, operational/business risk, market
risk/industry risk, financial and sustainability risk.
 MFI Grading
It is an independent, third party comprehensive assessment of risk
involved of underlying portfolio of Micro Finance Institution
and its resultant social impact.
Besides evaluating creditworthiness of MFIs, ratings also assess
trustworthiness, operational excellence, quality of loans etc of a Micro Finance
Institution, amongst other subjective parameters.
The assessment of MFIs also covers Financial, Operational, Management
& Political risk and matters related to its internal governance, strategic
positioning and social profile.
 Green Rating
 Green Ratings will examine subject units’ current processes and technology and its
impact on ecology i.e. air, land and water.
 Green Rating process would focus on units’ processes & technology deployed from
energy consumption perspective and understand various steps undertaken by the
unit to become energy efficient
 Green Rating would assess units’ industrial emission of air pollutants in the
atmosphere due to its existing manufacturing process & technology deployed.

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 Independent assessment of disposal of industrial waste & effluents and the re-
cycling treatment, if any, would be undertaken.
 Assessment of hazardous material management from raw material to waste product
stage will be studied.
 Depending on the industry, assessment of the noise management due to units’
activity will be undertaken under this study.
 Related process knowledge and documentation in place for consistent & efficient
management of air/water/noise pollution at the unit level will be analyzed.
 Bond Rating
SMERA gives opinion about timely debt payment including interest by the bond
issuer.
 IPO Grading
For any company to get listed needs to be mandatorily rated by a credit rating
company.
 Bank loan Rating
Bank Loan Ratings are used by banks to determine risk weights for their loan
exposures, in keeping with the Reserve Bank of India's (RBI's) April 2007 Guidelines
for Implementation of the New Capital Adequacy Framework under Basel II
framework.

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12. PROCESS OF RATING
The rating process is broadly divided in three stages
a) Primary Stage
b) Analysis Stage
c) Rating Finalization Stage

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PROCESS FLOW CHART OF CREDIT RATING
MANDATE
INITIAL STAGE
ASSIGN RATING TEAM
RECEVE INITIAL INFORMATION,
CONDUCT BAIC RESEARCH
MEETING & VISIT
FACTS FINDING & ANALYSIS
ANALYSIS & PREPARTION OF REPORT STAGE
PREVIEW MEETING
RATING MEETNG FRESH INPUT CLARIFICATION
ASIGN RATING
COMMUNICATE THE RATING & RATIONALE
ACCEPTNCE
REQUEST FOR REVIEW
NON ACCEPTANCE
NON ACCEPTANCE
RATING
FINALIZATION

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 Primary Stage
This phase comprises of two stages
At this stage client comes with a request to rate himself.
This is followed by mandatory information which is required to be furnished to CRA
by the client for the rating process.
The case is allocated to analyst.
 Analysis Stage
Analyst fixes a meeting with the client & meets the client in personnel, discusses
matters like about the future plans, understands the business model.
Analyst visits the facilities and inspects it
Analyst calculates various risk involve in the project and based on his analysis comes
out with rating.
 Rating Finalization Stage
In this stage the rating is presented in front of the rating committee where senior
members from the company come and give their on the rating assigned. Committee
also has senior and experienced members from outside the company who give their
views on the rating.
Once the rating is discussed and approved in the committee it can be communicate to
the client.
It is at client’s sole discretion whether he wants to accept the rating or not. And if
clients accept it then only it can be published.

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13. APPLICABLE REGULATORY BODIES
SECURITIES AND EXCHANGE BOARD OF INDIA
Credit Rating Agencies are governed by SEBI, regulator of capital market.
SEBI governs the following issues relevant to Credit Rating Agencies:
1. REGISTRATION OF CREDIT RATING AGENCIES
o Application for grant of certificate
o Promoter of credit rating agency
o Eligibility criteria
o 5A Applicability of SEBI (Criteria for Fit and Proper Person) Regulations, 2004
o Application to conform to the requirements
o Furnishing of information, clarification and personal representation
o Grant of Certificate
o Conditions of certificate and validity period
o Renewal of certificate
o Procedure where certificate is not granted
o Effect of refusal to grant certificate
2. GENERAL OBLIGATIONS OF CREDIT RATING AGENCIES
o Code of Conduct
o Agreement with the client
o Monitoring of ratings
o Procedure for review of rating
o Internal procedures to be framed
o Disclosure of Rating Definitions and Rationale
o Submission of information to the Board
o Compliance with circulars etc., issued by the Board
o Appointment of Compliance Officer
o Maintenance of Books of Accounts records, etc.
o Steps on auditor’s report
o Confidentiality
o Rating process

