Credit Rating

Prepared by

Prof. Rahul Mailcontractor

Assistant Professor,
Jain College of MCA and MBA,
Belgaum.

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 borrowers
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.

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

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

Promoter

A Credit rating agency can be promoted by:

Public Financial Institution
Scheduled Bank
Foreign Bank operating in India with RBI
approval
Foreign Credit Rating agency having at least
five years experience in rating securities
Any company having a continuous net worth
of minimum 100 cores for the previous five
years.

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.

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.

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.
o Clients agreement to disclose the rating
assigned in the offer document for the last 3
years

Monitoring of rating
The CRA should continuously monitor
the rating of securities rated by it
during their life time .
It should disseminate information
regarding newly assigned rating and
its changes in the earlier ratings
through press releases, websites and
inform the same to stock exchanges.

Disclosure of rating definitions and

Rational.

The rating agency should make public

the definitions of the concerned rating
along with symbol
They should also state that the ratings
do not constitute recommendation to
buy, sell or hold any securities.
It should provide the public the
rational of its rating which covers
analysis of various factors justifying
the assessment as well as the risk
factors.

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 ADB, 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.

Services offered by CRISIL

Credit Rating Services
Advisory Services
Credibility first rating and evaluation
Services
Training Services

Credit Rating Services(CRS)

The principle function of CRISIL is to rate mandated debt
obligations of Indian Companies chit fund, real estate developers,
LPG Kerosene dealers, NBFC, Indian states and so on.
Rating of debt obligations:
Debt obligation includes rupee denominated credit
instruments like debentures, preference shares, deposits, CDs
commercial papers and a structured obligations of
manufacturing ,finance companies, banks, financial
institutions etc.
It ensures stable and healthy growth of capital market by
offering credit rating which is widely acceptable. It provides
increased disclosures, better accounting standards and
improved financial information to the users.
It reduces cost of issue by direct mobilization of resources.
It protects the interest of investors by constantly monitoring
the results of rated companies.

 Rating of structured obligations:

It reflects CRISIL opinion regarding the
capacity and willingness of the company to
make timely payments of financial
obligations on rated instruments.

Rating of real estates developers:

CRISIL has developed framework for rating
of real estate projects. Such rating helps
investors to identify their investment
options
The rating is expected to help developers
mobilize funds for their projects.
The methodology assesses a project in
terms of project risk factors and
developers risk factors.

 Bond Fund ratings:

The rating is an opinion of the quality of bond
funds underlying portfolio holdings. They mainly
focus on fixed income securities.
The rating methodology takes into account the
following factors i.e., credit associated with the
securities, the systems and procedures followed
by the funds and management quality and
expertise.

Bank loan rating:

The creditworthiness of banks borrower is
assessed offering comments on the likelihood of
repayment of loans.
The methodology considers the borrowers
underlying assets liquidity and risk management
initiative and for NBFC quality of assets , loans
and investment.

 Collective investment schemes:

This covers rating of collective investment
schemes offering opinion on the degree of
certainty of the scheme to deliver the assured
returns in terms of cash as mentioned in the offer
document

Grating of health care institutions:

The grading for healthcare institutions is an
opinion on the relative quality of health care
delivered by the institutions to the patients.
Grading is done taking into account facilities,
quality , consistency in delivering the service etc.
Flowing are the grades given Grade A( Very good
quality), Grade B (Good Quality) , Grade C
(Average Quality) and Grade D( Poor Quality)

CRICIL Advisory Services (CAS)

The CAS offers consulting services that aim at
identifying and mitigating risk. The main focus of these
services is transaction and policy level assignments in
the area of energy, transport, banking and finance
disinvestment, privatization and valuation.
Energy group services: it offers advisory services to
companies engaged in energy sector like power,
coal, oil and gas. The policy level assignments
Include aspects like sector reforms and structuring,
regulatory framework privatization, corporate plan
fuel related services.
Transaction level assignment include project
scoping and structuring, bid process management,
financial viability analysis of projects, risk
identification and analysis and structuring of project
contacts, security package, structuring and
analysis.

 Transport and urban infrastructure group services:

It provides financial advisory services to transport
and infrastructure service provider.
Policy level assignments include advice on
transport sector privatization policy of state
ports, development of risk identification
allocation, long term sector plans and state role.
Transaction level assignments include financial
viability analysis, project structuring, bid process
management, negotiation of terms with
successful bidders
Privatization and disinvestment group: this
group renders advisory services to central state
governments, public sector enterprises and
private sector entities interested in participating
in privatization program, these services cover 3
aspects policy level, enterprise level and reforms
and restructuring.

