CREDIT RATING

10/19/09 1
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 CREDIT RATING
A credit rating assesses the credit worthiness of an individual,
corporation, or even a country. It tells a lender or investor the
probability of the subject being able to pay back a loan.
Credit ratings are calculated from financial history and current
assets and liabilities. The ratings are expressed in code numbers
which can be easily comprehended by the lay investors.
A poor credit rating indicates a high risk of defaulting on a
loan, and thus leads to high interest rates.
Credit rating, as exists in India, is done for a specific security
and not for a company as a whole.
A debt rating is not one time evaluation of credit risk, which
can be regarded as valid for the entire life of the security.

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 NEED FOR CREDIT RATING
- It is necessary in view of the growing number of cases of defaults
in payment of interest and repayment of principal sum borrowed by
way of fixed deposits, issue of debentures or preference shares or
commercial papers.
- Maintenance of investors’ confidence, since defaults shatter the
confidence of investors in corporate instruments.
- Protect the interest of investors who can not into merits of the debt
instruments of a company.
- Motivate savers to invest in industry and trade.

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 OBJECTIVES OF CREDIT RATING
The main objective is to provide superior and low cost
information to investors for taking a decision regarding risk-
return trade off, but it also helps to market participants in the
following ways;
• Improves a healthy discipline on borrowers,
• Lends greater credence to financial and other representations,
• Facilitates formulation of public guidelines on institutional
investment,
• Helps merchant bankers, brokers, regulatory authorities, etc., in
discharging their functions related to debt issues,
• Encourages greater information disclosure, better accounting
standards, and improved financial information (helps in
investors protection),
• May reduce interest costs for highly rated companies,
• Acts as a marketing tool
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FUNCTIONS OF CREDIT RATING AGENCIES
– Superior information
– Low cost information
– Basis for proper risk, return & Trade off
– Healthy discipline on corporate borrowers
– Formulation of public policy guidelines on Institutional
investment

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 BENEFITS OF CREDIT RATING
For Investors
– Safeguards against bankruptcy
– Recognition of risk
– Credibility of the issuer
– Easy understandability (ratings) of the investment proposal
– Savings of resources (time and money)
– Independence of investment and quick investment decision
– Choice of investments
– Good bye to thumb rules
– Benefits of rating surveillance
– Low cost information

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 BENEFITS OF CREDIT RATING contd…
For Rated Companies
– Low cost of borrowing
– Wider audience for borrowing (Increase the investor population)
– Rating as a marketing tool
– Self discipline by companies (Encourages financial Discipline)
– Reduction of cost in public issues (attract investors with least efforts)
– Motivation for growth
– Sources of additional certification
– Forewarns (caution) risk
– Merchant bankers job made easy
– Foreign collaborations made easy

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 BENEFITS OF CREDIT RATING contd…
For Brokers and financial intermediaries
– Saves time, money, energy, and manpower in convincing
their clients about investments.
– Less effort in studying company’s credit position to convince
their clients.
– Easy to select profitable investment security
– Helps to improve business

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 CREDIT RATING AGENCIES IN INDIA
1. Credit Rating Information Services Limited (CRISIL)
2. Investment Information and Credit Rating Agency of
India (ICRA)
3. Credit Analysis and research (CARE)
4. Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and
5. Onicra Credit Rating Agency of India Limited: Is an
established player in the individual credit assessment
and scoring services space in the Indian market.

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 Credit Rating Information Services Limited (CRISIL)
The first credit agency floated on January 1, 1988, jointly started by ICICI
and UTI with an equity capital of Rs. 4 crores, as public Ltd company.
Capital Structure of CRISIL
Institution Percentage
ICICI 15
UIT 15
Asian Development Bank 15
LIC of India 05
GIC & its Subsidiaries 05
SBI 05
HDFC 05
Nationalized Banks – BOI, BOB, UCO, Canara bank, Central Bank of India, Allahabad 18
bank, IOB, Vysya Bank, and Bank of Madura

Foreign Banks–SC Bank, Banque Indo-Suez, Mitsui bank, Bank of Tokyo, Hongkong Bank, 17
Citi Bank, Grindlays Bank, Deutsche Bank, SOciete General Banque, Nationale de Paris.

