Credit rating agencies play a key role in the modern financial system by providing ratings that assess the creditworthiness and risk of default for debt instruments. While ratings agencies increase market efficiency through widely available low-cost information, their business model is unusual in that issuers, not investors or users, pay for ratings. This can potentially compromise the independence and objectivity of agency ratings. The role of ratings agencies has expanded over time as regulations increasingly require their use in investment and lending decisions. Factors like independence, credibility, disclosure, and a developed debt market are important for ratings to effectively fulfill their function of informing investors.

1. Introduction:
Journalist Thomas friedman once said, “ There are two superpowers in the world today.
There is the United States and there is Moodys bond rating service. The US can destroy
by dropping bombs and Moodys can destroy you by dropping your bonds.” Rating
agencies play a key role in the infrastructure of the modern financial system.
Rating agencies, by making information widely available at a low cost have increased
market efficiency radically over the last few decades. However, in the credit rating
business, unlike any other business, the users of information do not pay for it. Though
this mechanism genertes positive externalities, the business tradition is rather strange. It
is so because though iinvestors, financial intermediaries and other end users use the
results of the rating agencies they actually do not pay for it. The issuer of the financial
instrument whose information is disclosed by the rating agency actually pays it. This
aspect makes the rating business a different animal. The transaction is very peculiar
because the party who pays for the service does not use it and who uses it does not pay
for it.
Trafitionally the agencies used to gather and analyze all sorts of pertinent financial and
non-fianacial information. Then they used to utilize it to provide a rating of the intrinsic
value or quality of a security. This was considered as a convienent way for investors to
judge quality and make investment decisions.
Rating agencies sell information and survive based on their ability to accumulate and
retain reputational capital. Howevwe, once regulation is passed, it makes it mandatory for
the company to incorporate ratings; rating agencies begin to sell not only information but
also valuable property rights associated with compliance of regulation. Though the rating
agencies will never force any company to buy their information, the companies will
always try to oblige the rating agencies by buying them. As the sale of these products
generates revenue, the rating agencies will not be willin to loose them.

2. How did Credit Rating evolve?
The role of financial markets in a market economy is that of an efficient intermediator,
mediating between savers and investors, mobilizing capital on one hand and efficiently
allocating them between competing uses on the other. Such an allocative role hinges
crucially on the availability of reliable information. An investor in search of investment
avenues has recourse to various sources of information-offer documents of the issuer(s),
research reports of market intermediaries, media reports etc… in addition to these
sources, Credit Rating Agencies have come to occupy a pivotal role as information
providers, particularly for credit related opinions in respect of debt instruments; a role
that have been strengthened byt the perception that their opinions are independent,
objective, well researched and credible.
The impetus for the growth of Credit Rating came from the high levels of default in the
U.S. capital markets after the Great Depression. In particular was the 1970 default of $82
million of commercial paper by Penn Central, consequent to which investors in
commercial papers became panicky and started refusing to rolloverthe commercial paper
outstanding, which in turn, resulted in massive defaults and liquidity crises. The issuers
then felt the need of getting their commercial paper programmes rated by independent
credit rating agencies to give the required degree of comfort and reassurance to their
investors. Furtherimpetus for the growth came when regulatory agencies began to
stipulate that institutions such as Government Pension Funds and Insurance
Comapniescould not buy securities rated below a particular grade. In addition, investors
themselves became aware of the ratings mechanism and they started using ratings
extensively as a tool of risk assessment. Merchant bankers, underwriters and other
intermediaries involved in the debt market also found rating useful for planning and
pricing the placement of debt instruments.
The other factors leading to the growing importance of the Credit Rating Systems in
many parts of the world over the last two decades are:

3. (1) the increasing role of capital and money markets consequent to
disintermediation;
(2) increased securitization of borrowing and lending consequent to
disintermediation;
(3) globalization of credit market;
(4) the continuing growth of information technology;
(5) the growth of confidence in the efficiency of the market mechanism; and
(6) the withdrawal of government safety nets and the trend towards privatization.
It was this growing demand on rating services that enabled credit rating agencies to
charge issuers for their services. Tis was much in variance with the mode of
fianancing used hitherto- with no fees charged to the issuers, a credit rating agency
used to provide rating information through the sale of their publication and other
materials.
Credit rating: the concept
Rating, usually expressed in alphabetic or alphanumeric symbols, are a simple and
easy understood tool enabling the investor to differentiate between debt instruments
on the basis of their underlying credit quality.
The credit rating is thus a symbolic indicator of the current opinion of the relative
capability of the issuer to service its debt obligation in a timrly fashion, with specific
reference to the instrument being rated. It is focused on communicating to the
onvestors, the relative ranking of the default loss probability for a given fixed income
investment, in comparison with other rated instruments.
A rating is specific to debt instrument and is intended as a grade, an analysis of the
credit risk associated with the particular instrument. It is based upon the relative
capability and the willingness of the issuer of the instrument to service the debt
obligations(both principal and interest) as per the terms of contract. Thus a rating is

4. neither a general purpose evaluation of the issuer, nor an overall assessment of the
credit risk likely to be involved an all the debts contracted or to be contracted by such
entity.
The primary objective of rating is to provide guidance to the investors/creditors in
determining a credit risk associated with debt instrument/credit obligation. It does not
amount a recommendation to buy, hold or sell an instrument as it does not take into
consideration factors such as market prices, personal risk preferences and other
considerations which may influence an investment decision. The rating process is
itself based on ‘givens’. The agency does not perform an audit. Instead, it is required
to rely on the information that is provided by the issuer and collected by analyst from
different sources, including interactions in-person with various entities.
Consequently, the agency does not guarantee the completeness or accuracy of the
information on which the rating is based. The judgment is qualitative in nature and
the role of quantitative analysis is to help make the best possible overall qualitative
judgment because, ultimately, rating is an opinion.
What is credit rating?
Credit rating is an unbiased, objective and an independent opinion as to an issuers
capacity to meet financial obligations. Rating Agencies rating indicates their current
opinion as to the relative safety of timely payment of interest and principal on a particular
debt instrument. Usually, rating agencies ratings are applicable to a particular debt of a
company and are not a rating for the company as a whole. The rating does not constitute a
recommendation to buy or sell or hold a particular security.
MOODY’s
“A Rating is an opinion on the future ability and legal obligation of the issuer to make
timely payments of the principal and interest on a specific fixed income security. The
rating measures the probability that the issuer will default on the security over its life,
which depending on the instrument may be a matter of days to 30 yrs or more. tn

5. addition, long term ratings incorporate an assessment of the expected monetary loss
should a default occur.”
STANDARD & POOR’s
“Credit Rating helps the investors by providing an easily recognizable, simple tool that
couples a possible unknown issuer with an informative and meaningful symbol of credit
quality.”
A rating does not amount to recommendation to buy, sell or hold an instrument, as it does
not take into consideration factors such as market prices, personal risk preferences and
other considerations, which may influence an investment decision.
What credit rating is not?
It would be useful to explain what credit rating does not connote.
First, a Rating is specific to the issue , debt or instrument that is rated. A rating is neither
a general purpose evaluation nor overall assessment of credit risk associated in all debts
contracted by an issuer.
Second, it is not recommendation ot buy, hold or sell. It is an opinion, perhaps well
informed opinions.
Third, they are not predictors of default but opinions about the relative probability of
default or loss. Thus, the difference between the highest rated instrument and another
rated a rung lower is that the probability of default of interest and principal in case of the
former is lower than that of the latter.
Fourth, ratings are not guarantees against losses.onder no conditions do they or can they
predict losses due to ‘shocks’ or highly unexpected situations.

6. Fifth, Credit Ratings relate only to ‘Credit’ and thus for example has no relationship with
the risk preferences with the investors or attractiveness of equity. Hence, the perceptions
of different stake holders, thet is, creditors, lendors, shareholders, etc …… in responding
to ratings could be different.
Need for credit rating:
The process of rating is independent, external review of the management, its strategies
and corporate performance. The ratings are beneficial to both the issuers and the
investors.
Issuers:
• For the borrowing company, a rating assists in enhancing the the marketability of
the instrument. A Rating offers an issuer a wider range of funding alternatives as
well as the opportunity to raise money at a relatively lower cost and from a larger
body of lenders thus leading to a broader investor base.
• Highly credit worthy companies may not necessarily be well known in the
market. A rating can facilitate fund raising for such companies.
• For institutional investors who usually operate onder strict investment guidelines,
it is often necessary that the securities in which they invest, carry a credit rating
assigned by a recognized Rating Agency.
• A Rating also benefits an organization to differentiate itself in the market and
easteblish its financial standing any time required.

7. Investors:
• As ratings serve as an objective guide to the risk involved in a particular
investment, investors use Ratings to supplement their own credit evaluation
process. Ratings assist investors, particularly in instances where they do not have
th resources or access to the management, to perform a through credit risk
analysis of the borrower.
• Credit rating also facilitated comparison of relative value between competing
securities. By providing a measure of relative creditworthiness, a credit rating can
help the investors decide if they wish to lend or to invest in securities issued by a
particular issuer and to determain the return on the investment they should
demand, given the relative degree of credit risk involved.
The use of credit rating:
By investors:
For the investor, the rating is an information service, communicating the relative
ranking of the default loss probability for a given fixes income investment in
comparison with other rated instruments.
In absence of a credit rating system, the risk perception of a common investor vis-à-
vis instruments largely depend on his/her familiarity with the names of the promoters
or the collaborators. Such “name recognition”, often used to evaluate credit quality in
underdeveloped markets cannot be an effective surrogate for systematic risk
evaluation.
It is not true that every venture promoted by a well known name will be successful
and free from default risk. Nor is it true that every venture promoted by a relatively

8. lesser known entity is disproportionately risk prone. What is therefore required for an
efficient allocation of resources is systematic risk evaluation. It is rarely, if ever
feasible for the corporate issuer of the debt instrument to offer evry perspective
investor the opportunity to undertake detailed risk evaluation. It is even rarer for such
a heterogenous group of investors to arrive at a meaningful and consistent conclusion
as to the relative credit quality of the instrument, specially when they do not possess
the requisite skills of credit evaluation.
A professional credit rating agency is well equipped with the required skills, the
competence and the credibility,all of which eliminates the role of “name recognition”
and replaces it with well researched and scientifically analysed opinions as to the
relative ranking of different debt instruments in terms of credit quality. Moreover,
these ratings are symbolic and therefore easier to understand and use once their
definitions and meanings are clearly enunciated. These ratings seeks to eastablish a
link between risk and return. The investor uses the rating to access the risk level of
the instrument and compares the offered rate of return with his expected rate of return
to optimize his risk return preference.
A rating provided by a professional credit rating agency is of significance not just for
the individual/small investor but also for organized institutional investor. Rating for
them provides low cost supplement to their own in-house appraisal system. Large
investors could use the information provided by rating changes , by carefully
watching upgrades and downgrades and altering their portfolio mix by operating in
the secondary market. Banks in some developed countries use the ratings of other
banks and financial intermediaries for their decisions regarding inter banking lending,
swap agreements and other counter party risks.
The investor community, in general, also benefits from other services provided by
credit rating agencies, namely, research in the form of industry reports, corporate
reports, seminars and open access to the analysts of agencies for discussion.

9. By issuers:
The benefit of credit rating for the issuers stems from the faith placed by the market
on the opinions of the rating provided, and the widespread use of ratings as a guide
for investment decisions. The issuers of rated securities are likely to have access to
much wider investor base as compared to unrated securities as a large section of
investors, not having the required resources and skills to analyse each and every
investment opportunity, would prefer to rely on the opinion of the rating agency.the
opinion of a rating agency enjoying investor confidence could enable the issuers of
highly rated instruments to access the markets even under adverse market conditions.
Credit rating provides a basis for determining the additional return which the
investors must get inorder to be compensated for the additional risk that they bear.
By intermediaries:
Rating is a useful tool for merchant bankers and other capital market intermediaries in
the process of planning pricing, underwriting and placement of issues. The
intermediaries, like brokers or dealers in securities, could use rating as an input for
their monitoring of risk exposures. Regulators in some countries specify capital
adequacy rules linked to credit rating for pre-packaging of issues by way of asset
securitization/structured obligations.
By regulators:
Regulatory authorities worldwide, have promoted the use of credit rating by issuing
mandatory requirements by issuers. Specific rules, for instance, restrict entry to the
market of new issues rated below a particular grade, stipulate different margin
requirements for mortgage of rated and unrated instrument and prohibit institutional
investors from purchasing or holding of instrumens rated below a particular level.

10. Factors contributing to the success of the rating system:
The driving force behind the rating industry is essentially the question of reputation
for analytical credibility. Following are the ingredients essential for the rating system
to function effectively and serve the interests of all the market participants and
regulators.
(1) Creditable and independent structures and procedures:
To quote from Standard and Poor’s- “ ratings are of value only as long as thay
are credible. Credibility arises mainly from objectivity which results from the
rater being independent of the issuers business. The investor is willing to
accept the judgement of a particular rater, that rater gains recognition as a
rating agency.”
According to Moody’s-“ the rating agency must do all it can to preserve its
credibility and integrity in the market place. As a primary ingredient of
credibility, the agency must maintain independence from all the interested
market forces including issuers, security underwriters or the government.”
A few other critical factors that serve to enhance the credibility of a rating
agency
 Objectivity and impartiality of opinions
 Analytical integrity and consistency
 Professionalism and relevant expertise across industry
 Strict rules of confidentiality relating to the sensitive and confidential
information of the issuer
 Timeliness of rating review and announcement of changes
 Ability to reach a wide range of investors by means of press reports,
print or electronic publications and more investor friendly research
services.
(2) Reliance on the market mechanism:

11. Reliance on the capital market for resource allocation generates a strong
demand for investment related information. Rating agencies provide this
information. An investor would be willing to look at rating as an important
input for his investment decision only when there is a perceived default risk.
(3) Corporate disclosure and credit education:
Rating agencies are not and they should not assume the role of
regulators. They are mostly carrying out an assignment on the
mandate of an issuer and in some countries the issuer has an option
of publishing or not publishing the rating assigned. This may result
in investors not having all essential information required for his
decision. The regulatory guidelines for mandatory disclosure of
ratings could ensure that the information reaches the users.
However, it is not sufficient for the information to reach the
investor. He must be capable of arriving at meaningful conclusions by
interpreting the assigned rating. He should also be aware of the limitations of
credit rating and should not assume that the rating amounts to an insurance or
guarantee against default risk
(4) Creation of active debt market:
The continued growth and evolution of the credit rating business
would depend on the size and growth of the debt market. An
active primary and secondary debt market is crucial for rating
agencies to continue to provide their service

12. Rating process:

13. The rating process is similar for almost all the credit rating agencies. The figure above
shows the credit rating process for CRISIL which is also used by ICRA, CARE and all
other rating agencies.
This process can be explaines as follows:
(1) Rating Agreement and Assignment of The Analytical Team:
The process of rating starts with the issue of the Rating Request Letter by
the issuer and the signing of the Rating Agreement. On receipt of the request, rating
agency assigns an analytical team comprising of atleast two analysts of whom one
could be the lead analyst and would serve as issuers primary comtact. The analysts
who have expertise in relevant business areas will be esponsible for carrying out the
rating assignment.
(2) Management meerting:
Before meeting with the issuer, the analytical team obtains and anaysis
information relating to the issuers financial statement, cash flow projections and
relevant information.
The analytical team then proceeds to have detailed meetings with the
company’s management. The Rating Agency and the Management dicuss topics such
as xompetitive position, strategies, financial policies, historical performance and
long-term fianacial and business outlook. Equal importance is placed on discussing
the issuers business risk profile and strategies, in addition to reviewing financial data.
The rating process ensures complete confidentiality of the provided by the
company. All information is kept strictly confidential by the ratings group and is not
used for any other purpose or any third party other than the rating agency.

