This document discusses credit ratings and the credit rating process in India. It provides definitions of credit ratings and explains that they are evaluations of creditworthiness based on financial history and current assets/liabilities. It then discusses the four major credit rating agencies in India - CRISIL, ICRA, CARE, and FITCH India. It outlines the registration process and eligibility criteria for credit rating agencies in India as regulated by SEBI. Finally, it describes the rating process, methodology, symbols and grades used in India.

1. Credit Rating

2. Credit rating
• A credit rating estimates the credit worthiness of an individual,
corporation, or even a country. It is an evaluation made by
credit bureaus of a borrower’s overall credit history.
• Credit ratings are based on financial history and current assets
and liabilities.
• Typically, a credit rating tells a lender or investor the
probability of the subject being able to pay back a loan.
• Commercial credit risk is the largest and most elementary risk
faced by many banks and it is a major risk for many other kinds
of financial institutions and corporations as well.
• Many uncertain elements are involved in determining both
how likely it is that an event of default will happen and how
costly default will turn out to be if it does occur.

3. There are four Credit Rating agencies in
India
• CRISIL(Credit Rating Information Services of India Ltd)
• ICRA(Information and Credit Rating Services ltd)
• CARE (Credit Analysis and Research Ltd)
• FITCH India

4. Registration
• Credit Rating agencies are regulated by SEBI.
• Registration with SEBI is mandatory for carrying out
the rating Business.
• A registration fee of Rs. 25000 should be paid to SEBI

5. Eligibility Criteria
• Is set up and registered as a company
• Has specified rating activity as one of its main objects
in its Memorandum of Association.
• Has a minimum Net worth of Rs 5 Crore.
• Has adequate Infrastructure
• Promoters have professional competence, financial
soundness and a general reputation of fairness and
integrity in Business transactions , to the satisfaction
of SEBI.
• Has employed persons with adequate professional
and other relevant experience, as per SEBI directions.

6. Grant of Certificate of Registration
• SEBI will grant to eligible applicants a
Certificate of Registration on the payment of a
fee of Rs 5,00,000 subject to certain
conditions.

7. Agreement with the client
• The CRA should enter into a written agreement with
each client containing ,
o Rights and liabilities of each party w.r.t rating of
securities.
o Fee charged
o A periodic review of the rating during the tenure
o Clients agreement to cooperate and provide true,
adequate and timely information.
o Disclosure by CRA to client regarding the rating
assigned.

8. CRISIL
• The first rating agency ‘Credit Rating Information Services of
India Ltd. , CRISIL, was promoted jointly in 1987 jointly by the
ICICI and the UTI. Other shareholders included LIC, HDFC Ltd,
General Insurance Corporation of India and several other
foreign and Indian Banks.
• It pioneered the concept of credit rating in the country and
since then has introduced new concepts in credit rating
services and has diversified into related areas of information
and advisory activities.
• It became public in 1993.
• In 1996, it formed a strategic alliance with S&P rating group.

9. ICRA Ltd
• Information and Credit Rating Services (ICRA) has been promoted
by IFCI Ltd as the main promoter and started operations in 1991.
• Other shareholders are UTI, Banks, LIC, GIC, Exim Bank, HDFC and
ILFS.
• It provides Rating, Information and Advisory services ranging from
strategic consulting to risk management and regulatory practice.
• The main objectives of ICRA are to assist investors both individual
and institutional in making well informed decisions
• To assist issuers in raising funds from a wider investor base.
• To enable banks, investment bankers, Brokers in placing debt with
investors.
• To provide regulators with market driven systems to encourage the
healthy growth of capital markets.
• It provides rating services, information services and advisory
services.

10. CARE Ltd.
• Credit Analysis and Research Ltd or CARE is promoted by IDBI
jointly with Financial Institutions, Public/Private Sector Banks
and Private Finance Companies.
• It commenced its credit rating operations in October, 1993
and offers a wide range of products and Services in the field
of Credit Information and Equity Research.
• It also provides advisory services in the areas of securitisation
of transactions and structuring Financial Instruments.
• It offers services like 1. Credit rating of debt instruments
2. Advisory services like structuring financial instruments,
financing infrastructure projects and municipal finances 3.
Information services like providing information to companies,
industry and businesses.

11. Fitch Ratings India Ltd.
• It is the latest entrant in the credit rating
Business in the country as a joint venture
between the international credit Rating
agency Duff and Phelps and JM Financial and
Alliance Group.
• In addition to debt instruments, it also rates
companies and countries on request.

12. Rating Process
• The process begins with issue of rating request
letter by the issuer of the instrument and signing of
the rating agreement.
• CRA assigns an analytical team consisting of two or
more analysts one of whom would be the lead
analyst and serve as the primary contact.
• Meeting with Management- The analytical team
obtains and analyses information relating to its
financial statements, cash flow projections and
other relevant information.
• Discussion with management on management
philosophy, competitive position, financial policies
and future plans.

13. Rating Process cont-
• Discussions on financial projections based on
objectives and growth plan , risks and
opportunities.
• Rating committee- after meeting with the
management the analysts present their report to a
rating committee which then decides on the rating.
• After the committee has assigned the rating, the
rating decision is communicated to the issuer, with
reasons or rationale supporting the rating.
• Dissemination to the Public: Once the issuer
accepts the rating, the CRAs disseminate it, along
with the rationale, to the print media.

14. Rating Review for a possible change
• The rated company is on the surveillance system of
the CRA, and from time to time, the earlier rating is
reviewed. The CRA constantly monitors all rating
with respect to new political ,economic, financial
development and industry trends.
• Analysts review new information or data available on
the company. On preliminary analysis of the new
information if the analyst feel that there is a
possibility for change in the rating then they meet
with the management and proceed with
comprehensive rating analysis.

