Credit Rating

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 V
R
VCAL FRAM
RK

Ú Credit rating is essentially a symbolic indicator of

the relative grading of the investment/credit qualities
of financial instruments.
instruments.

Ú t reflects the relative ability of the issuers of such

instruments to meet the servicing obligations as and
when they arise
arise..


 V
R
VCAL FRAM
RK

Ú t is neither a general purpose evaluation nor an

over--all assessment of the credit risk associated
over
with all the obligations of the issuers/
issuers/corporates
corporates..
Ú A rating is specific to an instrument.
instrument. t does not
amount to any recommendations to buy, hold or sell
an instrument.
instrument.
Ú Vhe increasing recognition to credit rating in the
country marks a major transition from a corporate
culture where names mattered
mattered..

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 CR
V RAV A
C


Vhere are five credit rating agencies in the country

which rate corporate entities
entities::
CRL,
CRA,
CAR
,
FVC ,
Brickwork Ratings
Ratings..

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 CRL

CRL is the most important rating agency in the

country..
country
hile it undertakes rating of mandated instruments,
namely, debentures, deposits, commercial papers,
LP/kerosene dealers, its rating services also
extend to preference shares, structured obligations,
chit funds, real estate developers/builders, banks
and states.
states.

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Vhe extensive compilation and analysis of data for
rating business is also used by CRL to provide
information services to corporate clients
clients..
t has leveraged its information base and expertise in
credit rating to provide counselling to government,
banks and financial institutions on aspects such as
privatisation of P s, debt securitisation,
securitisation, credit
evaluation and so on.
on.

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 CRA

CRA focuses on rating of instruments for which

credit rating is mandatory, namely, debentures/
bonds, deposits, commercial papers, kerosene/LP
dealers.. n addition, it rates banks
dealers banks..

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 CRA

t has also ventured into
PRA for grading the

primary market at the instance of the issuing
companies and assessing the secondary market for
the investors.
investors. t also provides credit assessment and
general assessment services
services..

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 CAR

CAR
confines to normal rating business only and

has not diversified its operations.
operations. Vhe instruments
credit--rated by CAR
are debentures, deposits,
credit
commercial papers and structured obligations
obligations..
t also undertakes general credit analysis of
companies for the use of banks, other lenders and
business enterprises.
enterprises.

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 Rating Process/Methodology

Procedurally, credit rating is done in ndia at the

instance of the issuers of the instruments
instruments..
nsolicited rating at the initiative of the rating
agencies has still not emerged.
emerged.
Vhe clients have, moreover, the option not to accept
the ratings.
ratings.

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Rating is a search for fundamentals and the
possibilities of change in these in the long-
long-term.
term.

All the credit agencies follow broadly the same

analytical framework of rating methodology.
methodology.

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t comprises of three broad sets of factors
(i) business analysis in terms of analysis of industry
risk, market position, operating efficiency and legal
position;;
position
(ii) financial analysis on the basis of consideration of
accounting quality, earnings protection, adequacy of
cash flows and financial flexibility and
(iii) management evaluation

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For finance companies, in addition, the assessment
by the rating agencies lays emphasis on regulatory
environment and fundamental analysis which
includes liquidity management, asset quality,
profitability and financial position and interest and
tax sensitivity
sensitivity..

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 Rating ymbols

Vhe technique of credit rating is through Rating

symbols. Vhey group together similar entities in
terms of their relative capacity of timely servicing of
obligations as per the terms of the contract.

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 Rating ymbols

Vhe suffixes plus (+) or minus (²

(²) are added to the
symbols to indicate the relative position of the
instrument within the group covered by the symbol.

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CRL Rating ymbols Vhe rating symbols of the
CRL are illustrated with reference (1) debentures,
(2) fixed deposits, (3) short-
short-term instruments
(commercial papers), (4) credit assessment, (5)
structured obligations, (6) bond funds, (7) bank
loans (8) collective investment schemes, (9) ndian
states, (10
10)) chit funds and (11) 11) real estate
developers/builders..
developers/builders

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ebentures:
ebentures:
Vhe rating of debentures is mandatory
mandatory..