14. (3) Rating Committee:
After the meeting with the management, the analysts present their report
to a Rating Committee that 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.
Rating reviews:
If the rating is not acceptable to the issuer, he has a right to appeal for a review of the
rating. There reviews are usually taken up only if the issuer provides fresh inputs on
the issues that were considered for assigning the rating. Issuer’s response is presented
to the Rating Committee. If the inputs are convincing, the committee can revise the
initial rating decision.
The Methodology of Rating by a Rating Agency:
The rating agency usually commences a rating exercise at the request of the company.
The rating methodology involves an analysis of the industry risk, the issuers business and
financial risk. The rating agency assigns a rating after assessing all the factors that could
affect the credit worthiness of the borrowing entity. Typically, the industry risk
assessment sets the stage for analyzing more specific company risk factors and
eastablishing the priority of these factors in the overall evaluation. For example, if an
industry is determined to be highly competitive, careful assessment of the issuers market
position is stressed. If the company has large capital requirements, examination of cash
flow adequacy assumes major importance.
The Ratings are based on the current information provided to the credit rating agencies by
the borrowing company, or facts obtained by the Rating Agencies from sources they

15. consider being reliable. In evaluating and monitoring the Ratings, the rating agencies
apply both qualitative and qualtitive criteria in accordance with the industry practices.
Some important issues in credit rating:
Investment and speculative grades: These two terms have been popularized by the
regulators. Securities rated below BBB(S&P)/Baa(Moody’s) are called non
investment grade or speculative grade or junk bonds. Rating agencies,howevwe,
donot recommend os indicate the rating levels of instruments upto which one should
or should not invest.
Surveillance:the ratings published by credit rating agencies are subjected to a
continuous surveillance during the life of the instrument till any amount is
outstanding against the specific instrument.in absence of any such development, such
reviews under surveillance are taken up periodically. A formal and extensive written
review is taken up atleast once a year. However in the event that there is some
specific concern avout the industry or the issuing entity, the review is taken up
immediately. As a result of such a review, if the rating agency feels that there is a
need for changing the rating, the rating is upgraded or downgraded according to the
likely impact of the changing circumstances
On the debt servicing capability of the issuer. In all other cases, the rating is retained
at the same level.
Creditwatch: when a major deviation from the expected trends of the issuer’s
business occurs, or when an event takes place which may have an impact on the debt
servicing capability of the issuer and may warrant a rating change, the rating agency
may put such ratings under creditwatch till the exact impact of such unanticipated
developments is analysed and the decision is taken regarding the rating change. The
creditwatch listing may also specify ‘ positive’ or ‘negative’ outlooks. However being

16. placed under creditwatch does not necessarily mean that there would be a rating
change.
Soverign rating ceiling: International credit rating agencies, while rating an issue
outside the issuers country or domicile , imposes a ceiling equal to the sovereign
rating assignes to the country of domicile. This implies that the rating of any
instrument of any issuer domiciled in that country would be above the sovereign
rating of the country of domicile. This concept may not ,however, be applicable when
domicile of the issuer in the country is wholly accidental to otherwise internationally
dispersed business operations.
Bank line coverage for commercial paper: According to Standard & Poor’s credit
overview international:” an evaluation of bank line policy is an essential component
of a commercial paper rating. It is not, however, part of the rating criteria and the
rating decision itself is not presicted on the strength or amount of bank lines.”
Ownership as a rating consideration:ownership by a strong concern may enhance
the credit rating of an entity, unless there exists a strong barrier separating the
activities of parent and subsidiary. The important issues involved in deciding the
relationship are the mutual dependence on each other, legal relationship, to what
extent one entity has the desire and ability to influence the business of the other and
how important is the operation of the subsidiary to the owner.

17. Credit Rating Agencies in India
The rating coverage in India is of recent origin, beginning 1988 when the first rating
agency, CRISIL-Credit Rating and Information Services was eastablished. At present
there are three rating agencies-
(1) CRISIL,
(2) ICRA(Investment Information and Credit Rating Agency of India Limited)
and
(3) CARE(Credit Analysis and Research).
(4) The fourth rating agency is a joint venture between Duff & Phelphs, US and
Alliance Capital Limited, Calcutta.

18. CRISIL: It was promoted by the financial institution,ICICI, nationalized and foreign
banks and insurance companies 1988. it went public in 1992 and is the only listed credit
rating agency in India. In 1995 it entered into a strategic alliance with Standard & Poor’s
to extend its credit rating services to borrowers from the overseas market.the services
offered are broadly classified as Rating, Information Services, Infrastructure Services and
Consultancy. Rating services cover rating of debt instruments- long, medium and short
term, securitized assets and builders. Information services offer corporate research reports
and CRISIL 500 index. The Infrastructure and Consultancy division provides assistance
such as Power, Telecom and Infrastructure financing.
ICRA limited: IT was promoted by IFCI and 21 other shareholders comprising
nationalized and foreign banks and insurance companies. Eastablished in 1991, it is the
second rating agency in India. The services offered can be broadly classifies as Analytical
Services, Advisory Services and Investment Information services. The analytical services
comprise of debt instruments and credit assessment. The advisory services include
strategic counseling, general assessment such as restructuring exercise and sector specific
services such as Power, Telecom, Ports Municipal ratings etc.. the information or the
research desk provides research reports on specific industry, sector and corporate. The
Information services also include equity related services, that is, euity grading and equity
assessment. In 1996, ICRA entered into strategic alliance with Fianancial Proforma Inc..
a Moody’s subsidiary to offer services on Risk Management Training and software.
Moody’s and ICRA has entered into a Memorandum of Understanding to support these
efforts.
CARE: incorporated in the year 1992, it is promoted by IDBI and several other banks and
insurance companies. The dervices offered cover rating of debt instruments and sector
specific industry reports from the research desk.

19. There are various other small agencies operating in the country but are not significant
players. The two- renowned organizations, which form a mojor chunk of the world credit
rating market Standard & Poor’s and Moody’s.
Regulation of Credit Rating Agencies in India:
In India, in 1998, SEBI constituted a committee to look into draft regulation for CRA’s.
the committee held the view that in keeping with the international practice, SEBI Act
1992 should be amended to bring CRA’s outside the purview of SEBI for variety of
reasons.
According to the committee, a regulator will not be in positionto objectively judge the
appropriateness of one rating over the other. The competency and the credibility of a
rating and CRA should by the market, based on th historical record, and not by a
regulator.
The committee suggested that instead of regulation, SEBI should recognize certain
agencies for particular purposes only, allowing ratings by CRA’s recognized by it for
inclusion in the public rights issue offer documents. In consultation with the government,
in July 1999, SEBI issued a notification bringing the CRAs under the regulatory ambit in
exercise of powers conferred on it by Section 30 read with Section 11 of the SEBI Act
1992.
The Act now requires all CRAS to be registered with SEBI. Since then all the CRAs
have been registered with SEBI. SEBI Act now defines “credit rating agency”, “rating”
and “securities”. Detaild of who could promote a CRA and their eligibility criteria has
been specified. The Act also mentions about agreements with clients, method of
monitoring of ratings, procedures for review of ratings, disclosure of ratings and
submission of details to SEBI and stock exchanges. Restrictions have now been placed on

20. CRAs from rating securities issued by promoters or companies connected with
promoters, that is, companies in which directors of CRAs are interested as directors.

21. CRISIL was promoted by the financial institution,ICICI, nationalized and foreign
banks and insurance companies 1988. It went public in 1992 and is the only listed credit
rating agency in India. In 1995 it entered into a strategic alliance with Standard & Poor’s
to extend its credit rating services to borrowers from the overseas market.the services
offered are broadly classified as Rating, Information Services, Infrastructure Services and
Consultancy. Rating services cover rating of debt instruments- long, medium and short
term, securitized assets and builders. Information services offer corporate research reports
and CRISIL 500 index. The Infrastructure and Consultancy division provides assistance
such as Power, Telecom and Infrastructure financing.

22. CRISIL has helped shape the evolution of the debt markets in India, by developing
criteria and standards to facilitate its dynamic growth. In its role as the pioneer in the
ratings business, CRISIL has always set the standards in rigour of analysis, transparency
and disclosure and has firmly eastablished its position as the provider of the “most
reliable opinion on risk.”
CRISIL has always set the highest standards in analytical rigour and transparency in the
ratings industry in India.
What crisil does?
CRISIL’s association with Standard & Poor’s, a division of The McGraw-Hill
Companies, dates back to 1996 when both companies started working together on rating
methodologies and joint projects. S&P is the world's foremost provider of independent
credit ratings, indices, risk evaluation, investment research, data and valuations. Since
then, we have significantly broadened this relationship, working together on critical,
cutting-edge assignments for global clients. This partnership has now culminated in
Standard & Poor’s acquiring a majority shareholding in CRISIL.
The following are the main functional areas of CRISIL:
(1) Ratings and Risk Assessment: CRISIL Ratings is the only ratings agency in
India to operate on the basis of sectoral specialisation. It reflects our sharpness
of analysis, the responsiveness of the process and the large-scale
dissemination of opinion. CRISIL Ratings plays a leading role in the
development of the debt markets in India. The Rating Criteria & Product
Development Centre, responsible for policy research, new product
development and ratings' quality assurance, has developed new ratings
methodologies for debt instruments and innovative structures across sectors.
(2) Policy, Regulatory and Transaction Advisory:
CRISIL Infrastructure Advisory: Our
Infrastructure Advisory enhances CRISIL's franchise in the

23. areas of policy-making and economic development. Our
spectrum of activities includes catalysing economic
development through creation of appropriate policy
frameworks, sector reforms, regulatory support, project
structuring and global competitive bid process management for
large and complex projects.
Gas Information & Solutions: CRISIL has acquired UK’s
leading gas advisory and information company,
Gas Strategies Group Limited (earlier known as
EconoMatters limited) and its subsidiary companies. CRISIL
now has a significant presence in the international gas and LNG
markets.
Gas strategies is a leading global consulting firm in the domain
of natural gas and liquefied natural gas (LNG). The Company
focuses on market studies, project finance due diligence,
regulation and liberalisation of markets, pipeline financial and
demand studies, pricing and contracts.
Gas Strategies’ data provision service provides gas pricing and
supply/demand data and an LNG database to companies
worldwide. Gas strategies has a substantial resource base of
associates with over 100 years of cumulative consulting
experience.
(3) Investment and Risk Advisory: The Risk Advisory business provides
integrated risk management solutions and advice to Banks and Corporates by
leveraging the experience and skills of CRISIL in the areas of credit and
market risk. Taking cognisance of the market needs for integrated solutions

24. that quantify and manage complex risks, the Risk Advisory Group uses
cutting-edge research and methodologies. Also, the Group brings together the
experience of all business teams to offer modular or integrated solutions and
advisory services that are customised to meet client needs.
(4) Crisil research: CRISIL Research is India's largest independent integrated
research house providing accurate and reliable research, analysis and forecasts
on the Indian economy, industries and companies to over 500 Indian and
international clients across financial, corporate, consulting and public sectors.
CRISIL Research leverages on its unique, integrated research platform and
capabilities spanning the entire economy-industry-company spectrum to
deliver superior perspectives and insights to its clients, through both,
subscription products and customised solutions.
(5) Financial news: CRISIL’s MARKETWIRE is CRISIL's cutting-edge financial
market newswire.
A "Wire" agency with a strong India understanding and an unparalleled
combination of news, views, analytics and tools, CRISIL MarketWire enables
clients to take pricing and investment decisions to stay ahead of the curve. It is
widely acknowledged to provide unmatched expert coverage on India's money
and fixed income markets. Backed by the experienced team of the erstwhile
Bridge News, CRISIL MarketWire spearheads CRISIL's offerings in the
market place with real-time news on multi-delivery platforms.
Credit rating at crisil:
Crisil provides rating and risk assessment services to manufacturing services, banks, non
banking financial institutions, financial institutions, housing finance companies,
municipal bodies and companies in the infrastructure sector.

25. CRISIL rates all rupee denominated debt obligations. Its comprehensive offerings include
ratings for long term instruments such as debentures/bonds, preference shares, structured
obligations (including asset backed securities), fixed deposits and short term instruments
such as commercial paper programmes and short term deposits. CRISIL undertakes credit
assessments of various entities including state governments. CRISIL also assigns
financial strength ratings to insurance companies.
CRISIL through the years has continued to innovate and play the role of a pioneer in the
development of the Indian debt market. CRISIL has pioneered the rating of subsidiaries
and joint ventures of multinationals in India and has rated several multinational entities,
both start-up entities as well as players with a well established track record in India. Over
the years, CRISIL has also developed several structured ratings for multinational entities
based on Guarantees and Letters of Comfort from the parent as well as Standby Letter of
Credit arrangements from bankers. The rating agency has also developed a methodology
for credit enhancement of corporate borrowing programmes through the use of partial
guarantees. In essence, CRISIL is uniquely placed in its experience in understanding the
extent of credit enhancement arising out of such structures.
Credit rating process:
CRISIL's rating process and rating committee are designed to ensure that all assigned
ratings are based on the highest standards of independence and analytical rigor.

26. The rating committee comprises members who have the professional competence to
meaningfully assess the credit analysis that underlies the rating, and have no interest in
the entity being rated. A team of analysts carries out the credit analysis . Each team has at
least two members. CRISIL's analysis is based on issuer meetings and an understanding
of the business environment. The analysis is carried out within the framework of clearly
spelt-out rating criteria.
Specific process safeguards that ensure independence from individual or organizational
bias include:
1. Multi-member rating teams
2. Multi-tier rating process
3. Rating committee comprising experienced, competent and reputed professionals
to assign all ratings
4. Organisation-wide internal transparency. Each stage of the rating process for all
ratings, including the final rating committee discussions, is open to all analytical
staff in CRISIL's rating division
5. Rating methodologies and criteria are clearly spelt out, published and
consistently applied
CRISIL ensures confidentiality of the information obtained for the rating exercise by
putting in place appropriate process safeguards. All CRISIL employees are required to
sign a confidentiality agreement. CRISIL does not disclose confidential information that
it has obtained for the purpose of credit rating to anyone (other than market regulators or
law enforcement authorities, if required).
The process of Rating starts with the issue of the Rating request by the issuer and signing
of the Rating agreement. CRISIL employs a multi-layered decision making process in
assigning a rating. It assigns a team of at least two analysts who interact with the
company's management.