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 Credit Rating Information Services Limited
(CRISIL)
• The first credit agency floated on January 1, 1988, jointly
started by ICICI and UTI with an equity capital of Rs. 4 crores,
as public Ltd company.
• CRISIL is India's leading rating agency, and is the fourth largest
in the world.
• With over a 60% share of the Indian Ratings market, CRISIL
Ratings is the agency of choice for issuers and investors.
• CRISIL Ratings is a full service rating agency that offers a
comprehensive range of rating services. CRISIL Ratings
provides the most reliable opinions on risk by combining its
understanding of risk and the science of building risk
frameworks, with a contextual understanding of business.

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 Credit Rating Information Services Limited
(CRISIL) contd….
Objective of CRISIL - The principal objective of CRISIL is to rate
the debt obligations of Indian companies. Its rating guides the
investors about the risk of timely payment of interest and
principal on a particular debt instrument.
Credit Rating Committee - 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.
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.

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 Credit Rating Information Services Limited
VALUES (CRISIL) contd….
1. Analytical Rigour
Our service offerings are underlined by analytical rigour. We blend in-depth conceptual
understanding – the science of building analytical frameworks – with the art of
evaluation.
CRISIL combines an extensive knowledge base, understanding of the dynamics of business
and the market place, expertise, judgment and experience to offer world-class solutions
to clients.
Our Policy level assignments in the area of Infrastructure Advisory are but one example of
this.
2. Independence
We pride on being non-partisan and unbiased.
Our culture fosters objectivity and neutrality of views and opinions.
Independence and objectivity are ingrained in our processes and call for a participatory
approach, individual thinking and transparency for arriving at logical conclusions.

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 Credit Rating Information Services Limited
3. Integrity (CRISIL) contd….
Our credibility in the market place is the result of unimpeachable integrity, honesty
and transparency in our work and dealings.
Our people are characterised by a strong sense of fairness and ethics. CRISIL seeks to
become the benchmark on integrity by adopting the best professional practices
regarding client confidentiality, integrity of analysis and lack of bias
4. Innovation
Our dedicated Centres of Excellence provide thought leadership. The core teams lead
the way by developing and sharing insights from the extensive corpus available,
building innovative analytical frameworks and developing new methodologies and
products in line with requirements of the market place.
5. Commitment - We are committed to…
Setting standards for integrity, analytical rigour and best practices in the marketplace
Consistently providing value to constituents through analytically relevant and reliable
opinions and solutions
Upholding independent evaluation processes and a non-partisan, unbiased and fearless
approach to functioning

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 CRISIL’S RATING PROCESS

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 CRISIL RATING SYMBOLS
Debenture Rating Symbols
High Investment Grades:
AAA (triple A): Highest Safety
AA (double A): High Safety
Investment Grades:
A: Adequate Safety
BBB (triple B): Moderate Safety
Speculative Grades:
BB: Inadequate Safety
B: High Risk
C: Substantial Risk
D: Default

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 CRISIL RATING SYMBOLS
Fixed Deposit Rating Symbols
– FAAA (triple A): Highest Safety
– FAA (double A): High Safety
– FA: Adequate Safety
– FB: Inadequate Safety
– FC: High Risk
– FD: Default
Ratings for short-term instruments
– P-1: Timely payment very strong
– P-2: Strong
– P-3: Adequate Safety
– P-4: Minimal
– P-5: Expected to be in default on maturity or is in default

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 RATING METHODOLOGY OF CRISIL
Key factors considered for rating are:
1. Business Analysis,
2. Financial Analysis,
3. Management evaluation,
4. Regulatory and competitive environment, and
5. Fundamental analysis.
Factors listed above at serial numbers 1, 2, and 3 are evaluated
for manufacturing companies, while 4 and 5 factors are used
to evaluate finance companies apart from the 1, 2 and 3
factors.
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RATING METHODOLOGY OF CRISIL contd…
1. Business Analysis – Industry risk, market position and
operating efficiency of the company, legal position.
2. Financial Analysis – Accounting quality, earnings
position, adequacy of cash flows, and financial flexibility.
3. Management Evaluation – Goals, philosophy, strategies,
ability to overcome adverse situations, managerial talents
and succession plans, commitment, consistency and
credibility.
4. Regulatory and Competitive Environment -
5. Fundamental Analysis – Liquidity management, assets
quality, profitability and financial position, interest and tax
sensitivity.
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 Investment Information and Credit Rating
Agency of India (ICRA)
ICRA was set up by IFCI on 16th January 1991.
ICRA Limited is an Associate of Moody's Investors
Service and an independent and professional company.
It is a public limited company with an authorized share
capital of Rs.10 crores, Rs. 5 crores is paid up.
ICRA’s major shareholders IFCI (26%), and the balance by
UTI, LIC, GIC, PNB, Central Bank of India, Bank of
Baroda, UCO Bank and banks (SBI)