CRL assigns an alpha based rating scale to rupee

denominated debentures.
debentures.

t categorises them into three grades namely, high

investment, investment and speculatives.
speculatives.

mŒ
 igh nvestment rade igh investment includes
includes::

÷÷÷
 ÷ 
   Vhe debentures
rated¶ AAA µ are judged to offer the highest safety
against timely payment of interest and principal.
principal.

Vhough 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.
issues.

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 igh nvestment rade igh investment includes
includes::

÷÷
 ÷ 
   Vhe debentures rated
µAA¶ are judged to offer high safety against timely
payment of interest and principal.
principal. Vhey differ in
safety from¶ AAA µ issues only marginally.
marginally.

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 nvestment rades nvestment grades are divided
into::
into
÷ ÷    Vhe debentures rated µA¶ are
judged to offer adequate safety against timely
payment of interest and principal.
principal.

owever, changes in circumstances can adversely

affect such issues more than those in the higher
rated categories
categories..


nvestment rades

000
 0     Vhe debentures

rated µBBB¶ are judged to offer sufficient safety
against timely payment of interest and principal, for
the present;
present; however, changing circumstances are
more likely to lead to a weakened capacity to pay
interest and repay the principal than in the case of
debentures in higher rated categories
categories..

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peculative rades

00
 0     Vhe debentures

rated µBB¶ are judged to carry inadequate safety of
the timely payment of interest and principal.
principal. hile
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 interest and
principal payments on time.
time.


peculative rades

0 
  Vhe debentures rated µB¶ are judged to
have greater susceptibility to default.
default. hile currently
interest and principal payments are met, adverse
business or economic conditions would lead to a
lack of ability or willingness to pay interest or
principal..
principal

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6     Vhe debentures rated µC¶ are
judged to have factors present that make them
vulnerable to default;
default; timely payment of interest and
principal is possible only if favourable
circumstances continue
continue..

  Vhe debentures rated µ¶ are in default

and in arrears of interest or principal payments or
are expected to default on maturity.
maturity. uch debentures
are extremely speculative and returns from these
debentures may be realised only on reorganisation
or liquidation.
liquidation.

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J  (1) Vhe CR may apply µ+¶ (plus) or µ±¶ (minus) signs for ratings from AA
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to C to reflect comparative standing within the category.
category. Vhe contents within
parentheses are a guide to the pronunciation of the rating symbols.
symbols. Preference
shares rating symbols are identical to debenture rating symbols except that the
letters µpf
pf¶¶ are prefixed to the rating symbols for example pf AAA (³pf
(³pf Vriple A´).
A´).

Fixed eposits
Vhe fixed deposits are divided into six broad groups.
groups. Vhe + (plus)/±
(plus)/± (minus)
signs may be applied for ratings from grade two to grade six to reflect
comparative standing within the grade/category
grade/category.. Vhe symbols and their
implications are described below
below..
FAAA--(F
FAAA (F--Vriple A) ighest afety Vhis rating indicates that the degree of safety
regarding timely payment of interest and principal is very strong
strong..
FAA--(F
FAA (F--ouble A) igh afety Vhis rating indicates that the degree of safety
regarding timely payment of interest and principal is strong.strong. owever, the
relative degree of safety is not as high as for the fixed deposits with µFAAA¶
rating..
rating

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FA-Adequate afety Vhis rating indicates that the degree of safety regarding
FA-
timely payment of interest and principal is satisfactory.
satisfactory. Changes in
circumstances can affect such deposits more than those in the higher higher--rated
categories..
categories
FB--nadequate afety
FB Vhis rating indicates inadequate safety of timely
payment of interest and principal.
principal. uch deposits 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.
payments.
FC-- igh Risk Vhis rating indicates that the degree of safety regarding timely
FC
payment of interest and principal is doubtful.
doubtful. uch deposits have factors at
present that make them vulnerable to default;
default; adverse business or economic
conditions would lead to lack of ability or willingness to pay interest or
principal..
principal
F--efault Vhis rating indicates that the deposits are either in default or
F
expected to be in default upon maturity.
maturity.
hort--Verm nstruments uch instruments include commercial papers
hort papers.. Vheir
rating is also mandatory.
mandatory. Vhe CRL grades them into five broad groups, as
listed below.
below.