 Banking and finance group:

CRISIL offers a wide range of services covering
restructuring and business reengineering, credit
management, investment management and portfolio
insurance, equity valuation, resource mobilization
studies and financial feasibility studies
Capital Market Group:
This group provides customized research and
advisory assistance to meet specific transactional
and strategic requirements of clients. It offers
services like diagnostic evaluation for valuation of
Indian partner of a foreign asset management
company, technical assistance to AMFI, portfolio
evaluation and portfolio analysis for leading mutual
funds, composite performance ranking of domestic
mutual funds, assistance to government for the
development of Indias financial sector.

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.

Rating services
ICRA rates debt instruments issued by manufacturing
companies, commercial banks, NBFCs, financial
institutions, PSUs and municipalities.
The instruments rated by it include bonds/ debentures,
fixed deposits commercial papers and certificate of
deposit. It also rates structured obligations in
accordance with the terms of the structure based on
risk assessment of the instrument . It rates sector
specific debt obligations issued by power, telecom and
infrastructure companies.
It also provides corporate governance rating , rating of
claims paying ability of insurance companies, credit
assessment of large medium and small scale companies
to obtain assistance from banks, FIs. It also provides
services of general assessment of companies.

Information services
The information services division of ICRA focuses
on providing authentic data and value added
products used by intermediaries, financial
institutions, banks, asset managers, institutions
and investors.
Value added services include equity grading
providing a critical input on a company's earning
prospects and inherent risks in decision making
process of equity investors and equity
assessment.
Other services include corporate reports, equity
assessment, mandate based studies (customized
research) and sector/industry specific publication.

Advisory services
The advisory services division of ICRA offers wide
ranging management advisory services. Under
advisory services ICRA provides its understanding on
the business processes and relevant organizational
issues to different players of financial markets such as
investors, issuers, regulators, intermediaries and
media.
The advisory services include 1.strategic consulting/
strategic practice 2. risk management (credit risk,
market risk and operations risk) 3. regulatory practice
4 transaction practice 5. information( content
services).
It focuses on sectors like banking and financial
services, infrastructure sector, manufacturing and
service sector, government and regulatory authorities.

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 securitization
transactions, structuring financial instruments,
financing infrastructure projects and municipal finances
3. Information services like providing information to
companies, industry and businesses. 4. Equity research

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.

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.

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.

Rating Review for a possible

The rated company is on the surveillance
change

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.

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 issuers 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.

Rating Methodology
The rating methodology involves an
analysis of industry risk, issuers
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.

Credit rating for manufacturing

companies
The main elements of rating methodology are as
below
Business risk Analysis : It begins with an
assessment of the companys 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.

 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.

 Management Risk: A proper

assessment od debt protection levels
requires an evaluation of management
philosophies and its strategies. The
analyst compares the companys
business strategies and financial plans
to provide insights into a
managements 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.

Credit rating for financial service

sector
When rating debt instruments of financial
institutions, banks, NBFCs in addition to the
financial analysis and management evaluation
the following factors are considered
Regulatory and competitive environment
Fundamental analysis
Capital adequacy
Asset quality
Liquidity management
Profitability and financial position
Interest and tax sensitivity

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.

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.

 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.

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

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)

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

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

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.

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

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)

Credit Rating of Indian

States
Rating of the states by the CRISIL
represents a landmark in the
diversification of the rating Business in
the country.
It has already rated several states.
While assessing a state, CRISIL
considers two basic factors:
The Economic Risk and
The Political Risk

Economic Risk
Economic structure of the state and its
finances
Macroeconomic performance
Infrastructure
Sector studies
Whether revenue and expenditure patterns
are sustainable.
Deficit Management
Degree of dependence on Central support
Tax policy of the state
Performance of Public sector undertakings and
their effect on the states finances.

Political Risk
Relations between the state and the Centre and
its impact on transfer of resources as well as
centres influence on political stability in the
state.
Various political parties in the state, their
economic policies and their effect on the states
policies.
Quality of the current leadership and
administration
Ability of the Government to take decisions that
are politically difficult.

Rating of real estate

developers
Rating pertains to particular project and not to the
company as a whole. It assigns ratings after assessing
the factors that could affect the ability of the
developer to meet agreed specifications in terms of
quality and time as well as the ability to transfer clear
titles to customers. Ratings are based on project risk
analysis and developer risk analysis
Project risk analysis : The quality of legal title in
respect of the property constructed, quality of
construction and timeliness of delivery of the
completed unit is assessed.
Developer risk analysis: The track record of the
developer, existing financial statements, financial
flexibility and management evaluation are considered
with rating the position of developer.

Rating symbols for

developers
PA1- Highest Ability to build the
project
PA2- High Ability to build the project
PA3- Adequate Ability to build the
project
PA1- Inadequate Ability to build the
project
PA1- Inability to build the project