The document provides a comprehensive overview of credit rating, detailing its historical development, processes, and regulatory framework, particularly in India. It explains the significance of credit ratings for investors and issuers, outlines the scope of ratings across various financial instruments, and highlights the advantages and disadvantages of utilizing credit ratings. Additionally, it discusses the regulations set by SEBI for credit rating agencies and lists major agencies operating in India.

1. CREDIT RATING
USHA SAI.S
1982163108

2. CONTENTS:
INTRODUCTION
A HISTORICAL PERSPECTIVE OF CREDIT RATING
CREDIT RATING: INDIAN PERSPECTIVE
SCOPE OF CREDIT RATING
PROCESS OF CREDIT RATING
COMMUNICATING OF CREDIT RATING
SEBI (CREDIT RATING AGENCIES) REGULATIONS, 1999
CREDIT RATING AGENCIES IN INDIA
ADVANTAGES AND DISADVANTAGES OF CREDIT RATING

3. CREDIT RATING:
 Credit rating involves analysis and assessment of companies and governments that
issue the financial securities.
 The rating agencies evaluate the issuer and the securities and assign a rating or
grade according to the degree of relative credit worthiness of the issuer .
 The securities with higher credit rating command lower interest rate than the
securities with lower credit rating.
 Information asymmetry between the investors and the issuer of securities is the
driving force behind credit rating.
 The rating of debt securities ranges from “AAA” to “D” with some variation in
notation by each agency.

4. A HISTORICAL PERSPECTIVE OF CREDIT RATING:
 Before 19th century, business was mostly local and the business transactions , particularly
borrowing and lending, took place between people who knew each other.
 As economies opened up around the world, the scale and geographical scope of business
transactions expanded.
 In the later part of 19th century, large scale railroad development under the auspices of the
private companies in the united states had created a rapidly growing bond market.
 It was the time that Moody initiated agency bond ratings in the United States in 1914 by
setting up Moody’s Investor’s Service –the 1st rating agency in the world.
 Moody’s Investor’s Service started as one man crusade to provide knowledge to the ordinary
investing public and later developed into formidable global rating agency .
 John Knowles Fitch founded Fitch Publishing Company in 1913, which was published financial
statistics in The Fitch Stock and Bond Manual and The Fitch Bond Book in 1924.

5.  John Knowles Fitch founded Fitch Publishing Company in 1913, which was
published financial statistics in The Fitch Stock and Bond Manual and The Fitch
Bond Book in 1924.
 For the 1st time, Fitch Publishing Company introduced the “AAA” to “D” rating
scale.
 All these rating agencies did not operate under the issuer pay model.
 But it was realised in the 1970’s that the issuers of the securities would get
substantial benefits from the rating of capital issues.

6. CREDIT RATING: THE INDIAN PERSPECTIVE
 Economic liberalization gave rise to several opportunities for investment. Companies
have undertaken fund rising programs on a large scale.
 At the same time , business risks have increased with the liberalization of the
economy.
 The industrial policy of the government has increased rapid industrialization , which
has resulted in a phenomenal increase in the no. of investors and the amount of
funds mobilized.
 The no. of companies tapping the capital market directly has also increased.
 But the investors have realised that the company’s name and size are no longer a
sufficient guarantee of timely payment of interest and the principal amount.
 It is in this context that policy makers thought of introducing the credit rating system
in India.

7.  Accordingly, the Industrial Credit and Investment Corporation of India Ltd
[ICICI] and Unit Trust of India [UTI] promoted the first rating agency called the
Credit Rating Information Services Of India Ltd[CRISIL] , in 1988.
 With the integration of financial markets all over the world credit ratings have
become more important.

8. SCOPE OF CREDIT RATING
Conventionally , credit rating is done for the following securities:
 Bonds
 Commercial paper
 Fixed deposits
 Fully convertible debentures to be convertor before 18 months the issue.
 Partly convertible debentures maturing before the 18th month of issue.
 Preference shares
The scope the credit rating has widened to encompass the rating of companies
engaged in the services sector.

9. THE PROCESS OF CREDIT RATING
Different credit rating agencies adopt different rating process depending on
the nature of instrument , the credit rating agency itself and the methodology
used.
1. The rating process begins at the request of the company .
2. On the receipt of the request from the company the company the credit
rating agency constitutes different teams to carry out the assignments.
3. The teams obtained the required data from the company and make
suitable analyses in order to draw meaningful conclusions.
4. Various factors that could affect the credit worthiness of the issues of the
securities are analysed
However ,the following are the basic and broad aspects that covered in any
evaluation process:
Background and history, Management, Business analysis and Financial
analysis.

10. COMMUNICATING THE RATING
 The rating assigned to a particular issue communicated to the client
along with a detailed rationale.
 The rating agency may share with the company management the
broad reasons for the rating it has assigned.
 Only ratings accepted by the clients are published and then
monitored on a continuous basis over the life of the instrument.
 Once a rating is assigned and published , the rating agency keeps the
rating under surveillance until the security is fully repaid.
 During the review the rating may be retained, upgraded or
downgraded based on the changed prospects of the issuer.
 The change in rating indicates a change in risk associated with the
instrument.