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P-1 ( ighest afety) Vhis rating indicates that the degree of safety, regarding
timely payment of the instrument, is very strong
strong..
P-2 ( igh afety) Vhis rating indicates that the degree of safety regarding
timely payment on the instrument is strong;
strong; however, the relative degree of
safety is lower than that for instruments rated ³P³P--l´
l´..
P-3 (Adequate afety) Vhis rating indicates that the degree of safety regarding
timely payment on the instrument is adequate;
adequate; however, the instrument is more
vulnerable to the adverse effects of changing circumstances than an
instrument rated in the two higher categories.
categories.
P-4 (nadequate afety) Vhis 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-
short-term adversity or less favourable conditions
conditions..
P-5 (efault) Vhis rating indicates that the instrument is expected to be in
default upon maturity or is in default.
default.
Vhe CRL may apply ³+´ (plus) sign for ratings from P-l to P-3 to reflect a
comparatively higher standing within the category
category..
Credit Assessment Vhe assessment indicates the CRL¶s broad opinion as to
the relative degree of capability of the entity to repay the interest and principal,
as per the terms of the contract.
contract. t indicates credit assessment symbols (as
distinct from credit rating symbols) by numerals ranging from 1 to 14 14,, detailed
below, which roughly correspond to the medium- medium-term instruments rating
symbols..
symbols
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1-Very trong Capacity Vhis indicates that the capacity for timely payment of
interest and principal is very strong
strong..
2, 3, 4 trong Capacity Vhis indicates that the capacity for timely payment of
interest and principal is strong.
strong. owever, the capacity is not as strong as for
borrowers with a credit assessment of ³1´.
5, 6, 7 Adequate Capacity Vhis indicates that the capacity for timely payment of
interest and principal is satisfactory.
satisfactory. Changes in circumstances can affect the
capacity of the borrower, more than those in the stronger credit assessment
categories..
categories
8, 9, 10 nadequate Capacity Vhis indicates inadequate capacity for timely
payment of interest and principal.
principal. uch borrowers are less susceptible to
default than borrowers with credit assessment below this category, but the
uncertainties that the borrower faces could lead to inadequate capacity to
make timely interest and principal payment.
payment.
11,, 12,
11 12, 13 Poor Capacity Vhis indicates that the capacity for timely payment of
interest and principal is doubtful.
doubtful. At present, such borrowers face
circumstances that make them vulnerable to default;default; adverse business or
economic conditions would lead to a lack of capacity to pay interest or
principal..
principal
14 efault Vhis indicates that the borrower is either in default or is expected to
be in default upon the maturity of the debt.
debt.

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tructured bligations Vhe structured obligations ratings are based on the
same scale (AAA through ) as ratings for long long--term instruments
instruments.. owever,
reflecting the distinction of structured obligations from a debt instrument, the
rating symbols are defined differently.
differently. rades are classified into (1) high
investment, (2) investment and (3) speculative
speculative..
igh nvestment rades Vhese grades comprise
comprise::
÷÷÷
 
   Vhis rating indicates the highest degree of certainty
regarding timely payment of financial obligations on the instrument.
instrument. Any
adverse changes in circumstances are most unlikely to affect payments on the
instruments..
instruments
÷÷
 
   Vhis rating indicates the highest degree of certainty
regarding timely payment of financial obligations on the instrument
instrument.. Vhis
differs only marginally in safety from µAAA()¶ instruments.
instruments.
nvestment rades nvestment grades include
include::
÷
 ÷    Vhis rating indicates adequate degree of certainty
regarding timely payment of financial obligations on the instrument.
instrument. Changes
in circumstances can adversely affect such instruments more than those in the
higher--rated categories
higher categories..

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000
     Vhis rating indicates a moderate degree of certainty
regarding timely payment of financial obligations on the instrument.
instrument. owever,
changing circumstances are more likely to lead to a weakened capacity to meet
financial obligations than for instruments in higher-
higher-rated categories
categories..
peculative rades peculative grades consist of of::
00
     Vhis rating indicates an inadequate degree of
certainty regarding timely payment of financial obligations on the instrument.
instrument.
uch instruments are less susceptible to default than instruments rated below
this category.
category.
0
 
  Vhis rating indicates high risk and greater susceptibility to
default.. Any adverse business or economic conditions would lead to a lack of
default
capability or willingness to meet financial obligations on time.
time.
6
     Vhis rating indicates that the degree of certainty
regarding timely payment of financial obligations is doubtful unless
circumstances are favourable
favourable..