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3. RESTRICTION ON RATING OF SECURITIES ISSUED BY PROMOTERS OR BY
CERTAIN OTHER PERSONS
o Securities issued by promoter
o Securities issued by certain entities, connected with a promoter, or rating
agency not to be rated
o Securities already rated
4. PROCEDURE FOR INSPECTION AND INVESTIGATION
o Board’s right to inspect
o Notice before inspection or investigation
o Obligations of credit rating agency on inspection or investigation by the Board
o Submission of report to the Board
o Action on inspection or investigation report
5. PROCEDURE FOR ACTION IN CASE OF DEFAULT
o Liability for action in case of default
RESERVE BANK OF INDIA
Although RBI does not directly govern CRAs, it plays an important oversight role as far as
Bank Loan Rating products concerned
OTHERS
1. MSME ministry oversight on SME/NSIC ratings
2. MNRE – Regulates RESCO ratings
3. Ministry of Shipping Regulates MTI

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14. CREDIT RATING ANCENCIES PRODUCT SUITE
CRISIL ICRA CARE SMERA Brickworks Fitch
CRABusiness Lines
Real Estate Ratings
Hospital Grading
Advisory Risk Management
Advisory Consulting
Research Industry Research
Research IPO
Research Independent Equity
IT Solutions
Offshoring
Solar
Maritime Institute Grading
Micro Finance Ratings
SME
Ratings BLR
Ratings Corporate

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15. KIND OF INSTRUMENTS RATED
To keep the pace with the changing credit requirements of new instruments the rating
agencies have been upgrading the technology and bringing in analytical innovation. The
instrument being rated by such agencies include:
1) Mortgage & Asset –Backed Securities
2) Letter Of Credit Backed Bonds, Commercial Paper and Structure Finance For Global
Market;
3) Project Finance
4) Municipal and Corporate Bond Insurance;
5) Bonds and Money Market Funds;
6) Syndicated Banks Loans:
Followings are the bodies or organization which can be rated
1. Manufacturing Companies
2. Banks
3. Non Banking Financial Institution
4. Financial Institutions
5. Housing Finance Companies
6. Municipal Bodies
7. Companies in Infrastructure Sector

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16. ETHICS TO BE FOLLOWED BY RATING AGENCIES
Member Credit Rating Agencies shall put in place systems and procedures to ensure the
following:
1) The proceedings of a credit rating board / rating committee, are kept confidential at
all times, and not revealed to any external parties or agencies. If any records of the
proceedings are made, credit rating agencies must take steps to keep such records
properly safeguarded, except where required to be disclosed by the provisions of
laws or regulations.
2) When the credit rating board decides on a rating, it shall be announced as a joint
decision and the individual votes shall be kept confidential, even if recorded. This
requirement of confidentiality shall apply to rating board members for their own
votes as well.
Member Credit Rating Agencies shall put in place systems and procedures to ensure the
following:
1) When and after a credit rating board / rating committee member or credit rating
agency employee terminates his/her employment or work association with the
rating agency, the requirement of confidentiality with respect to the information
received during the period of work association shall continue as information held in
trust.
2) A credit rating board / rating committee member does not take undue material
advantage of any confidential information received through his or her participation
in a credit rating process. Persons involved in the ratings process should also be
made vigilant to prevent abuse of prior knowledge of ratings changes.

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17. FUTURE OF CREDIT RATING AGENCY
Undoubtedly credit rating agencies have a great future in a growing economy like India
where more and more companies are resorting to exchanges and banks to raise and
borrow funds. Another point which is in favour of CRA’s is that ratings have been made
mandatory by regulatory bodies like RBI and SEBI. Year on year people’s disposal income is
increasing and so they are looking for avenues to invest. So any company who has an
investment grade attached to its instrument, gives immense confidence to the investors to
invest in it. And because of the growing and developing nature of the nation there will be
many companies in future who will raise or borrow funds, so by this we can conclude that
CRA’s have great future in India.
But the matter of concern is, in India credit rating agencies (CRA) are approved by two
regulators, Securities and Exchange Board of India (SEBI) for capital market operations and
by Reserve Bank of India (RBI) for rating of borrowers of banks. And as it is said dual
control is no control. The existing regulations in India are not comprehensive enough to
take care of the present crisis caused by many of the issuers dragging the rating agencies to
courts on grounds of bias, manipulation and lack of transparency or sheer incompetence.
And they do not come under the Right to Information (RTI) Act in our country as they are
all in private sector, though their activities have a vital bearing on the economy of the
country. The rising court cases against rating agencies, not only in India but in many other
parts of the world, are indicative of the growing resentment to the arbitrariness of the
rating agencies, which calls for serious thought on the part of the regulators all over the
world.

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18. CONCLUSION
A credit rating is a useful tool not only for the investor, but also for the entities looking for
investors. An investment grade rating can put a security, company or country on the global
radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging
market economies, the credit rating is key to showcase their worthiness of money for
foreign investors, and because the credit rating acts to facilitate investments, many
countries and companies will strive to maintain and improve their ratings, hence ensuring
a stable political environment and better transparency.
Credit rating agencies can best serve markets when they operate independently, adopt and
enforce internal guidelines to avoid conflicts of interest and protect confidential
information received from issuers. Credit rating agencies should be made accountable for
any faulty rating.

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19. REFERENCES
 SMERA’S Website.
 SEBI’S Website.
 On the job training.
 Material provide by the company guide.

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