27. Integrity of rating:
CRISIL Ratings and all its employees shall comply with all applicable laws, rules and
regulations governing CRISIL Ratings' activities, maintaining high standards
of integrity.
» CRISIL Ratings and all its employees shall deal fairly and honestly with
Issuers, investors, other market participants, and the public.
» CRISIL Ratings and all its employees shall adhere to the highest ethical
standards. Rating mandates shall not be solicited by promising specific ratings
to Issuers.
» CRISIL shall designate an appropriately qualified and experienced person as
the Compliance Officer. Such designation shall be notified to all CRISIL
Ratings employees. The Compliance Officer shall be responsible for
compliance with the provisions of the Code of Conduct, and with applicable
laws and regulations. The Compliance Officer shall not be a part of CRISIL
Ratings.
» Any CRISIL Ratings employee who comes to know about any unethical
conduct or breach of any law, regulation, or the Code of Conduct, by any other
CRISIL Ratings employee, is required to report such matter to the Compliance
Officer immediately. The Compliance Officer shall promptly take appropriate
action.

28. Quality of rating process in India (crisil)
» All rating decisions in CRISIL Ratings shall be based on well-documented and clearly
specified processes and criteria. The rating process shall be designed to ensure that all
assigned ratings are based on the highest standards of independence and analytical rigour.
The rating practices and policies followed shall be kept updated and made available to the
public free of charge.
» The rating criteria and processes shall be comprehensive and rigorous, and shall take all
the relevant factors impacting the rating into account.
» The rating criteria shall be regularly reviewed and updated. CRISIL Ratings shall
ensure that criteria are developed by a team with appropriate qualifications, skills and
experience in the relevant field.
» To ensure that all ratings are assigned objectively and after taking into account all the
relevant issues having a bearing on the credit quality of the issue being rated, each rating
shall be assigned by a committee (known as the Rating Committee in CRISIL)
comprising competent and experienced professionals. The composition of the Rating
Committee shall be appropriate to meaningfully assess the credit risk that underlies the
rating.
» Staffing and allocation of responsibilities shall duly take into account the qualifications,
training and experience of ratings personnel.
» To ensure that there is always a second opinion and that individual biases do not
influence the analysis, the rating exercise shall be carried out by a team comprising at
least two analysts.

29. » The rating team shall make all reasonable efforts to collect all the relevant public and
non-public information on issues which may have a bearing on the rating
Only information that is relevant or likely to be relevant for arriving at an objective rating
is to be sought from the entity being rated (hereinafter referred to as 'the Issuer').
Although analysts shall assess the information gathered based on their existing
knowledge, they are not required to perform the role of auditors or investigators.
» When information sufficient to arrive at a rating is collected and analysed within the
framework of clearly spelt out parameters, the rating team shall make a presentation to
the Rating Committee covering all relevant information and analysis.
» The Rating Committee shall deliberate and carefully consider all the relevant issues
before arriving at the rating. The proceedings of the Rating Committee shall be minuted.
However, in order to maintain the integrity and objectivity of the rating processes and the
robustness of internal deliberations, the minutes of the meetings and details of the
discussions are to be kept strictly confidential and not disclosed to outsiders.
» The rating assigned by the Rating Committee shall be communicated to the Issuer along
with the rationale underlying the assigned rating.
» CRISIL Ratings must clearly establish and document a rigorous process to be followed
during the entire rating exercise, and the surveillance period. The process shall also
clearly indicate the rights and duties of the Issuers. The Issuer shall have a right to accept
or not accept the rating. CRISIL Ratings will also entertain appeals based on material
new information or clarifications. The entire rating, surveillance and appeal process shall
be published and be freely available in public domain.
» In the event of an appeal, the rating team will present the new information and analysis
along with the Issuer's views to the appropriate Rating Committee, which will decide on

30. the appeal.
» CRISIL Ratings shall institute appropriate procedures and quality control mechanisms
to ensure objective, consistent, and timely rating actions, and compliance with existing
processes and criteria.
» Default and transition studies shall be regularly conducted using empirical ratings data.
Default and transition analysis will provide an objective assessment of the efficacy of the
rating criteria and processes.
» Default and transition rates derived through such studies shall be published on a regular
basis. This would provide the market participants an objective tool to assess the reliability
of CRISIL's ratings.
» CRISIL Ratings shall also institute, document, and publish well-structured surveillance
and appeal processes.
Rating scales:
Long term instrument:
High investment grades:
AAA
(Triple A) Highest
Safety
AA
Debentures rated `AAA' are judged to offer highest safety of timely
payment of interest and principal. Though the circumstances
providing this degree of safety are likely to change, such changes as
can be envisaged are most unlikely to affect adversely the
fundamentally strong position of such issues.
Debentures rated 'AA' are judged to offer high safety of timely
payment of interest and principal. They differ in safety from `AAA'

31. (Double A) High
Safety
issues only marginally.
Investment grades:
A
Adequate Safety
BBB
(Triple B)
Moderate Safety
Debentures rated `A' are judged to offer adequate safety of timely
payment of interest and principal; however, changes in
circumstances can adversely affect such issues more than those in
the higher rated categories.
Debentures rated `BBB' are judged to offer sufficient safety of
timely payment of interest and principal for the present; however,
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for debentures in
higher rated categories.
Speculative grades

32. BB
(Double B)
Inadequate Safety
B
High Risk
C
Substantial Risk
D
In Default
Debentures rated `BB' are judged to carry inadequate safety of
timely payment of interest and principal; while they are less
susceptible to default than other speculative grade debentures in the
immediate future, the uncertainties that the issuer faces could lead to
inadequate capacity to make timely interest and principal payments
Debentures rated `B' are judged to have greater susceptibility to
default; while currently interest and principal payments are met,
adverse business or economic conditions would lead to lack of
ability or willingness to pay interest or principal.
Debentures rated `C' are judged to have factors present that make
them vulnerable to default; timely payment of interest and principal
is possible only if favourable circumstances continue.
Debentures rated `D' are in default and in arrears of interest or
principal payments or are expected to default on maturity. Such
debentures are extremely speculative and returns from these
debentures may be realized only on reorganisation or liquidation
Note:
1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to reflect
comparative standing within the category.
2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on Rating
Watch will not carry outlooks. A rating outlook indicates the direction in which a rating
may move over a medium-term horizon of one-to-two years. A rating outlook can be
'Positive', 'Stable' or 'Negative'. A rating outlook is not necessarily a precursor of a rating
change.
3) The contents within parenthesis are a guide to the pronunciation of the rating symbols.

33. 4) Preference share rating symbols are identical to debenture rating symbols except that
the letters "pf" are prefixed to the debenture rating symbols, e.g. pfAAA ("pf Triple A").
Medium term instruments:

34. Note:
FAAA
("F Triple A")
Highest Safety
FAA
("F Double A") High
Safety
FA
Adequate Safety
FB
Inadequate Safety
FC
High Risk
FD
Default
This rating indicates that degree of safety regarding timely payment
of interest and principal is very strong.
This rating indicates that the degree of safety regarding timely
payment of interest and principal is strong. However, the relative
degree of safety is not as high as for fixed deposits with "FAAA"
rating.
This rating indicates that the degree of safety regarding timely
payment of interest and principal is satisfactory. Changes in
circumstances can affect such issues more than those in the higher
rated categories.
This rating indicates inadequate safety of timely payment of interest
and principal. Such issues are less susceptible to default than fixed
deposits rated below this category, but the uncertainties that the
issuer faces could lead to inadequate capacity to make timely
interest and principal payments.
This rating indicates that the degree of safety regarding timely
payment of interest and principal is doubtful. Such issues have
factors at present that make them vulnerable to default; adverse
business or economic conditions would lead to lack of ability or
willingness to pay interest or principal.
This rating indicates that the issue is either in default or is expected
to be in default upon maturity.

35. 1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from FAA to FC to
indicate the relative position within the rating category of the company raising fixed
deposits.
2) CRISIL may assign rating outlooks for ratings from 'FAAA' to 'FB'. Ratings on Rating
Watch will not carry outlooks. A rating outlook indicates the direction in which a rating
may move over a medium-term horizon of one-to-two years. A rating outlook can be
'Positive', 'Stable' or 'Negative'. A rating outlook is not necessarily a precursor of a rating
change.
3) The contents within parenthesis are a guide to the pronunciation of the rating symbols.
Short Term Instruments Rating Scale:
P-1
P-2
P-3
This rating indicates that the degree of safety regarding timely
payment on the instrument is very strong.
This rating indicates that the degree of safety regarding timely
payment on the instrument is strong; however, the relative degree of
safety is lower than that for instruments rated "P-1".
This rating indicates that the degree of safety regarding timely
payment on the instrument is adequate; however, the instrument is
more vulnerable to the adverse effects of changing circumstances
than an instrument rated in the two higher categories.

36. P-4
P-5
This rating indicates that the degree of safety regarding timely
payment on the instrument is minimal and it is likely to be adversely
affected by short-term adversity or less favourable conditions.
This rating indicates that the instrument is expected to be in default
on maturity or is in default.
Credit Quality Rating Scale
Rating Definition
Bond fund credit quality ratings, which range from ‘AAAf’ to ‘C-f’, are based on the
overall creditworthiness of the securities in a fund’s portfolio. The ratings are broadly
classified into two categories: secure and vulnerable. Ratings from ‘AAAf’ to ‘BBB-f’
are classified as ‘secure’ ratings, indicating the relative safety of the fund’s portfolio
against credit defaults of underlying securities. Ratings from ‘BB+f’ to ‘C-f’ are
classified as vulnerable ratings, indicating the portfolio’s relative vulnerability to losses
from credit defaults of the underlying securities.
A credit quality rating is not a recommendation to purchase, sell or hold a security in as
much as it is not a comment on the market price, yield or suitability for a particular
investor. The ratings are based on current information furnished by the fund or obtained
from other sources that CRISIL considers reliable. The ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such information or
based on other circumstances. The rating symbols and definitions are as follows:
Secure Ratings:

37. AAAf
AAf
Af
BBBf
The fund’s portfolio holdings provide very strong protection against
losses from credit defaults
The fund’s portfolio holdings provide strong protection against
losses from credit defaults
The fund’s portfolio holdings provide adequate protection against
losses from credit defaults
The fund’s portfolio holdings provide moderate protection against
losses from credit defaults
Vulnerable Ratings:
BBf
Bf
Cf
The fund’s portfolio holdings provide uncertain protection against
losses from credit defaults
The fund’s portfolio holdings exhibit vulnerability to losses from
credit defaults
The fund’s portfolio holdings make it extremely vulnerable to losses
from credit defaults
Note:The ratings from ‘AAf’ to ‘Cf’ may be modified by the addition of a plus (+) or
minus (-) sign to show the relative standing within the major rating categories.

38. Fund Governance and Process Quality Ratings Scale:
CRISIL Fund House
Level-1
CRISIL Fund House
Level-2
CRISIL Fund House
Level-3
CRISIL Fund House
Level-4
CRISIL Fund House
Level-5
Asset Management Companies rated Fund House Level 1 are
judged to possess Highest governance levels and process quality in
fund management practices
Asset Management Companies rated Fund House Level 2 are
judged to possess High governance levels and process quality in
fund management practices.
Asset Management Companies rated Fund House Level 3 are
judged to possess Average governance levels and process quality in
fund management practices
Asset Management Companies rated Fund House Level 4 are
judged to possess Below Average governance levels and process
quality in fund management practices.
Asset Management Companies rated Fund House Level 5 are
judged to possess Poor governance levels and process quality in
fund management practices
Bond Fund Portfolios Rating Scales:

39. AAAf
AAf
Af
BBBf
Bf
Cf
The fund’s portfolio holdings provide very strong protection against
losses from credit defaults.
The fund’s portfolio holdings provide strong protection against
losses from credit defaults.
The fund’s portfolio holdings provide adequate protection against
losses from credit defaults
The fund’s portfolio holdings provide moderate protection against
losses from credit defaults.
The fund’s portfolio holdings provide inadequate protection against
losses from credit defaults
The fund’s portfolio holdings have factors present which make them
vulnerable to credit defaults.
Composite Performance Ranking (CPR):
Based on percentile of number of schemes considered in each category:
CRISIL CPR~1
CRISIL CPR~2
CRISIL CPR~3
CRISIL CPR~4
CRISIL CPR~ 5
Top 10% Very Good Performance
Next 20% Good Performance
Next 40% Average Performance
Next 20% Below Average Performance
Last 10% Poor Performance

40. Non Credit Risk Rating Scale:
AAAr
(Triple A r)
Highest Safety
AAr
(Double A r)
High Safety
Ar
(Single A r)
Adequate Safety
BBBr
(Triple B r)
Moderate Safety
Debentures rated AAAr are judged to offer highest safety of timely
payment of interest and/ or principal. Though the circumstances
providing this degree of safety are likely to change, such changes as
can be envisaged are most unlikely to affect adversely the
fundamentally strong position of such issues.
Debentures rated AAr are judged to offer high safety of timely
payment of interest and/ or principal. They differ in safety from
AAAr issues only marginally
Debentures rated Ar are judged to offer adequate safety of timely
payment of interest and/ or principal; however, changes in
circumstances can adversely affect such issues more than those in
the higher rated categories.
Debentures rated BBBr are judged to offer sufficient safety of timely
payment of interest and/ or principal for the present; however,
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for debentures in
higher rated categories.
Speculative grades:

41. BBr
(Single B r)
High Risk
Br
(Single B r)
High Risk
Cr
(Single C r)
Substantial Risk
Dr
(Single D r)
In Default
Debentures rated BBr are judged to carry inadequate safety of timely
payment of interest and/ or principal; while they are less susceptible
to default than other speculative grade debentures in the immediate
future, the uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments
Debentures rated Br are judged to have greater susceptibility to
default; while currently interest and/ or principal payments are met,
adverse business or economic conditions would lead to lack of
ability or willingness to pay interest or principal.
Debentures rated Cr are judged to have factors present that make
them vulnerable to default; timely payment of interest and/ or
principal is possible only if favourable circumstances continue
Debentures rated Dr are in default and in arrears of interest and/ or
principal payments or are expected to default on maturity. Such
debentures are extremely speculative and returns from these
debentures may be realized only on reorganisation or liquidation
Note: 1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to
reflect comparative standing within the category.
2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on Rating
Watch will not carry outlooks. A rating outlook indicates the direction in which a rating

42. may move over a medium-term horizon of one-to-two years. A rating outlook can be
'Positive', 'Stable' or 'Negative'. A rating outlook is not necessarily a precursor of a rating
change.
3) The contents within parenthesis are a guide to the pronunciation of the rating symbols.
4) The 'r' symbol attached to the rating indicates that the instrument has an element of
non-credit risk (such as market risk). The risk represented by the 'r' symbol would be
specific for each instrument.
5) In situations where there is any arrangement for payment on the instrument by an
obligor other than the issuer or any means of enhancing credit including arrangements
such as guarantees, letters of credit, etc., CRISIL can add the structured obligations rating
symbol '(so)' to this rating scale.
Risk Adjusted Return Ranking (RRR): In RRR, for each category, CRISIL ranks
schemes on a numerical scale (RRR1, RRR2, RRR3 and so on) to cover all schemes.