  Vhis rating indicates that the obliger is in default or expected to
default..
default
J  Vhe CRL may apply µ+¶ (plus) or µ±¶ (minus) signs for ratings from
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AA() to C() to reflect comparative standing within the category
category..

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Bond Funds Vhe rating symbols and their interpretation are as follows
follows::
AAAf Vhe fund¶s portfolio holdings provide very strong protection against
losses from credit defaults
defaults..
AAf Vhe fund¶s portfolio holdings provide strong protection against losses
from credit defaults
defaults..
Af Vhe fund¶s portfolio holdings provide adequate protection against losses
from credit defaults
defaults..
BBBf Vhe fund¶s portfolio holdings provide moderate protection against
losses from credit defaults
defaults..
BBf Vhe fund¶s portfolio holdings provide inadequate protection against
losses from credit defaults
defaults..
Cf Vhe fund¶s portfolio holdings have factors present that make them
vulnerable to credit defaults
defaults..
Bank Loan Ratings (BLRs) Vhe BLRs and their interpretation are given below.
below.
BLR--l A strong likelihood of repayment of interest and principal on the bank
BLR
loan..
loan
BLR--2 A good likelihood of repayment of interest and principal on the bank
BLR
loan..
loan
BLR--3 A satisfactory likelihood of repayment of interest and principal on the
BLR
bank loan.
loan.

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BLR-4 A moderate likelihood of repayment of interest and principal on the
BLR-
bank loan.
loan.
BLR--5 ub
BLR ub--standard;
standard; vulnerability to loss.
loss.
BLR--6 Loss
BLR Loss;; high likelihood of loss.
loss.
Collective nvestment chemes Vhe CRL has developed a framework for the
rating of collective investment schemes of plantations and other companies.
companies.
Vhe rating is an opinion on the degree of certainty of the scheme to deliver the
assured returns, in terms of the quantity of produce and/or cash, as mentioned
in the offer document
document.. Vhe rating is not a comment on the quality of the
produce or the monetary value that all the investors will get from the produce.
produce.
Vhe methodology broadly assesses the scheme-scheme-related risk factors as well as
promoter--related risk factors
promoter factors.. nder each of these, the CRL has identified
factors that it believes, would have impact on the degree of certainty of the
scheme providing an assured return to the investor investor.. Vhese factors are
crystallised into a composite rating expressed in the form of grades. grades. Vhe
symbols divide them into five grades, as detailed below:
below:
rade  ( igh Certainty) Vhis rating indicates high certainty that the collective
investment scheme will provide the assured returns in the form of produce
and/or cash.
cash.
rade  (Adequate Certainty) Vhis rating indicates adequate certainty that the
collective investment scheme will provide the assured returns in the form of
produce and/or cash.
cash.
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rade  (Moderate Certainty) Vhis indicates moderate certainty that the
collective investment scheme will provide the assured returns in the form of
produce and/or cash.
cash.
rade V (nadequate Certainty) Vhis rating indicates inadequate certainty that
the collective investment scheme will provide the assured returns in the form
of produce and/or cash.
cash. Risk factors for the scheme are high and the scheme is
prone to default.
default.
rade V ( igh ncertainty) Vhis rating indicates high uncertainty that the
collective investment scheme will provide the assured returns in the form of
produce and/or cash.
cash. Risk factors for the scheme are extremely high
expectation of default on obligations.
obligations.

aa
Rating of Chit Funds Vhe CRL undertakes rating of chit funds incorporated
as public/private limited companies, typically having an operating track record
of at least 10 years, with a reported minimum net worth of Rs 5 1akh akh.. uch
rating is, however, not mandatory.
mandatory. Vhe purpose of the rating of chit funds is to
assess their ability to make timely payment of the prize money to the
subscribers.. t also reflects the relative degree of risk associated with
subscribers
subscription to the chit series floated by chit funds.funds. Moreover, a rating
enhances the marketability of chits, widens the access to subscribers,
provides a distinct identity to the chit fund and an objective evaluation of its
strengths and weaknesses.
weaknesses. Vhe rating process and methodology is the same
as in the case of mandated instruments
instruments.. Vhe rating symbols and their broad
interpretations are listed below.
below.
nvestment rade
rade:: C V AAA
AAA--Very igh afety Vhis rating indicates that the
degree of safety regarding timely payment to the subscribers is very strong
strong..
C V AA+/C V AA/C V AA AA-- igh afety Vhis rating indicates that the degree
of safety regarding timely payment to the subscribers is strong
strong..
C V A+/C V A/C V A-Adequate afety Vhis rating indicates that the degree
of safety regarding timely payment to the subscribers is satisfactory
satisfactory..