11. RATING PROCESS:
ISSUER Credit Rating Agency
Request for rating
Rating team assigned. team collates
Signs rating agreement, information; conducts preliminary analysis
provides information
and rating fee
interaction with management
analysis presented to the committee
ratings issued and communicated to the issuer

12. SEBI (CREIDT RATING AGENCIES) Regulations , 1999
According to this, any organization proposing to commence any activity as a credit rating
agency shall restore with SEBI.
The organization shall make an application to SEBI for the grant of a certificate of
registration for the purpose.
The applicant shall also fulfil certain eligibility conditions. The important one’s are
mentioned below:
1. The applicant is set up and registered as a company under the Companies Act , 1956.
2. The applicant has minimum net worth of INR 5crore.
3. The applicant has adequate infrastructure to enable it to provide rating services in
accordance with the provisions of the SEBI Act and the relevant regulations.
4. The applicant and the promoters of the applicant have professional competence,
financial soundness and a general reputation of fairness and integrity in business
transactions to the satisfaction of SEBI.

13.  SEBI on being satisfied that the applicant is eligible for the grant of certificate of
registration , shall grant the certificate subject to the condition that credit rating agency
shall comply with provisions of SEBI Act.
 The period of validity of the certificate of registration shall be 3 years.
 Every credit rating agency shall enter into a written agreement with each client whose
securities it proposes to rate.
 Every credit rating agency shall make the definitions of the concerned rating, along with
the symbol, and the state that the ratings do not constitute recommendations to buy , hold
or sell any security.
 Every credit rating agency shall specify the rating process and file a copy of the same with
SEBI for record.
 SEBI may appoint one or more persons as inspecting officers to undertake inspection of the
books of the account , records and documents of the credit rating agency.
 A credit rating agency shall fulfil its obligations in a prompt ethical and professional
manner.
 In the essence , the SEBI regulations and guidelines mainly focus on the protection of the
interest of investors.

14. CREDIT RATING AGENCIES IN INDIA
1. Credit Rating Information Services of India Limited (CRISIL)
2. Investment Information and Credit Rating Agency of India Limited (ICRA)
3. Credit Analysis and Research Limited (CARE)
4. Fitch India Limited
5. Brickwork Ratings India Pvt Limited
6. SME Rating Agency of India Limited

15. Rating India Ratings&
research
CRISIL Brickwork Ratings CARE ICRA
Highest safety: Lowest
risk of turning into a
defaulter
IND AAA CRISII AAA BWR AAA CARE AAA ICRA AAA
Highest safety: very low
credit risk
IND AA CRISIL BBB BWR AA CARE AA ICRA A
Low risk IND A CRISIL A BWR A CARE A ICRA A
Moderate safety:
moderate credit risk
IND BBB CRISIL BBB BWR BBB CARE BBB ICRA BBB
Moderate risk: moderate
risk of default
IND BB CRISIL BB BWR BB CARE BB ICRA BB
High risk: very high risk
of default
IND B CRISIL B BWR B CARE B ICRA B
Very high risk: very risk
of default
IND C CRISIL C BWR C CARE C ICRA C
Default: instruments are
already in default or on
the verge of default
IND D CRISIL D BWR D CARE D ICRA D

16. ADVANTAGES AND DISADVANTAGES OF CREDIT RATING LIMITATIONS
Credit ratings are used by different groups of people and organizations. Investors ,
issuers of securities , suppliers , customers and government regulators are major
groups that use credit ratings .
The specific advantages of credit rating are as follows:
 Credit rating provides investors with convenient and readily identifiable symbols
to make final distinctions of risk.
 Investors can have a choice of instruments based on graded risks and related
returns.
 Once an organization is assessed and given a rating by an outside agency , it will
be under continuous surveillance by that agency.
 Credit rating helps investors in assessing the degree of risk involved in a borrowing
program , the issuer or borrower can raise funds with cheaper cost of capital.
 The suppliers particularly use issuer credit rating to assess the general credit
worthiness of the company.

17.  The credit rating enables customers to form correct opinions about the credibility of
companies and their products.
 As the costs of borrowing is inversely related to the ratings received companies with
high growth potential will have greater advantages with credit rating .
 By attracting investors credit rating helps companies channelize the idle savings of the
public into productive use.

18. DISADVANTAGES
There are certain bottlenecks in the effective use of rating system.
 The average investor in India is not able to understand the significance of rating
because of lack of awareness.
 Some times ratings may create confusion in the minds of investors when different
credit rating agencies give different ratings for same instrument.
 There is no standardized fee structure .
 Rating agencies assign the rating based on information obtained from the issuer and
other sources which are deemed to be accurate.
 Although credit rating agencies are supposed to maintain appropriate independence
from the issuer of securities, this is generally doesn’t happen in practice.

19. CRISIL Ratings:
Long term scale- CRISIL AAA, CRISIL AA, CRISIL A, CRISIL BBB, CRISIL BB, CRISIL B, CRISIL C,
CRISIL D
Short term scale- CRISIL A1,…..,CRISIL A4, CRISIL D
Long term structured finance scale-CRISIL AAA, CRISIL AA, CRISIL A, CRISIL BBB, CRISIL BB,
CRISIL B, CRISIL C, CRISIL D
Short term finance structured scale- CRISIL A1,…..,CRISIL A4, CRISIL D
Fixed deposit scale- FAAA, FAA, FA, FB, FC, FD
NOTE: CRISIL may apply “+” or “-” signs for ratings to indicate the relative position within
the category.

20. CONCLUSION:
Credit Rating helps as a tool while taking investment decisions, but it not shows the
profitability of company. It shows how far the investments are safer or riskier.