43. Bond Funds:
CRISIL Vb1+
CRISIL Vb1
CRISIL Vb2+
CRISIL Vb2
CRISIL Vb3+
CRISIL Vb3
Scheme's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity less than 4.0 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 4.0 to 4.5 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 4.5 to 5.0 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 5.0 to 5.5 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 5.5 to 6.0 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity more than 6.0 years

44. Gilt Funds:
CRISIL Vg1+
CRISIL Vg1
CRISIL Vg2+
CRISIL Vg2
CRISIL Vg3+
CRISIL Vg3
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity less than 8 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 8 to 9 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 9 to 10 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 10 to 12 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity 12 to 15 years
Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity more than 15 years

45. ICRA Limited formerly known as INVESTMENT INFORMATION AND CREDIT
RATING AGENCY OF INDIA LIMITED was incorporated in 1991 by the lending
financial/investment institutions, commercial banks and financial service companies as an
independent and professional Investment Information and Credit Rating Agency. ICRA is
a leading provider of investment information and credit rating services in India.
Alliance with moodys investors service:
The Intenatinal Rating Agency MOODY’s INVESTOR SERVICE has taken up
stake in the equity capital of ICRA and is currently ICRA’s largest share holder. The
other shareholders include banks and other financial institutions.
The ICRA factor
(1) Facilitating efficiency in business……
ICRA information products, ratings and solutions reflect independent
professional and impartial opinions which aid business to enhance the quality of their

46. decisions and help issuers to access a broader anvestor base and even lesser known
companies to access money and capital markets.
(2) The research factor……
ICRA strongly believes that the quality and the authenticity of information
are derivatives of the organizations research base.they have dedicated teams for
Monetary, Fiscal, Industry and Sector research, and a panel of advisors to enhance our in-
house capabilities.our research base equips usto maintain the highest standards of quality
and credibility.
(3) Committed to development of the financial market…….
The focus of ICRA in the coming years will continue to be on developing
innovative concepts and products in a dynamic market environment, generating and
promoting wider investor education and interest, enhancing efficiency and transparency
in the financial market, and providing a healthies environment for market participants and
regulators.
ICRA products and services are designed to:
• Provide information and guidance to institutional and individual investors or
creditors.
• Enhance the ability of the borrowers or issuers to access the money market and
the capital market for tapping a larger volume of resources from a wider range of
the investing public.
• Assist the regulators in promoting transparency in the financial markets
• Provide intermediaries with a tool to improve efficiency in the funds raising
process.

47. With the growth and globalisation of the Indian capital markets leading to an
exponential surge in demand for professional credit risk analysis, ICRA has been
proactive in widening its service offerings, executing assignments including credit
ratings, equity gradings, specialised performance gradings and mandated studies
spanning diverse industrial sectors. In addition to being a leading credit rating agency
with expertise in virtually every sector of the Indian economy, ICRA has broad-based its
services for the corporate and financial sectors, both in India and overseas, and currently
offers its services under the following banners:
(1 ) Rating services:
As an early entrant in the credit rating business, ICRA is one of the most
experienced credit rating agencies in the country today. ICRA rates rupee dominated debt
instruments issued by manufacturing companies, commercial banks, non banking finance
companies, fianancial institutions, public sector undertakings and municipalities, among
others. The obligations include long term instruments such as bonds and debentures,
medium term instruments such as fixed deposit programmes and short term instruments
such as commercial paper programmes and certificate of deposit. ICRA also rates
structured obligations ans sector specific debt obligations such as instruments issued by
Power, Telecom and Infrastructure companies. The other services offered include
Corporate Governance rating, Stakeholder value and Governance rating, Rating of claims
payable ability of Insurance companies, Project Finance Ratingand Line of Credit Rating.
(2) Information:
The Information Services Division focuses on providing authentic data and
value- added products used by intermediaries, financial institutions, banks, asset

48. managers, institutional and individual investors and others. The division portfolio of
pproducts include sector/industry- specific studies/ publications, corporate reports and
mandate based studies(customized research). These products, covering a diverse
spectrum of industrial sectors besides the economy, seek to facilitate investment decision
making while providing a perspective on underlying micro variables.
(3)Grading services:
The Grading services offered by ICRA’s Information Services Division employ
pioneering concepts and methodologies and include grading of:
(a) Construction entities(ICRA and Construction Industry Development Council seek
to provide lenders with an independent opinion on the quality of entities graded);
(b) Real Eastate Developers & Projects: (ICRA and The National Real Eastate
Development Council seek to make property buyers aware of the risks associated with
real eastate projects and with the developers ability to deliver according to terms ).
(c) Mutual Fund Schemes: (These seek to provide an independent opinion on the
credit risk associated with investing in various mutual fund schemes).
(d) Healthcare Entities: (present an independent opinion on the quality of care
provided by healthcare entity).
(3) Advisory services:
The advisory Services Division offers wide ranging management Advisory
Services covering the areas of Strategic Practice, Risk management Practice, Regulatory
Practice and Content. While Strategy Practice focuses on improving the organizations
competitiveness across its value chain, Regulatory Practice advises clients like
Governments and Regulators on formulation of economic and financial policies. ICRA
Advisory provides consulting service at transaction level to infrastructure projects, while
under Risk Management Practice is offered on the efficient management of risks to banks

49. and other lenders. On the content side, ICRA advisory provised customized and
diagnostic reports for diverse entities including governments, investors, project
developers and e-commerce websites.
THE RATING PROCESS:
ICRA’s rating process is initiated on receipt of a formal request (or mandate)
from the prospective issuer. A rating team, which usually consist of two analyst, with the
expertise and skills required to evaluate the business of the issuer, is involved with the
rating assignment. An issuer is provided a list of information requirements and a broad
framework of discussions. These requirements are derived from ICRA’s experience of
the issuer’s business, and broadly cover all aspects that have a bearing on the rating.
ICRA also draws on secondary sources of information, including its own
research division. The rating involves assessment of qualitative factors with a view to
estimating the future earnings of the issuer. This requires extensive interactions with the
issuer’s management, specifically on subjects related to plans, outlook, competitive
position and funding policies.
Plant visits are made to gain a better understanding of the issuer’s production
process, make an assessment of the state of equipment and main facilities, evaluate the
quality of technical personnel and form an opinion on the key variables that influence the
level, quality and the cost of production. These visits also help in assessing the progress
of projects under implementation.
After completing the analysis, a Rating Report is prepared, which is presented
to the ICRA Rating Committee. A presentation on the issuer’s business and management
is also made by the Rating Team. The Rating Committee is the final authority for
assigning ratings.

50. The assigned rating, along with the key issues, is communicated to the
issuer’s top management for acceptance.the ratings that are not accepted may be
reviewed.. the non- accepted ratings are not disclosed and complete confidentiality is
maintained on them.
If the issuer does not find the rating acceptable, it has the right to appeal for
review. Such reviews are usually taken up only if the issuer provides certain fresh inputs.
During a review, the issuer’s response is presented to the Rating Committee.if the inputs
and/or fresh clarifications are impressive, the Rating Committee would revise the initial
rating decision.
As pat of mandatory surveillance process, ICRA monitors the accepted
ratings over the tenure of the rating instrument. The ratings are generally reviewed once
every year, unless the circumstances of the case warrant an earlier review. The rating
outstanding amy be retained or revised(that is, upgraded or downgraded) on surveillance.
The rating methodology:
ICRA considers all the relevant factors that have a bearing on the future cash generation
of the issuer’s. these factors include:
• Industry characteristics
• Competitive position of the issuer
• Operational efficiency
• Management quality

51. • Commitment to new projects and other associate companies
• Funding policies of the issue
A detailed analysis of the pat financial statements is made to assess the performance
under the “real world” business dynamics. Estimates of future earnings under various
sensitivity scenarios are drawn up and evaluated against the claims and obligations that
require servicing over the tenure of the instrument being rated. Primarily, it is the relative
comfort level of the issuer’s cash flows to service obligations that determine the rating.
ICRA’s Issuer Ratings
ICRA’s Issuer Rating Scale- for assessing the general creditworthiness of the rated
entitiesrelation to their senior unsecured obligations. ICRA’s Issuer ratings are not
specific to any particular debt
instrument issued by the rated entities.
IrAAA : The highest-credit-quality rating assigned by ICRA. The rated entity carries the
lowest credit risk. Therating is only an opinion on the general creditworthiness of the
rated entity and not specific to any particular debt instrument.
IrAA: The high-credit-quality rating assigned by ICRA. The rated entity carries low
credit risk. The rating is only an opinion on the general creditworthiness of the rated
entity and not specific to any particular debt
instrument.
IrA: The adequate-credit-quality rating assigned by ICRA. The rated entity carries
average credit risk. The rating is only an opinion on the general creditworthiness of the
rated entity and not specific to any particular
debt instrument.

52. IrBBB: The moderate-credit-quality rating assigned by ICRA. The rated entity carries
higher than average credit risk. The rating is only an opinion on the general
creditworthiness of the rated entity and not specific
to any particular debt instrument.
IrBB: The inadequate-credit-quality rating assigned by ICRA. The rated entity carries
high credit risk. The rating is only an opinion on the general creditworthiness of the rated
entity and not specific to any particular
debt instrument.
IrB: The risk-prone-credit-quality rating assigned by ICRA. The rated entity carries very
high credit risk. The rating is only an opinion on the general creditworthiness of the rated
entity and not specific to any particular
debt instrument.
IrC: The lowest-credit-quality rating assigned by ICRA. The rated entity carries
extremely high credit risk. The rating is only an opinion on the general creditworthiness
of the rated entity and not specific to any particular debt instrument.
Note:
For the Rating categories IrAA through to IrC the sign of + (plus) or – (minus) may be
appended to the Rating
symbols to indicate their relative position within the Rating categories concerned. Thus
the Rating of IrAA+ is
one notch higher than IrAA, while IrAA- is one notch lower than IrAA.
IC

53. Rating scale:
Long term (including debentures, bond preference share)
LAAA
LAA+
LAA
LAA-
LA+
LA
Highest safety. Indicates fundamentally strong position. Risk factors are
negligible. There mat be circumstances adversely affecting the degree of
safety but such circumstances, as may be visualized, are not likely to affect
the timely payment of principal and interest as per terms.
Highest safety. Risk factors are modest and may vary slightly. The protective
factors are strong and the prospect of timely payment
Of principal and interest as per terms under adverse circumstances , as may be
visualised, differs from LAAA only marginally.
Adequate safety. Risk factors are more variable and greater in periods of
economis stress. The protective factors are average and any adverse change in
circumstances, as may be visualised may alter the fundamental strength and
affect the timely payment of the principle and interst ad per the terms.

54. LA-
LBBB+
LBBB
LBBB-
LBB+
LBB
LBB-
LB+
LB
LB-
LC+
Moderate safety. Considerable variability in risk factors. The protective
factors are below average. Adverse changes in business/economic
circumstances are likely to affect the timely payment of principle and interest
as per the terms,
Inadequate safety. The timely payment of interest and principle are more
likely to be affected by present or prospective changesin the business or
economic circumstances. The protective factors fluctuate in case of changes
in economy or business conditions.
Risk prone. Risk factors indicate that obligations may not be met when
due.the protective factors are narrow.adverse changes in business and
economic conditions could result in inability or willingness to service debts
on time as per the terms.

55. LC
LC-
LD
Substantial risk. There are inherent elements of risk and timely servicing of
debts or obligations could be possible only in case of continued existence of
favourable circumstances.
Default. Extremely speculative. Either already in default in payment of
interest and/ or principal as per terms or expected to default. Recovery is
likely only on liquidation or re-organisation.

56. Medium term (including certificated of deposit and fixed deposit programmes)
MAAA
MAA+
MAA
MAA-
MA+
MA
MA-
MB+
Highest safety. The prospect of timely servicing of the interest and the
principal as per the terms is the best
Highsafety. The prospect of timely servicing of the interest and the principal
as per the terms is high but not as high as MAAA rating.
Adequate safety. The prospect of timely payment of the interest and the
principal as per the terms is adequate. Howewer, the debt servicing maybe
affected by adverse changes in the business or economic conditions.
Inadequate safety. The timely payment of interest and principal are more

57. MB
MB-
MC+
MC
MC-
MD
likely to be affected by future uncertainities.
Risk prone. Susceptibility to default is high. Adverse changes in the business
or economic conditions could result in inability or willingness to service debts
on time and as per the terms.
Default. Either already in default or expected to be in default in the near
future.
Short term(including commercial paper)
A1+
A1
A2+
A2
A3+
Highest safety. The prospect of timely payment of debt or the obligation is the
best
High safety. The relative safety is marginally lower than in ‘A1’
Rating.
Adequate safety. The prospect of timely payment of interest and installment is
adequate, but any adverse change in the business or economic conditions may

58. A3
A4+
A4
A5
affect the fundamental strength.
Risk prone. The degree of safety is low. Likely to default in case of adverse
changes in business or economic conditions.
Default. Either already in default of expected of default in the near future.
Claims paying ability(of insurance companies):
ICRA’s claims paying ability ratings (CPR’s)for insurance companies are ICRA’s
opinion on the ability of the insurers concerned to honour policy holders claims and
obligations on time.in other words, a CPR is ICRA’s opinion on the financial strength of
the insurer, from a policy holders perspective.
Following deregulation, a paradigm shift is expected in the domestic insurance
sector as newer playersand products enter the market. Given this scenario, ICRA expects
its CPRs to be an important input, influencing the consumers choice of insurance
companies and products. ICRA’s rating process involves analysis of an insurers business
fundamentals and its competitive position and focuses mainly on the insurers franchise
value, its management, organizational structure/ ownership and underwriting and
investment strategies. Besides, the analysis include an assessment of the insurance
companies profitability, liquidity, operating and financial leverage, capital adequacy and
asset/liability management method.