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peculative rade
rade:: C V B+/C V B/C V B- nadequate afety Vhis rating
indicates inadequate safety of timely payment to subscribers
subscribers.. hile such chit
funds are less susceptible to delay/default than chit funds rated below this
category, the uncertainties that such chit funds face could lead to inadequate
capacity to make timely payments to subscribers
subscribers..
C V C+/C V C/C V C- igh Risk Vhis rating indicates that the degree of
safety regarding timely payment to the subscriber is doubtfuldoubtful.. uch chit funds
have factors at present which make them vulnerable to default; default; adverse
business conditions would lead to lack of ability or willingness to pay
subscribers..
subscribers
C V  efault Vhis indicates that the chit fund is either in default or is
expected to be in default.
default.
Rating of Real
state evelopers/Builders Vhe CRL undertakes rating of real
estate projects
projects.. Vhe rating pertains to a particular project and not to the
company as a whole
whole.. nly projects with an approved plan and planning permit
from the appropriate local authorities are considered for a rating
rating..
Methodology Vhe CRL 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 title to customers.
customers. Vhe
ratings are based on current information provided to the CRL CRL.. Vhe
considered factors are
are:: (i) project risk analysis and (ii) developer risk analysis
analysis..

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^   ÷ Vhe quality of legal title, in respect of the property to be
constructed, quality of construction and timeliness of delivery of the
proposed/completed unit are assessed
assessed.. Vhe analysis of quality takes into
account the specifications agreed upon by the developer and the buyers.
buyers.
!  ÷ Vhe track record of the developer, existing financial
position, financial flexibility and management evaluation are some of the
factors considered in order to assess the standing of the developer
developer.. Vhe key
documents for scrutiny at the time of rating are:are:
· Registered sale deeds for all transfers over the past 30 years or from the
time a clear proof of title is established;
established;
· A report on the title, from a reputed legal firm/lawyer or from the
appropriate authority;
authority;
· Copy of the sanctioned plan, together with commencement and
completion certificates, as applicable
applicable;;
· Copies/formats of all agreements between the developer and the
buyer(s);;
buyer(s)
· Receipts of all municipal and government rates, duties and taxes in
respect of the property paid to date;
date;
·
xemption order under the rban Land Ceiling Act, 19761976,, from a
competent authority, if applicable and
· Clearance certificate under the ncome Vax Act Act..
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Rating ymbols Vhe rating of builders is not mandatory.
mandatory. Vhe CRL, however,
rates them as a part of its diversification strategy.
strategy. t uses the prefix (PA) to the
rating symbols to indicate the project development ability of the developer
developer.. Vhe
rating symbols it uses and their interpretation are indicated below.
below.
^÷"
^÷ " 
 ÷  Projects rated PA PA1 1 indicate the highest ability of the
developer to specify and build to the agreed quality levels, and transfer clear
titles within stipulated time schedules
schedules..
^÷#
^÷ # 
 ÷  Vhe developer¶s ability to build the project to specified quality
levels and time schedules and transfer clear title is high. high. Project risks are
marginally higher in this category as compared to projects in the PA PA11 category
category..
^÷$
^÷ $ ÷  ÷  Adequate ability of the developer to build to reasonable
quality levels and time schedules and transfer clear title for the present. present.
owever, changing circumstances are likely to adversely affect these projects
more than those in the higher rated categories
categories..
^÷%
^÷ %   ÷  Vhe developer¶s ability to build to specified quality
levels and adhere to time schedules is inadequate
inadequate.. ncertainties facing the
project could result in inability and/or unwillingness to complete projects
projects..
^÷&
^÷ &   Projects rated PA PA5
5 indicate the inability of the developer to
complete projects or transfer clear titles
titles..
J  Vhe CRL may apply µ+¶ (plus) sign for ratings PA1
J  PA1 to PA
PA33 to reflect
comparative standing within the category
category..

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