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 OBJECTIVES OF ICRA
To access the credit instrument and award it a grade consonant
to the risk associated with such instrument.
- To assist investors in making well informed investment
decision
- To assist issuers in raising funds from a wider investors base
- To enable banks, investment bankers and brokers in placing
debt with investors by providing them with a marketing tool
- To provide regulators with a market driven system to
encourage the healthy growth of the capital markets in a
disciplined manner without costing an additional burden on
the Government for this purpose.

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 STRATEGIES OF ICRA
– Create awareness of the rating concept and benefits
among issuers, investors, regulators, and financial
institutions.
- Win the credibility, confidence and trust of the
constituents by demonstrating that its methodology is
transparent and its ratings are independent and consistent.
- Aggressively focus on business development whitish
would result in a significant increase in the volume of
rating assignments and spur the Govt. into introducing an
exclusively market-driven interest rate structure.

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 Investment Information and Credit Rating
Agency of India (ICRA)
- 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:
– Rating Services Information.
– Grading and Research Services.
– Advisory Services.
– Economic Research Outsourcing.

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 Investment Information and Credit Rating
Agency of India (ICRA) contd…
Long term Debentures, Bonds and Preference shares-Rating Symbols
LAAA : Highest Safety
LAA : High Safety
LA : Adequate Safety
LBBB : Moderate Safety
LBB : Inadequate Safety
LB : Risk prone
LC : Substantial Risk
LD : Default, Extremely speculative

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 Investment Information and Credit Rating
Agency of India (ICRA) contd…
Medium term including Fixed deposits Rating Symbols
MAAA: Highest Safety MAA: High Safety
MA : Adequate Safety MB : Inadequate Safety
MC : Risk prone MD : Default
Short-term including CPs
A-1: Highest Safety A-2: High Safety
A-3: Adequate Safety A-4: Risk prone
A-5: Default

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 RATING METHODOLOGY OF ICRA
The rating methodology comprises the study of industry as
well as the company’s SWOT analysis.
- Marketing strategies,
- Competitive edge,
- Level of technological development,
- Operational efficiency,
- Competence and effectiveness of management,
- HRD policies and practices,
- Hedging of risks,
- Cash flow trends and potential,
- Liquidity,
- Financial flexibility,
- Asset quality and past record of servicing debts and obligations, and
- Government policies and status affecting the industry.

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 Credit Analysis and Research Limited
(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. Canara Bank, UTI, Credit Capital Venture Fund (I)
Ltd, Sundaram Finance Ltd, The Federal Bank Ltd, The Vysya
Bank, First Leasing Company of India, ITC Classic Finance Ltd,
Kotak Mahindra Finance Ltd, IFB Leasing and Finance Ltd,
Kalimati Investment Company Ltd, The Investment Corporation of
India Ltd, Varuna Investments Ltd, and 20the Century Finance
Corporation Ltd.

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 Credit Analysis and Research Limited (CARE)

Services offered by CARE are

1. Credit rating
2. Information services
3. Equity research, and
4. Advisory services

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 Services Offered by CARE
1. Advisory Services:
• 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. 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. 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.
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 Services Offered by CARE contd….
• 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 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.

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 Services Offered by CARE contd….
• 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.
• Debt Market Review - CARE's Advisory division also publishes a
monthly bulletin "debt market review" on the happenings in the debt
market and general development in the economy in the previous month.
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 Services Offered by CARE contd….
2. Credit 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 (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 deposits).
- 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.