59. iAAA
iAA
iA
iBBB
iBB
Highest claims paying ability. Indicates fundamentally strong position.
Prospect of meeting policyholders obligations is the best.
High claims paying ability. Risk factors are modest and may vary slightely.
Prospect of meeting policyholders obligations is high and differs from iAAA
only marginally.
Adequate claims paying ability. Prospect of meeting policyholders obligations
is adequate. The risk factors are more variable and greater in periods of
economic stress and any adverse changes in business/economic circumstances
as may be visualised, may alter the fundamental strength.
Moderate claims paying ability. The protective factors are below averageand
adverse changes in business and economic circumstances are likely to affect
the prospect of meeting policyholders obligations.
Inadequate claims paying ability. The protective factors fluctuate in case of
changes in business or economic conditions and prospects of meeting
policyholders obligations are more likely to be affected by such changes.
Weak claims paying ability. Risk factors indicate that policyholders

60. iB
iC
obligations may not be met when due. Adverse changes in business or
economic conditions could result in inability or unwillingness to receive
policyholders obligations.
Lowest claims paying ability. Indicates fundamentally poor position. Such
companies may often be in default on policyholders obligations and may be or
are likely to be placed under supervision of insurance regulators.
Corporate governance rating scales:
ICRA's Corporate Governance Rating (CGR) is meant to indicate the relative level to
which an organisation accepts and follows the codes and guidelines of corporate
governance practices. Corporate Governance practices prevalent in a company reflect the
distribution of rights and responsibilities among different participants in the organisation
such as the Board, management, shareholders and other financial stakeholders and the
rules and procedures laid down and followed for making decisions on corporate affairs.
The emphasis of ICRA rating is on corporate's business practices and quality of
disclosure standards that addresses the requirements of the regulators and is fair and
transparent for its financial stakeholders The variables, which are analysed for arriving at
the rating, are the shareholding structure, executive management processes, board
structure and processes, stakeholder relationship, transparency and disclosures and
financial discipline. Each of these variables is evaluated with respect to a set of attributes
and a composite score is computed using a proprietary model developed by ICRA. The
rating process also looks at compliance with statutory regulations as laid down in Clause
49 of the Listing Agreement. The focus, however, is on substance over form and
compliance with regulations is only the starting point. The ICRA opinion, is , however

61. not a certificate of statutory compliance or a comment on company's future financial
performance, credit rating or stock price.
CGR1
CGR2
Implies that in ICRA’s current opinion, the rated company has adopted and
follows such practices, conventions and codes as would provide its financial
stakeholders the highest assurance on quality of corporate governance.
ICRA opinion, howewer, is not a certificate of statutory compliance or a
comment on the rated companys future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rates compant has adopted and
follows such practices, conventions and codesn as would provide its
financial stakeholders a high level of assurance on the quality of corporate
governance. ICRA opinion, howewer, is not a certificate of statutory
compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
Implies that in ICRAs current opinion, the rated company has adopted the
and follows such practices, conventions and codes as would provide its
financial stakeholders adequate level of assurance on the quality of

62. CGR3
CGR4
CGR5
corporate governance. ICRA opinion, however, is not a certificate of
statutory compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
Implies that in ICRAs current opinion, the rated company has adopted the
and follows such practices, conventions and codes as would provide its
financial stakeholders moderate level of assurance on the quality of
corporate governance. ICRA opinion, however, is not a certificate of
statutory compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
Implies that in ICRAs current opinion, the rated company has adopted the
and follows such practices, conventions and codes as would provide its
financial stakeholders inadequate level of assurance on the quality of
corporate governance. ICRA opinion, however, is not a certificate of
statutory compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.

63. CGR6
Implies that in ICRAs current opinion, the rated company has adopted the
and follows such practices, conventions and codes as would provide its
financial stakeholders low level of assurance on the quality of corporate
governance. ICRA opinion, however, is not a certificate of statutory
compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
ICRA’s stakeholders value and governance ratings:
The emphasis of ICRA’s Stakeholder Value and Governance (SVG)rating, is on value
creation and value management for all stakeholders of a company, besides the companys
corporate governance practice. The SVG rating considers the companys actual
performance and the accrual of the benefits of such performance among all its
stakeholders, apart from the quality of the comapanys corporate governance practices. It
is the combines assessment of stakeholder value creation and management and the quality
of corporate governance practices that determines the SVG rating.
ICRAs CGR and SVG ratings help the rated corporate entity in raising funds, listing on
stock exchange, dealing with third parties like creditors providing comfort to regulators,
improving image/credibility, improving valuation and bettering corporate governance
practices through benchmarking.

64. SVG1
SVG2
SVG3
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the

65. SVG4
SVG5
SVG6
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Project fianance ratings:

66. The envisages demand for private sector investments in infrastructure projects,
particularly in the energy and road sectors, suggests considerable potential for adequately
structured project finance transactions. Growth in such transactions would also be driven
by the inability of many potential project sponsers to implement such capital intensive
and highly leveraged projects on their balance sheet without having their own credit risk
profile materially impacted. Project financing usually involves seetiing up of a special
purpose vehicle(SPV) , bound by a contractual matrix to various project participants,
which raises debt and services it from its own cash flows, without recourse from its
sponsors. ICRA’s rating approach emphasizes the importance carefully assessing the
risks that characterize such transactions and suitably structuring the projects to mitigate
the risks.
It may be noted that if a project entity proposes to issue a debt instrument that requires a
Credit Rating, ICRA would assign the Credit Ratingon its conventional Credit Rating
scale.the Project Finance rating(PFR) service is essentially a project risk assessment
exercisewhich may be useful to project enetity and its lenders or investors.
ICRA would also provide a detailed assessment report on the project without assigning a
formal PFR if lenders or project entities require only that.
The rating methodology invo,lves an assessment of three broad areas:
(1) sponsor strength
(2) project risks
(3) cash flow adequacy
The ratings given are as follows:

67. PFR1
PFR2
PFR3
PFR4
Projects classifies as PFR1 have adequate attributes of investment grade
credit. The protective factors are satisfactory.
Projects classifies as PFR1 have adequate attributes of investment grade
credit. The protective factors are satisfactory.
Projects classifies as PFR1 have adequate attributes of investment grade
credit. The protective factors are satisfactory.
Projects classifies as PFR1 have adequate attributes of investment grade
credit. The protective factors are satisfactory.
CARE

68. Credit Research
and
Analysis
CARE- Credit Research And Analysis
Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating,
information and advisory services company promoted by Industrial Development Bank of
India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and
financial services companies. In all CARE has 14 shareholders.
CARE assigned its first rating in November 1993, and upto March 31, 2006, had
completed 3175 rating assignments for an aggregate value of about Rs 5231 billion.
CARE's ratings are recognised by the Government of India and all regulatory authorities
including the Reserve Bank of India (RBI), and the Securities and Exchange Board of
India (SEBI). CARE has been granted registration by SEBI under the Securities &
Exchange Board of India (Credit Rating Agencies) Regulations,1999.
The rating coverage has extended beyond industrial companies, to include public utilities,
financial institutions, infrastructure projects, special purpose vehicles, state governments
and municipal bodies. CARE's clients include some of the largest private sector
manufacturing and financial services companies as well financial institutions of India.
CARE is well equipped to rate all types of debt instruments like Commercial Paper,
Fixed Deposit, Bonds, Debentures and Structured Obligations.
CARE's Information and Advisory services group prepares credit reports on specific
requests from banks or business partners, conducts sector studies and provides advisory
services in the areas of financial restructuring, valuation and credit appraisal systems.
CARE was retained by the Disinvestment Commission, Government of India, for
assistance in equity valuation of a number of state owned companies and for suggesting
divestment strategies for these companies.

69. The following is the scope of activities foe CARE:
Credit Reports
CARE offers credit reports on companies based on published information and CARE's
in-house data base. These confidential credit reports are useful to entities considering
financing options, joint ventures, acquisitions and collaborations with Indian companies
.
Sector Studies
CARE from time to time conducts studies on select sectors of the Indian economy,
particularly those which were largely government controlled and funded till recently, but
have been thrown open for private investment.
Studies on the Indian Power Sector, Fertilizer Industry and Municipal Finances have been
completed. These studies examine the legal framework and the rules and regulations
under which these sectors function. They also discuss the opportunities for private sector
investment, the risks and returns on these investments and the financing options.
CARE has also prepared reports on twelve of the larger states of the Indian Union, which
account for the bulk of foreign direct investment into India. These reports have been used
by investors setting up infrastructure projects in India and by domestic and international
banks to determine the strength of guarantees and other credit enhancements provided by
the state governments for these projects.
CARE also regularly prepares reports on important segments of the Indian economy.
These reports are used by industry participants, financial intermediaries and also by
analysts in CARE for their rating reports.
Project Advisory Services
For financing its infrastructure, India is increasingly relying on private sector
participation. CARE uses the expertise gained in evaluating the credit risk of projects in
areas such as roads, ports, power and telecom to advise investors and banks about the
regulatory framework, the specific project risks and the ways of risk mitigation. CARE
has helped independent power producers in India understand the functioning of the

70. principal power purchasers, the State Electricity Boards and evaluate options for
mitigating purchaser risk. CARE has also worked closely with project sponsors to
structure their debt securities based on estimates of cash flows.
Financial Restructuring
The business risk faced by Indian companies increased following the liberalisation of
Indian economy in 1991. To compete in the changed environment, companies have had
to reassess their capital structures. CARE uses its knowledge about various industry
sectors to advise companies about the optimal capital structure and the financial
restructuring options.
Valuation
CARE carries out enterprise valuations for company managements, prospective and
exisiting business partners or large investors. The Disinvestment Commission,
Government of India, has used CARE's services for valuing 20 state owned enterprises
Credit Appraisal Systems
CARE helps banks and non banking finance companies to set up or modify their credit
appraisal systems.
Rating services:
CARE's Credit Rating is an opinion on the relative ability and willingness of an issuer to
make timely payments on specific debt or related obligations over the life of the
instrument. CARE rates rupee denominated debt of Indian companies and Indian
subsidiaries of multinational companies.
CARE undertakes credit rating of all types of debt and related obligations. These include
all types of medium and long term debt securities such as debentures, bonds and
convertible bonds and all types of short term debt and deposit obligations such as
commercial paper, inter-corporate deposits, fixed deposits and certificates of deposit.

71. CARE also rates quasi-debt obligations such as the ability of insurance companies to
meet policyholders obligations. CARE's preference share ratings measure the relative
ability of a company to meet its dividend and redemption commitments.
CARE has a strong structured finance team and has been instrumental in developing
rating methodologies for innovative asset backed securities in the Indian capital market.
The term 'structured financing' refers to securities where the servicing of debt and related
obligations is backed by some sort of financial assets and/ or credit support from a third
party to the transaction. The securities are termed 'structured' because through specific
choices relating to the type and amount of assets and particular structural features, these
securities may be structured to achieve a desired rating level. CARE assigns the suffix
(SO) to denote that the rating has been achieved by suitably structuring the transaction to
enhance the credit quality of the securities and not on the basis of the credit quality of the
issuer alone.
Rating process:
The rating process takes about three to four weeks, depending on the complexity of the
assignment and the flow of information from the client. Rating decisions are made by the
Rating Committee.
Requests for rating 1. Assigns rating team
Submits information and detailed
schedules
2. The team analyses the
information.
Interacts with the team, responds to
queries raised and provides any
additional data necessary for the
analysis
3. The team interacts with clients,
undertakes site visits, and analyses
data submitted by the client
4. Internal committee previews
analysis.
5. RATING COMMITTEE awards

72. rating to client
Accepts rating * , ** 6. Notification in press
7. Periodic Surveillance
* : Client may ask for a review of the rating assigned and furnish
additional information for the purpose.
** : Client has option not to accept the final rating in which case, CARE
will not publish the rating or monitor it.
The rating process for structured financing differs from the traditional rating process.
Issuers of structured financings aim to structure appropriate credit protections to achieve
a 'desired' credit rating. The role of CARE is to arrive at the level of credit enhancements
required to achieve the desired rating
Frequency of rating actions:
The rating assigned is communicated to the client along with a detailed rationale. Only
ratings accepted by the clients are published and then monitored on a continuous basis
over the life of the instrument. CARE has a comprehensive in-house data base which
facilitates surveillance of the various industries and companies operating in these
industries.
Each rating is reviewed formally at least once a year, when analysts meet the issuer's
management. A review can also be triggered by a major development in the company or
in the industry, which may have a significant bearing on the credit-worthiness of the
company. As a part of the review exercise, actual financial performance is analysed in the
light of the estimates made earlier and deviations are examined.
CARE puts the rating under Credit Watch, when any event or deviation from the
expected trend has occurred or is expected and additional information is necessary to take

73. rating action. The rating may be retained, upgraded or downgraded based on the changed
prospects for the issuer. A rating change is at the absolute discretion of CARE, without
concurrence of the client.
Rating methodology:
CARE undertakes rating exercise based on information provided by the company, in-
house database and data from other sources that CARE considers reliable. CARE does
not undertake unsolicited ratings. The primary focus of the rating exercise is to assess
future cash generation capability and their adequacy to meet debt obligations in adverse
conditions. The analysis therefore attempts to determine the long-term fundamentals and
the probabilities of change in these fundamentals, which could affect the credit-
worthiness of the borrower. The analytical framework of CARE's rating methodology is
divided into two interdependent segments. The first deals with the operational
characteristics and the second with the financial characteristics. Besides quantitative
factors, qualitative aspects like assessment of management capabilities play a very
important role in arriving at the rating for an instrument. The relative importance of
qualitative and quantitative components of the analysis vary with the type of issuer.
Rating determination is a matter of experienced and holistic judgement, based on the
relevant quantitative and qualitative factors affecting the credit quality of the issuer.
What ratings do not measure?
It is important to emphasise the limitations of credit ratings. They are not
recommendations to invest. They do not take into account many aspects which influence
an investment decision. They do not, for example, evaluate the reasonableness of the
issue price, possibilities for capital gains or take into account the liquidity in the
secondary market. Ratings also do not take into account the risk of prepayment by issuer.
Although these are often related to the credit risk, the rating essentially is an opinion on
the relative quality of the credit risk.

74. Issuer ratings:
CARE’s Issuer Ratings (CIR) is issuer specific assessment of credit risk. CIR is similar to
long term instrument ratings except for the fact that they are specific to an issuer and not
specific to any of the issuers instruments. Issuer rating factors in expected performance of
the entity over an intermediate time horizon of around three years and reflects the overall
debt management capability of the entity as regards to its senior unsecured debt
obligations. Once accepted, the ratings will be subject to periodic reviews. The rating
company will have to provide a rating requeat to CARE giving a notice of period of one
year for withdrawal of an accepted rating. The rating will mainly be applicable to
organized type of business enterprises, that is, public and private ltd. Companies.
CARE AAA
CARE AA
CARE A
CARE BBB
CARE BB
Issuers with this rating are considered to be of the best credit quality,
offering highest safety of timely servicing of debt obligations. Such
issuers carry minimal credit risk.
Issuers with this rating are considered to be of the high credit quality for
timely servicing of debt obligations. Such issuers carry very low credit
risk.
Issuers with this rating are considered to be of the adequate credit quality
for timely servicing of debt obligations. Such issuers carry low credit risk.
Issuers with this rating are considered to be of the moderate safety for
timely servicing of debt obligations. Such issuers carry moderate credit
risk.
Issuers with this rating are considered to be of the inadquate safety for
timely servicing of debt obligations. Such issuers carry high credit risk.