15. Credit Rating Watch
• During the review monitoring or surveillance
exercise, rating analysts might become aware of
imminent events like mergers and so on, which effect
the rating and warrants a rating change.
• In such a possibility, the issuer’s rating is put on
‘credit watch’ indicating the direction of a possible
change and supporting reasons for review.
• Once a decision to either change or present the
rating had been made, the issue will be removed
from credit watch.

16. Rating Methodology
• The rating methodology involves an analysis of
industry risk, issuer’s business and financial
risk. A rating is assigned after assessing all
factors that could affect the credit worthiness
of the entity. The industry analysis is done first
followed by the company analysis.

17. Credit rating for manufacturing
companies
• The main elements of rating methodology are as
below
• Business risk Analysis : It begins with an assessment
of the company’s environment focusing on the
strength of the industry prospects, business cycle as
well as competitive factors affecting the industry. The
vulnerability of the industry to political factors is also
assessed. If a company is involved in more than one
business, each segment is analyzed separately. The
main factors include Industry Risk, Market position,
operating efficiency and legal position.

18. • Financial risk analysis: Financial risk is analyzed mainly
through financial ratios. Emphasis is placed on the ability
of the company to maintain /improve its future financial
performance.
• The profitability of a company is an important
determinant of its ability to withstand business adversity.
The main measures of profitability include operating and
net margins and returns on capital. The absolute levels of
these ratios, trends and comparison of these ratios with
other competitors is analyzed. Emphasis is also laid on
cash flow patterns.
• The area analyzed are accounting quality, earnings
prospects, adequacy of cash flows financial flexibility and
interest and tax sensitivity.

19. • Management Risk: A proper assessment of
debt protection levels requires an evaluation
of management philosophies and its
strategies. The analyst compares the
company’s business strategies and financial
plans to provide insights into a management’s
ability to forecast and implement plans. The
areas analyzed include track record of the
management, planning and control systems,
evaluation of capacity to overcome adverse
situations, goals, philosophy and strategies.

20. Rating symbols/Grades
• Rating symbols are a symbolic expression of
the opinion/assessment of the credit rating
agency regarding the investment, credit
quality, grade of the debt, obligation
instrument.
• CRISIL rating symbols: The rating symbols of
CRISIL with respect debentures, fixed
deposits, short term instruments(CPs), credit
assessment, structured obligations, bond
funds, bank loans, collective investment
schemes, Indian states, real estate developers
are as follows.

21. Rating symbols for Debentures
• High Investment Grade:
• AAA-(Triple A ) Highest security- Offer the highest
safety against payment of interest and principal
• AA(Double A) High Safety - Offer high safety against
payment of interest and principal.
• A- Adequate safety- Offer adequate safety against
payment of interest and principal. In adverse
conditions might affect such issues.
• BBB(Triple B)- Moderate safety- Offer sufficient
safety against payment of interest and principal.
Circumstances may lead to weakened capacity to pay
interest and principal.

22. • Speculative grades
• BB(Double B)- Inadequate safety- These
instruments carry inadequate safety of timely
payment of interest and principal.
• B( High risk)- Instruments rated B have greater
risk of default.
• C( Substantial risk)- Risk of default. Repayment
can only be expected in favorable conditions.
• D (Default) Such instruments are extremely
speculative and default risk is highest.

23. Rating symbols for Fixed deposits.
• FAAA( F triple A)- Highest safety
• FAA( F- double A)- High safety
• FA- Adequate safety
• FB- Inadequate safety
• FC- High Risk
• FD- Default

24. Rating symbols for Short term
instruments
• P-1 (highest safety)
• P-2 (High Safety)
• P-3( Adequate safety)
• P-4(Inadequate safety)
• P_5 (default)

25. Rating for credit assessment
• It indicates the capability of entity to repay
the interest and principal as per the terms of
the contract. The rating symbols are as below-
• 1-Very strong capability
• 2,3,4- Strong capability
• 5,6,7- Adequate capability
• 8,9,10- Inadequate capability
• 11,12,13 –Poor capability
• 14- Default

26. Ratings for structured obligations
• High investment grades:
• AAA(SO)- Highest safety
• AA(SO)- high safety
• Investment grades:
• A(SO) –Adequate safety
• BBB(SO)- Moderate safety
• Speculative grades:
• BB(SO)- Inadequate safety
• B(SO) – High Risk
• C (SO)- Substantial risk)
• D (SO)- Default

27. Ratings for bond funds
• AAAf – Very Strong Protection against losses
• AAf - Strong Protection against losses
• Af- Adequate Protection against losses
• BBBf- Moderate Protection against losses
• BBf - Inadequate Protection against losses
• Cf – vulnerable to credit defaults.

28. Bank Loan Ratings
• BLR-1: strong likelihood of repayment of interest and
principal on bank loan
• BLR-2: good likelihood of repayment of interest and
principal on bank loan
• BLR-3: satisfactory likelihood of repayment of
interest and principal on bank loan
• BLR-4: moderate likelihood of repayment of interest
and principal on bank loan
• BLR-5: sub standard , vulnerable to loss
• BLR-6: High likelihood of loss

29. Rating of collective investment
schemes.
• GRADE I (high certainty of assured returns)
• GRADE II (adequate certainty of assured
returns)
• GRADE III (moderate certainty of assured
returns)
• GRADE IV ( Inadequate certainty of assured
returns)
• GRADE V (high uncertainty of assured returns)

30. Rating Fees
• Rating agencies charge 0.1 percent of
instrument size as the rating fees
• Annual surveillance fees at rate of 0.03
percent to monitor the instrument during its
life

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