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 Credit Analysis and Research Limited (CARE)
• Long term debt instruments-Rating Symbols
CARE AAA : Highest Safety
CARE AA : High Safety
CARE A : Adequate Safety
CARE BB : Inadequate Safety
CARE B : High Risk
• Medium term debt instruments-Rating Symbols
CARE AAA : Highest Safety
CARE AA : High Safety
CARE A : Adequate Safety
CARE BB : Inadequate Safety
CARE C : High Risk

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 CARE
Short term debt instruments Rating Symbols
PR 1: Superior capacity
PR 2: Strong capacity
PR 3: Adequate capacity
PR 4: Minimal degree of safety
PR 5: Default or likely in default on maturity
.Credit Analysis Rating
CARE 1: Excellent Debt Management Capacity
CARE 2: Very good Debt Management Capability
CARE 3: Good capability for Debt Management
CARE 4: Barely satisfactory capability for debt management
CARE 5: Poor capability for debt management

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 Services Offered by CARE contd….
3. Other Rating / Grading Services : IPO Grading
- CARE's IPO grading is a service aimed at facilitating the assessment of
equity issues offered to public.
- CARE's IPO grading is an independent and professional opinion on the
fundamentals of the issuer.
- The grade assigned to any individual issue represents a relative
assessment of the 'fundamentals' of that issuer.
Utility to market participants
- CARE’s IPO grading would help the investors particularly the retail
investors better appreciate the meaning of the disclosures in the issue
document to the extent that they affect its fundamentals. IPO grading is
expected to be one of the inputs in the investor’s decision making process.
- Moreover, such a service would be particularly useful for assessing the
offerings of companies accessing the equity markets for the first time
where there is no track record of their market performance. Issuers would
also benefit from CARE's IPO grading as it would help them in
benchmarking themselves in the market place.

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 Services Offered by CARE contd….
3. Other Rating / Grading Services : IPO Grading
What IPO Gradings are not?
• As IPO grading does not take cognizance of the price of the security, it
is not a recommendation to buy, sell or hold shares/securities.
• They are not a comment on the offer price or the listed price of the
scrip.
• They do not imply that CARE performs an Audit function or forensic
exercise to detect fraud.
IPO Grading scale
• CARE would assess the overall fundamentals of an IPO on a five-point
scale. Highest score to be assigned by CARE to any IPO would be 5
and the lowest score would be 1.

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 Services Offered by CARE contd….
IPO Grading Scale
CARE IPO Grade Evaluation
CARE IPO Grade 5 Evaluation
CARE IPO Grade 4 Strong fundamentals
CARE IPO Grade 3 Average fundamentals
CARE IPO Grade 2 Below average fundamentals
CARE IPO Grade 1 Poor fundamentals
IPO Grading Process
Client CARE
Requests for grading 1. CARE's grading team commences assignment
Submits offer document & other information 2. The grading team analyses the information.

Interacts with the grading team, responds to 3. The grading team interacts with clients, undertakes site
queries raised and provides any additional data visits, and analyses data submitted by the client.

4. Internal committee previews analysis.

5. GRADING COMMITTEE awards grading to IPO
Accepts grading * 6. Notification in press
* Client may ask for a review of the grading assigned and furnish additional information for the
purpose. However, clients do not have the option of not accepting the final grading
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 Services Offered by CARE contd….
IPO Grading Criteria - CARE would assess the fundamentals of an
issue based on the following factors:
Quantitative – growth prospects of the industry, financial strength &
operating performance of the issuer
Qualitative - business fundamentals & prospects, management
quality, promoter evaluation, accounting policies, corporate
governance practices, project risk, and compliance and litigation
history.
CARE would consider a time horizon of around 3 years for its
assessment.

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 RATING METHODOLOGY OF CARE
CARE has prescribed a format for obtaining requisite information
required for rating the instruments. These are different formats
for manufacturing company, and for financial services
company.
The formats collects information relating to key factors business
analysis, financial analysis, management evaluation, regulatory
and competitive environment, and fundamental analysis.

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 ONICRA
• In India there has been a absence of rating agency for individuals.
• ONICRA has filled this gap and it is the India’s first individual credit
rating system.
• It brings to India the internationally established concept of providing
credit rating of individuals, for the use of lending institutions.
• Rating of Individuals: ONICRA credit rating systems is based on the
sophisticated software developed in collaboration with James Martin &
Co, that has provided to ONICRA the most comprehensive methodology
that addresses the needs of a mega credit rating system
ONICRA takes up credit rating for individuals customer at the request of a
lending firm/institution. In the process customer is required to fill the
form given by ONICRA.
Benefit of Rating: It is beneficial to lenders because it saves time, and
helps in concentrating on core area of interest.

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 DISADVANTAGES OF CREDIT RATING
• Biased rating and misrepresentation,
• Static study,
• Concealment of material information,
• No guarantee for soundness of the company,
• Human bias,
• Reflection of temporary and adverse conditions,
• Present rating may change (down grade),
• Differences in rating of two agencies.
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