75. CARE B
CARE C
CARE D
Issuers with this rating are considered to be of the low safety for timely
servicing of debt obligations. Such issuers carry very high credit risk.
Issuers with this rating are considered to be having very high likelihood of
default in the payment of interest and principal.
Issuers with this rating are of the lowest category. They are either in
default or likely to be in default soon
Rating scale:
Rating symbols for long and medium term instruments
CARE AAA
(FD)/(CD)/(SO)
CARE AA
(FD)/(CD)/(SO)
Instruments carrying this rating are considered to be of the best quality,
carrying negligible investment risk. Debt service payment are protected by
stable cash flows with good margin. While the underlying assumptions
may change, such changes can be visualized are most unlikely to impair
the strong position of such instruments.
Instruments carrying this rating are to be judged of high qualiy by all
standards. They are also classified as high investment grades. They are
rated lower than CARE AAA securities because of somewhat lower
margins of protection. Cjanges in assumptions may have greater impact or
the long-term risks may be somewhat larger. Overall, the difference with

76. CARE AA
(FD)/(CD)/(SO)
CARE BBB
(FD)/(CD)/(SO)
CARE BB
(FD)/(CD)/(SO)
CARE B
(FD)/(CD)/(SO)
CARE AAA rated securities is somewhat marginal.
Instruments with this rating are considered upper medium grade
instrumentsand have many favourable investment attributes.safety for
principal and interest are considered adequate. Assumptions that do not
materialize may have a greater impact as compared to instruments rated
higher.
Such instruments are considered to be of investment grade. They indicate
sufficient safety for payment of interest and principal, at the time of
rating. Howewer, adverse changes in assumptions are most likely to
weaken the debt servicing capability compared to higher rated instruments
.
Such instruments are considered to be speculative, with inadequate
protection for interest and principal payments.
Instruments with such rating are generally classified susceptible to default.
While interest and principal payments are being met, adverse changes in
business conditions are likely to lead to default.

77. CARE C
(FD)/(CD)/(SO)
CARE D
(FD)/(CD)/(SO)
Such instruments carry high investment risks with the likelihood of
default in the payment of interest and principal.
Such instruments are of lowest category. They are either in default or
likely to be in default soon.
(FD)- Fixed Deposit
(CD)- Certificate of Deposit.
(SO)- Structured Obligations
Rating symbols for short term instruments:
PR-1
PR-2
PR-3
Instruments would have superior capacity for the repayment of short term
promissory obligations. Issuers of such instruments will normally be
characterized by leading market positions in established industries, high
rates of return on funds employed etc….
Instruments would have strong capacity for repayment of short term
promissory obligations. Issuers would have most of the characteristics as
for those with PR-1 instruments.
Instruments have an adequate capacity for repayment of short- term
promissory obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection.
Instruments have minimal degree of safety regarding timely payment of
short term promissory obligations and the safety is likely to be adversely

78. PR-4
PR-5
affected by short term adversity or less favourable conditions.
The instrument is in default or is likely to be in default on maturity.
Long Term Loans: CLR is an opinion on the ability and willingness of a borrower to
make timely payments on specific loan obligations, over its life. CLR is aimed at
providing an additional input in the decision making process of banks, financial
institutions, and non-bank financial services companies. in addition, the ratings assist
lenders in making quick credit decisions, determining the risk premium to be charged and
in portfolio monitoring. Borrowers benefit from wider access to potential lenders and
reduced cost of borrowing. The rating process is initiated either by a bank or institution,
with the consent of the borrower or by the borrowing entity itself. The ratings are kept
confidential from third parties

79. CARE AAA(L)
CARE AA(L)
CARE A(L)
CARE BBB(L)
CARE BB(L)
CARE B(L)
CARE C (L)
CARE D(L)
Loans with this rating are considered to be of the best credit quality,
offering highest safety for timely servicing of loan obligations. Such loans
carry minimal credit risk.
Loans with this rating are considered to be of the high safety for timely
servicing of loan obligations. Such loans carry very low credit risk.
Loans with this rating are considered to be of the quality, adequate safety
for timely servicing of loan obligations. Such loans carry low credit risk.
Loans with this rating are considered to be of moderate safety for timely
servicing of loan obligations. Such loans carry moderate credit risk.
Loans with this rating are considered to be of inadequate safety for timely
servicing of loan obligations. Such loans carry high credit risk.
Loans with this rating are considered to be of low safety for timely
servicing of loan obligations. Such loans are susceptible to default.
Loans with this rating are considered to having very high likelihood of
default in the payment of interest and principal.
Loans with this rating are of the lowest category. They are either in
default or are likely to be in default soon.

80. Short term loans:.
Performance rating of parallel marketers:
These ratings are on a scale of 1 to 4 as notified by Govt. of India
.
1-Good
2-Satisfactory
3-Low Risk
Pl 1
PL 2
PL 3
PL 4
PL 5
Loans with this rating would have strong capacity for timely payment of
short-term loan obligations and carry lowest credit risk. Within this
category, loans with relatively better credit characteristics are assigned
PL1+ rating.
Loans with this rating would have adequate capacity for timely payment
of short-term loan obligations and carry higher credit risk as compared to
loans rated higher.
Loans with this rating would have moderate capacity for timely repayment
of short term loan obligations at the time of rating and carry higher credit
risk as compared to loans rated higher.
Loans with this rating would have inadequate capacity for timely payment
of short-term loan obligations and carry very high credit risk. Such loans
are susceptible to default.
The loan is in default or is likely to be in default on maturity.

81. 4-High Risk
Collective investment schemes:
CARE 1 (CIS)
CARE 2 (CIS)
CARE 3 (CIS)
CARE 4 (CIS)
Schemes carrying this rating are considered to be very strong, with high
likelihood of achieving their objectives and meeting the obligations to
investors.
Schemes carrying this rating are considered to be strong, with adequate
likelihood of achieving their objectives and meeting the obligations to
investors. They are rated lower than CARE 1 (CIS) rated schemes because
of relatively higher risk.
Such schemes are considered to have adequate strengths for achieving
their objectives and meeting the obligations to investors. They are
considered to be investment grade
Schemes carrying this rating are considered to have inadequate capability
to achieve their objectives and meet the obligations to investors. They are
considered to be speculative grade
Such schemes are considered weak and are unlikely to achieve their
objectives and meet their obligations to investors. They have either failed
or are likely to do so in the near future.

82. CARE 5 (CIS)
Credit Rating criteria Manufacturing Companies:
CRISIL:
CRISILS framework for assessing credit quality covers the four broad areas of Business
risk, Financial risk, Management risk and Project risk.
Business risk:
Business risk analysis covers the business fundamentals of the rated companies, the
characteristics of the industry in which it operates, its competitive and market position in
the industry and operational efficiencies.
The analysis begins with the fundamental assessment of the company’s environment in
terms of the industry in which it operates, the risks attached to that industry and the
government policies affecting that industry. The evaluation extends to an assessment of
the companys market position and its operational efficiencies.
(1) Industry risk: assessing the industry risk is fundamental to evaluating a
company’s business risks. Some key factors pertinent across industries are its
size, growth prospects, competitive scenario and the demand-supply dynamics
in the industry, its importance to the economy, government policies, entry
barriers, profitability & cyclicality. The rating also considers other critical

83. industry factors such as its vulnerability to technology change and to
regulatory/political interference. The industry rating broadly determines the
median rating for corporates in that industry.
(2) Government policies: the impact of government policies on various industries
is an important parameter in analyzing the business risk. In evaluating this, the
following factors are considered-
(i)The importance ogf the industry to the Indian Economy
(ii)Tariff barriers(both quantitive and qualitative)
(iii)Excise duties and taxes
(iv)Domestic price controls
(v) Incentives for new investments and incentives for exports.
(vi)Legislation regarding pollution control measures
(vii)Laws with respect to foreigh exchange.
(3) Market Position: An anlysis of the rated companys market position provides
insights into its current strengths in the market place and its ability to sustain
its competitive advantage. CRISIL undertakes a detailed analysis of both the
degree of competition in each market segment and the competitive dynamics
amongst different players to evaluate the rated entitiesmarket position. Entry
barriers to the industry and the capacity expansions of existing players are
analysed to understand the dynamics of demand and supply. CRISIL also
analyses regional demand-supply balances as some products exhibit diverse
characteristics in different markets.
An analysis of the companys products categories on the basis of their
size, features, price rangs and consumer segments gives
Crisil an insight into the company’s positioning strategy. The market postion of
companies in dynamic industries such as software, drugs, pharmaceuticals and
consumer durables is analysed in terms of their track record and their ability ti
innovate and launch products and achieve commercial success.

84. (4) Operating Efficiency: operating efficiency is a critical parameter in
evaluating a company’s business risk. The risk factors considered while
evaluating operational efficency vary from industry to industry. Some of the
key factors common across industries are:
(i) Technology
(ii) Access to resources
(iii) Human resources
(iv) Capacity utilization and flexibility
(v) Level of integration
(vi) Research and development
Financial risk analysis:
Financial risks anaysis includes an assessment of the companys past financial
performance, its future performance and its financial flexibility with particular
emphasis on its cash flows.
(1) Accounting Quality: the financial ratios and statements used by CRISIL to
analyse a companys financial performance are derived from the audited
financial statements. Consequently, CRISIL commences its financial risk
analysis by assessing the company’s accounting quality. Some of the ey areas
analysed include:
(i) overstatement/ understatement of profits
(ii) qualifications made by autditors.
(iii) Method of income recognition and depreciation
(iv) Inventory valuation policies.
(v) Off-balance sheet items/contingent liabilities.
(2) Earnings Protection: An evaluation of the company’s past and

85. Future profit potential is performed to analyse the level of credit protection available
and sustainability of the same. CRISIL evaluates the profitability of the company’s
operations and its sensitivity to price fluctuatiuons and downturns in the industry. The
operational cost structure is also analysed and a comparison is made with other
players in the industry.
Since a credit rating is an assessment of the company’s ability to meet its debt
obligations in future, CRISIL places greater emphasis on the company’s future
earning capacity.
(3) Adequacy of cash flows: An analysis of cash flows is undertaken to
evaluate the company’s debt servicing capability. The evaluation is important
as “earnings” is an accounting concept and only cash flows reveal a
company’s actual financial position and its ability to service interest and
principal payments. Cash flows are analysed with respect to their stability and
adequacy in relation to debts and working capital needs and capital spending
requirements.
(4) Financial Flexibility: CRISIL evaluates a companys ability to generate funds
through alternative sources in case of nay financial distress. The companys
contingency plans and its abilityto deal with various adverse scenarios are
analysed. The company’s ability to raise funds through internal
sources(internal accruals, saleable assets) and external sources(relationship
with bankers, liquidity back-ups) to cover temporary shortfalls is evaluated.
An anlysis of the capitalization ratios is undertaken to evaluate if the company
is overly reliant on debt funding as this would limit its ability to raise
resources from the debt market. Additionally; a companys flexibility to defer
its capital expenditure plans in case of a weakening financial positon is also
analysed. The external support that the rated entity can receive from the parent
company or group companies is also analysed at great length and factored in
the overall rating.

86. Management Evaluation:
An evaluation of the company’s management, its philosophies, strategies/policies and
risk appetite is undertaken in assessing management risk.
CRISILS evaluation of a company’s management entails understanding the goals,
philosophies and strategies that drive the company’s business and financial
performance. An evaluation of the management involves several aspects such as
understanding the organizational and reporting structur, the management experience
and the track record , the level of commitment and integrity of its personnel and
adequacy of its planning and control systems.
The managements past success in introducing new products and its ability to manage
chamge in the external environment such as regulatory or technological changes is
also analysed. A high-risk appetite manifested in high leveraging or a propensity to
take up projects that are larger than the existing operations is viewed negatively by
CRISIL.
Succession is another key area concern in case the company’s operation are
dependent on a single promoter or manager. Corporate governance principals
followed by the management in it sdaily operations and transparency in management
actions are also evaluated.
Project risk evaluation:
If the company is implementing any large project, the risks associated
implementation, is funding and marketing risks are also evaluated.

87. In case of companies implementing a project, CRISIL evalutes the risk associalte
with that project and factors in these risks while assigning the overall rating. The
relative size of th new project compared to the existing operations indicated the
significance of the project risk in the overall rating.
Implementation risks such as time and cost 0ver- runs and technology risks and the
impact of these on the projects viability, and funding risks in terms of the projects
capital structure and funding arrangements are also evaluated.
The projects market risks in relation to the companys existing product line and the
companys trach record in implementing such projects are given adequalte importance
in assigning the rating.
Care:
CARE also follows the same criteria for rating the manufacturing companies, with
some changes. The only difference between the two is that CARE does not take into
consideration the project risk but on the other hand conducts the economy and
industry risk analysis.
• Economy and Industry Risk Analysis:
CARE’S analysis of industry risks focuses on the prospects of the industry
and the competitive factors affecting the industry. The economic/industry
environment is assessed to determine the degree of operating risks faced by the
company in a given business. Investment plans are the major players in the
industry, demand supply factors, price trends , changes in technology,
international/domestic competitive factors in the industry, entry barriers, capital
intensity, business cysles etc… are the key ingredients of the industry risk. CARE
also takes into account economy iwde factors which have a bearing on the
industry under consideration. The strategic nature of the industry in the prevailing
policy environment, regulatory oversight governing industries etc… are also
analysed.

88. CARE also conducts the Business risks analysis, the fianacial risks anaysis and
the management evaluation which is similar to CRISIL.
Credit Rating Criteria For Banks And Financial Institutions
CRISIL:
The objective of CRISILs analysis is to form an opinion on the types of risks that may
affect the relative ability of banks and financial institutionsto service the interests and
principal payments on the rated instruments in a timely manner.
The exercise incorporated the review of the overall economy, th financial sector and the
banking industry. CRISIL also analyses the changing regulatory environment and
increased competition arising out of liberlisation. Over the past decade, the Indian
economy had been liberalized and the financial sector, deregulated. Both the opening up
of the economy and the gradual lowering of the tariff barriershas exposed the corporate
sector to risk of foreign competition.some of the risks have manifested in certain sectors
where the domestic industry has been rendered uncompetitive.
The financial sector is going through a phase of trandformation and convergence and
there has been increasing blurring of boundaries between the role of banks and financial
institutions, which is likely to set up competitive pressures in future. This transformation
is evident on both assets and liability side. On the asset side, banks are shifting from their
historical business model of providing finance to corporates to aggressively focus on
financing retail assets such as housing, automobiles and commercial vehicles. This is
driven both by weak demand from corporates as well as the paucity of clients with good
creditquality. On the liability side, the transformation is from a passive retail strategy to a
very active retail thrust to attract the retail customers and increase the deposit base. The
entry of the new private sector banks and marketing strategy adopted by them has
precipitated this transformation.Apart from this transformation, banks are also going

89. through the phase of convergence wherein almost all the banks are offering the entire
gamut of products and services on the asset and liability side to both retail as well as
wholesale customers.
An entry- specific analysis of the risk profile is don’t through the qualitative cum
quantitative approach following a structures methodology called the CRAMEL model.
Apart from this, CRISIL also evaluates the market position of the bank/FI being rated and
its strategy in the emerging competitive scenario.
The following is the criteria based on which CRISIL rates the banks and financial
institutions:
CRISIL fators in the size of an entity in the financial sector and looks at its positioning in
the industry. A larger size enables the entity to with stand systematic shocks ans
determines the extent of system support that can be expected for the entity. Diversity in
the product portfolio, business lines and customer base are also positively factored in by
CRISIL.
The CRAMEL model comprises of the following:
 C- Capital Adequacy.
 R- Resource- Raising Ability.
 A- Asset Quality.
 M- Management and systems evaluation
 E- earnings potential.
 L- liquidity/asset liability management.
This CRAMEL model can be explained as follows:
Capital adequacy: An entitys capital provides it with the necessary cusion to with stand
credit risks and other risks in its business. While assigning a rating, CRISIL analysis the
capital adequacy level and its sustainability in the medium to long term. This assessment

90. is significantly influenced to relative profitability, the entity’s risk profile and its asset
quality. This analysis encompasses the following factors:
(1) Size of the capital: the absolute size of capital imparts flexibility to the banks
or FI to withstand shocks and thus, an entity with higher absolute capital is
viewed favourably.
(2) Quality of capital: the proportion of core capital is the primary indicator of the
quality of a bank or FI’s capital. CRISIL also analysis other issues,like the
presence of hidden reserves and the percentage of the investment portfolio
that is marked to the market.
(3) Sustainability of capital ratios and flexibility:a bank or FI’s ability to support
the increased asset base through earnings is an important parameter in
assessing the sustainability of its capital adequacy. Such an entity is viewed
favourably.
(4) Growth plans:CRISIL factors the rated bank or FI’s future growth plans while
analyzing its capital adequacy. Its capital adequacy would be regarded as
unsustainable if the entity pursues a high growth strategy.
Resource- raising ability:CRISIL analyses the resources position of the bank or FI
in terms of its ability to maintain a low cost stable resource base. Banks are
significantly deposit funded and FI’s have to depend on wholesale funds. FI’s do raise
retail funds but as compared to banks, they are at a disadvantage while doin so in
terms of restrictions on the minimum tenure and interest rates etc….
The following issues are considered while analizing the resource position of a
bank…..
(1) Size of the deposit base: A large deposit base provides stability to a bank’s
resource position by diversifying the depositor base and ensuring a continuous
stable source of funds.
(2) Diversity in deposit base: The number of branches and their geographical
spread lend diversity to its deposit base. Thus, a bank with a large number of
branches dispersed all over India and with an optimal rural/urban is viewed
favourable.

91. (3) Deposit mix: A bank’s deposit mix has an impact on its costs of deposits. A
high proportion of savings and current deposit leads to a low cost resource
base. CRISIL also analyses the trends in deposit mix to form an opinion on
future stability and costs.
(4) Growth in deposit: accretion to deposits is the main source of funding asset
growth and managing liquidity risks in banks. CRISIL compares the growth in
deposits of a bank with industry trends to make relative judgements.
(5) Cost of deposit: Banks that have low cost of resources not only benefit
through higher profitability but also have greater flexibility to increase deposit
rates in order to maintain their resources position.
The following issues are considered while analyzing the resource position of a
financial institution……..
(1) Diversity of investor base: given that FI’s are predominantly wholesale
funded., the diversity of the investor population does not mitigate an FI’s risk
profile to some extent. FI’s that are dependent on few investors are viewed
less favourably.
(2) Funding mix and cost of funds: The funding mix between domestic and
foreign currency funding is also examined to determine the FI’s overall
profile.FI’s that tend to have higher proportion of foreign currency funding
carry the risk of a foreign currency borrower defaulting on payment
obligations and thus exposing the FI to increased currency risk. This risk
assumes greater significance at times when the economy is slowing down or
there is a greater instance of corporate defaults.
(3) Retail penetration: Some of the leading FI’s have started tapping the retail
market for bonds and deposits. These funds do impart stability to the funding
mix and the trends in raising retail sources are favourably factored into
CRISIL’s risk evaluation.
Asset quality:A bank or FI’s asset quality is a measure of its ability to manage credit
risks. Besides studying the banks credit appraisal mechanisms, portfolio monitoring

92. procedures and problem asset resolution strategies, CRISIL analyses asset quality on
the basis of the following parameters:
(1) Geographical diversity and diversity across industries: Geographical diversity
of asset base and diversity across industries, alonwith single risk concentration
limits, are important inputs in determining the asset quality of banks and FI’s.
Regional banks with limited operations and branch network have lesser
flexibility to diversify their advances portfolio than banks with a national
presence and are thus susceptible to adverse economic conditions in a
particular region.
(2) Client profile or corporate asset portfolio: CRISIL analysis the profile of
clients in the asset portfolio to make a judgement on portfolio quality. The
ability of a bank or FI to attract bettr credit quality clients is an important
indicator of future credit quality.also, a bank or FI’s ability to attract and
retain good quality clients by providing value-added services would enhance
asset quality in future.
(3) Quality of non-industrial lending: CRISI:L analysis the quality of non-
industrial portfolio in arriving at a judgement of the overall asset quality of a
bank.the credit quality of the asset portfolio is also indicated by the segment
wise non-performing asset levels of the portfolio, revealing the performance
of the bank in each segment. In recent times, both the banks and FI’s are
focusing on retail customer loans particularly housing and vehicle loans.
CRISIL aso looks at the quality of retail customer growth levels, underwriting
standardsand the recovery mechanisms.
(4) NPA(non-productive asset)levels: The gross NPA levels help to benchmark
the banks or FI’s ability to manage its asset portfolio on a relative scale. Net
NPA levels are an indicator of the balance-sheet strength of the bank, the
proportion of earning assets held by it and the potential credit loss. The
proportion of earning assets and the potential credit loss would have a bearing
on the banks future earnings capability.
(5) Movement of provision and write-offs:average positioning including write
offs, over a five year timframe is an indicator of the level of cleaning up done

93. by a bank over a period of time. This average positioning level and its
movement is an indicator of the portfolios credit risk and the expected future
write-offs and provisioning, which would further affect the bank’s earnings
capability.
(6) Growth in advances: CRISIL closely analyses the pattern and the nature of
such growth, studying entities with higher growth rates more carefully to look
into the nature of the growth, the reasons for it and the implications on the
asset quality. An entity that has grown by attracting good quality clients from
its competitors would be viewed more favourably than one that has grown just
by increasing its geographical presence or diluting credit criteria.
Management and Systems Evaluation: CRISIL believes that the quality of
management can be an important differentiating factor in the future performance of a
bank/FI.the management is evaluated on the following parameters:
(1) Goals and strategies: A banks future goals and strategies are evaluated to take
a view on its managements vision. The banks ability to adapt to the changing
environment and its ability to mange credit and market risks, especially in a
scenario of increasing deregulation of the financial markets, assumes critical
importance. CRISIL also has extensive discussions with the banks
management on their philosophy with regars to diversification, asset growth
and maintainence of capital, provisioning and liquidity levels.
(2) Systems and monitoring: CRISIL studies credit appraisal systems and the
systems for managing and controlling credit and market risks at a portfolio
level. Significant emphasis is laid on the risk monitoring systems. CRISIL
attaches significance to the operating systems for data capturing and MIS
reporting in a bank. CRISIL also analyses expenses made on technology
during the recent period and the banks strategy of using technology effectively
as a delivery platform to reduce cost and improve service levels.
(3) Appetite of risk: CRISIL also analyses the bank managements attitude
towards risk and the level of interest rates, foreign exchange and equity risks
in the balance sheet. A high-risk propensity typically reflects in high volatility

94. in earnings in both the fund based ans fee businesses. A management with
high propensity to take risks is viewed cautiously.
(4) Motivation levels of staff: Employee motivation levels should be a function of
remuneration, management involvement and job satisfaction. Such motivation
levels would directly affect a banks service levels, which is the key service
factor in a market-driven environment.
Earnings potential: CRISIL analyses a banks/FI’s earnings on the basis of the level,
diversity and stability in earnings.
(1) Level of earnings: the levelof earnings as measured by the return on total
assets(ROTA) provides the bank or FI a cushion for its debt servicing and also
increases its ability to cover its asset risk. ROTA is a function of interest
spreads, expense levels, provisioning levels and the non-interest income
earned by the bank. The size of the net profit is also factored in while rating
the entities earnings.
(2) Diversity of income sources: Diversity of income sources is an important
input in analyzing the stability of earnings. CRISIL reviews the compostion of
interest revenue streams while analyzing the earnings position of a bank or FI.
It also analyses the composition of the i=non-interest income while evaluating
the earnings which includes income from trading activities, which tend to be
volatile. A closer analysis of the composition of revenue treams helps in
formaing an opinion on the sustainability of the earnings.
(3) Efficiency measures: CRISIL looks at the level and the trend of operating
expenses and degree of automation in the bank/FI. CRISIL looks at salary
expenses and total non-interest expenses as a proportion of total income and
average assets.

95. Liquidity/asset liability management: CRISIL assess the asset liability maturity
profile of the rated entity to form an opinion on the liquidity risk as well as the
interest rate risk.
Liquidity risk: CRISIL views mos of the public sector banks favourably on this
patameter due to the stable accretion to deposited and the liquidity support available
to them. An FI’s liquidity position is a function of its management’s policy of main
taining treasury portfolios to meet asset and liability side liquidity demands.
Howewer, on account of their significance to the domestic financial sector FI’s enjoy
a high degree of financial flexibility that reduces liquidity risks to fairly low levels.
The specific liquidity parameters analysed by CRISIL are:
(1) Liquid assets/ Total assets: to arrive at this ratio, CRISIL looks at the
percentage of sovereign investments in an entitys books to its total assets.this
can also be roughly derived from the credit deposit ratio.
(2) Proportion of small deposit: CRISIL looks at the proportion of deposit below
rs. 150 million to the banks total deposit base. These small sized retail
deposits tend to be inherently more stable.
(3) Interest rate risk: The rating factors are in the volatility to the bank or FI’s
earnings to interest rate changes. CRISIL analyses the entity’s asset liability
maturity profile to judge the level of interest rate risk.
ICRA:
An ICRA's financial sector debt ratings include the major entities, one of which is, the
Banks and Financial Institutions. ICRA's ratings factor the entire gamut of risks that can
possibly affect the operations of a finance company - operating risks, financial risks and

96. management risks. The key determinants of operational risk include volatility in revenues
and expenses, regulatory risks, risk of administrative expenses going out of hand, and
deterioration in asset quality. The financial risk is driven by capital adequacy, asset
liability management, solvency, financial flexibility and also the accounting quality. The
management risks include management quality and efficacy of systems.
In the context of globalization of the Indian economy, progressive de-regulation of the
banking and financial sector, increasing volatility in the economy and the financial sector,
and raising competition, most banks are having a re-look at their strategies, structure
process and systems. Faced with rapid changes in the competitive and regulatory
landscape, banks are focusing on a variety of initiatives, such as, re-jigging strategic
positioning, broadening product portfolio, strengthening risk management systems, using
technology as a competitive weapon, enhancing skills of human resources, improving
customer relationship management and reducing transaction costs. IMaCS works with
regulatory bodies, banks, financial services firms, insurance companies and clearing
agencies in a variety of ways to help them accomplish their objectives.
Risk management:
IMaCS is one of the leading solution providers in the area of Risk Management. ICRA
believes that better risk measurement leads to better risk management. Better risk
measurement helps risk managers understand fully the nature and magnitude of their
exposures, which improves the risk adjusted return on capital. A major part of ICRA’s
work focuses on translating these risk concepts into practical tools that can be integrated
into business processes. ICRA works closely with clients to ensure that our experience is
translated into tangible results.
Specifically, ICRA offers the following services in the banking and financial services
sector:

97. (1) Implementing credit risk management system: IMaCS has designed and
developed a Credit Risk Management software, IMaCS Risk Scorer that
comprehensively addresses business and regulatory issues with respect to risk
management. The solution helps banks in complying with the requirements of
the accord. The solution provides risk scoring of obligors, regulatory and
economic capital calculators and portfolio analysis. The solution is web-
enabled and browser based with the user interface developed using ASP.NET.
(2) Designing and implementing risk models:
(I) Credit Risk Models: We have validated models for measuring in
virtually every segment that a lender would like to focus on - Large
Corporate Segment, SME Segment, SBS (Small Business &
service) Segment, Retail (Home Loan and Personal Loan)
Segment, Banks, NBFCs, Project Finance, Sub-Sovereign
Exposures, and Broker Finance.
(II) Portfolio risk models: for estimating probability of defaults, loss
given defaults, economic capital for credit risk and RAROC.
(III) Market Risk Models: For Asset-Liability Management and
Calculating VaR for Estimating Economic Capital for Market risk.
Derivative Models: For Pricing Rupee and Foreign Currency
Options, Futures and Exotics,.
(IV) Operations Risk Model: For Estimating Capital for Operations
Risk.
(3) Process development and organization structure:
ICRA works with clients to develop appropriate processes across various
functions. These include limit setting, monitoring processes, and reporting
processes in the area of risk management.
ICRA understands design and help clients implement all customer related
processes across all channels – sales, customer care & complaints handling
across branch, call centre & web. This helps banks and financial institutions in

98. improving customer loyalty while optimising costs. ICRA also help banks in
the area of operational processes like treasury, credit etc. This helps reduce
costs and improve productivity. ICRA conducts organisational design studies.
These studies address issues such as developing appropriate organisational
structure, identifying HR requirements, and formulating roles and
responsibilities of key executives and committees.
(3) Business Strategy: ICRA works with clients in formulating business
strategies and/or fine-tuning the organisation structure to implement the
chosen strategies. Strategy formulation spans a variety of areas such as M&A,
organic growth, entry strategy, profit improvement plans, channel
management, product development strategies, cost reduction strategies, and
the like. On request, ICRA also assists clients in the implementation of
strategies.
ICRA believes that structure should follow strategy, rather than the other
around. Many banks/financial services organisations review their business
models and/or organization structure every few years so as to remain
contemporary and competitive in the market. IMaCS works closely with
clients to help them successfully navigate the difficult terrain of strategic
planning and restructuring.
(4) NPA management: ICRA works with clients in designing appropriate
strategies for improving recovery from non-performing assets. ICRA studies
the underlying obligor, reasons for accounts turning non-performing, the
actual and potential recovery patterns, the security details, and other germane
factors that enable us to recommend the best possible recovery options that
maximise recovery or improve the chances of a successful rehabilitation.
(5) Mergers/De-mergers and Portfolios Transactions: ICRA undertakes
economic valuation and formulate merger/de-merger strategies for banks and
financial institutions. The scope of work extends to evaluating the strategic

99. reasons for a merger/de-merger, undertaking economic valuation, evaluating
technological constraints and integrating Human resources to ensure strategic
fit. ICRA also works with clients on buying & selling of corporate & retail
portfolios. It conduct due-diligence and economic valuation and assist clients
during negotiations and deal closure.
(6) Training: ICRA conducts a variety of training programmes in the areas of
Risk Management. These Programmes span the functional areas Credit Risk,
Market Risk and Operations Risk. These include "User Training" and "Train
the Trainer Programmes". Several banks and institutions that need superior
risk management skill sets have used IMaCS to enhance their skill levels thus
enabling them to evaluate complex forms of risk that frequently arise in
business transactions today.
CARE:
CARE’s ratings are an opinion on the relative ability and the willingness of an issuer
to make timely payments on the specific debt obligations over the life of the
instrument. CARE has developes a comprehensive methodology for credit rating of
debt instruments issued by the banks.
Some of the factors considered in CARE’s rating analysis are described below:
(1) Quantitive factors
(2) Qualitative factors
Quantitive factors: The starting point in reaching a rating decision is a detailed
review of key measures of financial performance and stability. These factors resemble
the CRAMEL model of CRISIL. It includes all factors like capital adequacy, asset
quality,resources,. Earnings and liquidity.

100. Qualitative factors: In addition to the quantitative factors, certain qualitative factors
are also taken into consideration by CARE, which are as follows:
(1) Ownership: An assessment of ownership pattern and shareholder support in a
crises is significant. In case of public sector banks, the willingness of the
government to support the bank is an important consideration.
(2) Management quality: The composition of the board, frequency of the change
of CEO, organization structure of the bank, strategic objectives, adequacy of
information systems, extent of frauds committed in the bank etc… are
considered. CARE focuses on the modern banking practices and systems,
degree of computerization, capabilities of senior management etc..
(3) Risk management: credit risk management is evaluated by examining tha
appraisal, monitoring and recovery systems and the prudential lending norms
of the bank.CARE assesses the extent to which the banks has assets
dominated in one currency and liabilities dominated in another currency. The
derivatives and other risk management products are also analysed.
(4) Compliance with statutory requirements: CARE examines the track record
of the bank in complying with SLR/CCR and priority sector lending norms as
specified by the RBI.
(5) Accounting quality: Policies for income recognition, provisioning and
valuations of investments are examined.
(6) Size and the market presence: The fund base and the branch networkof the
bank may have a bearing on the banks competitive position. While both large
and small banks have successfully co-existed in India, in the rapid changing
competitive banking environment, the nich strategy of smaller banks against

101. the scale advantage of larger banks would be carefully examined to
understand the business model of each bank.
Thus it can be seen as to how the three major credit rating agencies rate the
banking and the financial institutions.
Rating criteria for
Non-Banking Financial Companies(NBFC’s)
And
Housing Finance Companies(HFC’s).
CRISIL:
The broad analytical framework used by CRISIL to rate financial companies is the same
as that is used for banks and financial institutions. In addition, CRISIL also addresses
certain issues that are specific to finance companies.
The industry can be broadly classified into Non Bnaking Finance Companies(NBFC’s)
and Housing Finance Companies(HFC’s). typically NBFC’s finance vehicles( cars,
commercial vehicles and two- wheelers), consumer durables, plant and machinery.
NBFC’s are registered with the RBI and HFC’s with the National Housing Bank(NHB).
The NBFC’s exhibited high growth rates in the first half of 1990’s esoecially in the
corporate finance portfolio even though many of them lacked the credit appraisal,
monitoring and recovery skills required for the same. When subsequent recessionand
tight liquidity conditions saw several companies defaulting, it affected the solvency of
several NBFC’s as well.the high profile collapse of a large NBFC, which ushered in

102. tighter prudential norms and regulatory changes, led to a period of rationalization and
consolidation, with several small players existing in the business.
The NBFC’s industry is dominated by handful of players today. These include MNc
players, captive finance companies and a few large stand-alone companies. Banks ,
especially, private sector banks, have also increased their presence in the retail finance
sector.
On the other hand, HfC industry has been more stable and has traditionally been
dominated by the Housing Development Finance Corporation(HDFC). Of late thr private
sector banks have become more aggressive in this arena because of the segments good
asset quality experience which has intensified the competition.
The consolidation of the industry has resulted in some trends, which CRISIL believes are
structurally positive for the finance companies. These are:
(i) Strengthening of credit appraisal and monitoring systems: industry players
have increased their focus on controlling asset quality costs and expanse
levels to maintain overall profitability. Such efforts have significantly
strengthened the industry’s credit origination and monitoring systems and
consequently the performance of contracts.
(ii) Increasing relaiance on capital markets for meeting resource
requirement:the industries funding profile has shifted in the favour of
capital market instruments. Indian players have reduced their reliance on
bank funding and fixed deposits.
(iii) Increased use of securitization: securitization is gaining popularity with
the finance companies having strengths in origination.securitisatin began
in early 1990’s and even today is the most dominant asset class securitized
continues to be retail assets.

103. CRISIL has evolved the rating criteria that are specific to the business characteristics
of NBFC’s and HFC’s. these include:
(1) Market position: The aspects assessed by CRISIL are the company’s brand
equity, service standard’s, track records,customer relationship, product
portfolio, companys distribution network etc…. he housing finance segment is
grown at over 30% a year in recent times on the back of low interest rates,
stable property prices, demand supply gaps and governemtn initiatives in the
form of greater tax benefits on housing loans.the key determinant og HFC’s
market position is availability and the cost of funds. CRISIL believes that the
finance companies have a weaker market position in this segment than the
banks and financial institutions, which have the size and cost of funds
advantage.
(2) Management: CRISIL’s analysis of the quality of the companys management
, its business strategies and its ability and track recors=d in responding to the
changes in the market comditions from a central input in the credit
assessment. CRISIL laso analysis the management ridk appetite in terms of its
growth nad divbersification philosophy, provisioning and capitalization
policies. CRISIL evaluates the managements starategies of balancing business
and finanacial risks.
(3) Asset quality: In analyzing the asset quality, CRISIL reviews a companys
credit risk management strengths, portfolio quality, underwriting standards,
aprovel authorities, collection procedured,amangement information
systemsetc… the quantitive analyses encompasses asset diversity in terms of
asset classes and geographic distribution, delinquency trends, NPA levels,
write off and recovery levels.

104. (4) Capital adequacy: CRISIL’s analysis of a companys capital adequacy
incorporates the absolute quantum and the quality of capital, risk adjusted
capital levels and its management capitalization philosophy. It also views the
leveraging ability of a housing loan portfolio to be higher than that of a
commercial vehicle, construction equipment or a corporate finance
portfolio. .CRISIL considers the capital position of most finance companies to
be weakon accpunt of the small capital base and weak recapitalization
prospects. CRISIL also factors in the growth outlook of the companys asset
abse and its ability to generate capital internally or by accessing capital
markets. CRISIL’s ratings for some large finance companies contitnue to be in
high safety categories despiteof the significant change in their operating
environment and profitability. CRISIL believes that finance companies
securitizing their assets retail significant risks with themselves.hence, an
assessment of capital levels of a particular finance company includes a study
od all its outstanding securitization transactions.
(5) Resource raising ability: Since funds are a finance companys raw material,
its ability to generate them is essential for its operating model.CRISIL’s
analysis of a finance companies resource peofile incorporates the cost of
resources, diversity of the resource profile and the appropriateness of the
funding strategy in the light of asste types being financed. CRISIL notes that
the resurce raising ability of a finance company is constrained compare to
banks due to the lack of extensive branch network and inability to provide
cheque issuing facilities. The resource raising ability of the smaller NBFC’s
and the HFC’s is a constraining factor in their ratings.
(6) Earnings: CRISIL views profitability as an outcome of the companys
management strategy as reflected in the business position, funding structure,
operational efficiencies and portfolio quality. CRISIL evaluated the strability
and the sustainability of the companys profits. Its analyses is forward looking

105. and relevance of past profitability performance is the only base for estimating
future profitability. CRISIL notes that the increasing competiton in retail asset
financing due to the entry of strong players(MNC’s) has been most viable
impact on the players profitability. CRISIL assess the managements ability to
respond to such changes in the operating environment.
(7) Liquidity/ asset liability management: In the recent past several NBFC’s
faced a liquidity crunch as a result of asset quality problems. Systematic
illiquidity and negative shifts in sentiment towarde companies and sectors also
tend to suck out liquidity. CRISIL evaluates a finance companies contingent
liquidity plans to take care of such eventualities. It also assesses the maturity
profile of assets and liabilities to form an opinion on the companys liquidity
and interest rate risks.
ICRA:
ICRA has broken down a finance companies fund based operations into its bare
essentials and can be explaines as follows:
(i) Sourcing funds at the lowest possible cost
(ii) Packaging it for its customers at an appropriate price
(iii) Effecting the collecions over the tenure of the contract as envisaged
(iv) Starting the cycle all over again.
The rating methodology is as follows:

106. The credit rating agency’s ratings factor the entire gamut of risks that can be possibly
affect the operations of a finance company. These riske can be broadly classified as
under:
(1) Operating risks: Major determinants of operating risks are:
(a) Votatility in revenues and expenses: The operating risks for a
finance company manifest in the form of fluctuatios in the income
and/or expanses ans consequently and affect the profitability and the
financial position. Votality in the revenue stream of the company can
arise out of the intrinsic nature of the operation and/ or fluctuations in
the economy.
(b) Regulatory risks: Since the financial sector is fairly regulated in India
a finance companys operations are governed by the changes in
regulation that occur from time to time some of which can be udden
and unpleasant. Also a recent deregulationof interest rates for the
NBFC sector is likely to have far reaching effects on several
companies. The effect of these changes in regulation on the industry
and the individual companies while assigning its ratings are also
evaluated by ICRA
(c) Risk of administrative expenses going out of hand: A finance
company needs to keep a close watch on the administrative expenses
that it incurs in the course of its operations. If the proportion of earning
assets is low in relation to its expenses,that is, there is insufficient
volume of business to spread the fixed cost over, the company runs the
risk of not being able to cover its cost.
(d) Deterioration in asset quality: The potential asset quality by
analyzing the concentration risks, by evaluating the appraisal and
monitoring systems in place for the kind of business the company is

107. in , and examining the safeguards taken by the company to ensure that
its monet comes back, as scheduled, are evaluated.
(2) Financial risk: major determinants of financial risks are:
(a) Capital adequacy: Capital adequacy refres to the quantum of
shareholder’s funds in the business in relation to the risk-weighted
assets that the company has. Different businesses have different risks
depending on the variedty of factors such as location of operation,
sizw of clients, competition etc….. which would mandate a higher
level of capital adequacy for some of them. Thus, it is recognized that
there are differences in risks associated with different types of asstes,
although they may carry the same risk weight for computation of
capital adequacy.
(b) Asset/liability management:In the recent past several NBFC’s faced a
liquidity crunch as a result of asset quality problems. Systematic
illiquidity and negative shifts in sentiment towarde companies and
sectors also tend to suck out liquidity. CRISIL evaluates a finance
companies contingent liquidity plans to take care of such eventualities.
It also assesses the maturity profile of assets and liabilities to form an
opinion on the companys liquidity and interest rate risks.
(c) Financial flexibility: The financial flexibility is an important
determinant of credit quality of any borrower. Financial flexibility
refers to the ability of the company to raise financial resources from
any source under conditions of financial duress. The ability of a
company enables it to dip into its pockets or borrow from lenders who
are willing to finance it despite of its crunch, and help meet its
immediate obligations.

108. (d) Accounting quality: Different companies follow different accounting
policies to draw up their financial performances. These can cause
significant changes to the bottom line or to the baalne sheet of the
company, significant enough to change the views of a credit analyst.
(3) Management risks:
(a) Management quality: ICRA’s analysis of the quality of the companys
management , its business strategies and its ability and track recors=d
in responding to the changes in the market comditions from a central
input in the credit assessment. CRISIL laso analysis the management
ridk appetite in terms of its growth nad divbersification philosophy,
provisioning and capitalization policies. CRISIL evaluates the
managements starategies of balancing business and finanacial risks.
(b) Evaluation of systems: The extent of automation is a reflection of
several factors such as the scale of operations, the attitude of the
management,and the economics of automating the operations.in its
assessment process, more emphasis is laid on the appropriateness of
the systems with reference to the operations of the company. The
appropriateness of the policies and the procedures of the company are
evaluated with reference to the projected nature and level of business
for the company.While ICRA does not conduct an audit during the
rating exercise, it relies on several methods of cheking the adequacy
of the systems, such as, meeting with statutory and internal auditors,
sample chcks of critical records, scrutinizing statutory returns filed
with different regulatory authorities and analysis of internal review
reports.
CARE:
CARE’s ratings are an opinion on the relative ability and the willingness of an issuer to
make timely payments on the specific debt onbligations over the ife of the instrument.

109. CARE has developed a comprehensive methodology for credit rating of debt instruments
issued by NBHC’s and HFC’s.
Some of the factors considered in the rating analysis are described below:
(1) Quantitive factors
(2) Qualitative factors
The quantitative factors are similar to the CRISIL’s criteria of rating. These include:
(1) Capital adequacy
(2)Asset quality
(3) Resources
(4) Liquidity
(5) Earnings quality.
The qualitative factors which form a part of the rating criterial is as follows:
(1) Ownership: Ownership pattern and track record of the promorters or the
group companies is examined. Strong promorters are more likely to provide
support to the company in times of crises.
(2) Management quality: The compostion of the board, credentials of the CEO
and the organizational structure of the company, the starategic objectives and
initiatives of the company, its ability to identify opportunities and track down
in maangeing stress situations, adequacy of information systems used by the
management etc …… are evaluated. CARE focuses on modern practices and
systems, degree of computerization, capabilities of senior management,
personal policies and the extent of delegation of powers.
(3) Risk management: Credit risk management is evaluated by examining the
appraisal, monitoring and recovery systems and the prudential lending norms
of the company. The company’s policy and exposure to interest rate and

110. foreign currency risk is examined. The derivatives and the other risk
management products used in the past and the implication of these deals are
also analysed.
(4) Compliance with statutory requirements:CARE examines the track record
of the company in complying with the regulatory requirements of RBI/NHB.
(5) Accounting quality: Rating relies heavily on audited data. Policies for
income recognition, provisioning and valuation of investments are examined.
Suitable adjust,ments to reported figures are made for consistency of
evaluation and meaningful interpretation.
(6) Size and market presence: The fund base and the branch network of the
company may have a bearing on the company’s competitive position. While
both large nad small companies have successfully co-existed in India in the
rapidly changing competitive environment, the niche strategy of smaller
compaies against the scale advantages of larger players/banks would be
carefully examined to understand the business model of each company.