A

PROJECT REPORT ON
STUDY OF CREDIT RATING

BY

AISHWARYA GAIKWAD

SUBMITTED TO
SAVITRIBAI PHULE PUNE UNIVERSITY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF

DR. DIVYA LAKHANI

THROUGH

DR. VIKHE PATIL FOUNDATION’S

PRAVARA CENTRE FOR MANAGEMENT RESEARCH
&DEVELOPMENT
PUNE-411016
2017-2019
Scanned by CamScanner
 ACKNOWLEDGEMENTS

I am overwhelmed in all humbleness and gratefulness to acknowledge all those who have
helped me to put the ideas, well above the level of simplicity and into something
concrete.

I am extremely grateful to my guide, Dr. Divya Lakhani who provided wholesome

direction and support to me at every stage of this work. It was her invaluable insight,
critical comments and suggestions, which helped me to bring this work to completion.

I am also grateful to Dr. Manoj Narwade, Director, and Dr. Vikhe PatilFoundation’s
Pravara Centre for Management Research and Development for his encouragement and
support.

AISHWARYA GAIKWAD.

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 DECLARATION

I hereby declare that the Dissertation titled “Credit Rating” is an original piece of

research work carried out by me under the guidance of Dr. Divya Lakhani. The
information has been collected from genuine and authentic sources. The work has been
submitted in partial fulfilment of the requirement of the degree of Master of Business
Administration to Savitribai Phule Pune University.

Date: 10 March 2019

Place: Pune AISHWARYA GAIKWAD.

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 INDEX

Page
Sr. No. Contents No.

Acknowledgements i

Declaration ii

Index iii

List of Tables iv
Executive Summary

Chapter 1 Introduction 1-26

Chapter 2 Review of Literature 27-30

Chapter 3 Research Methodology 31-32

Chapter 4 Data Analysis & Interpretation 33-48

Chapter 5 Findings, Suggestions & Conclusions 49-51

References 52-53

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 LIST OF TABLES

Table No. Details Page No.

Table No.4.1 CRAs registered with SEBI 34

Table No.4.2 Methodology adopted 39

Table No.4.3 Activities Undertaken 40

Table No.4.4 Research Services 41

Table No.4.5 Long term and medium term instruments. 42

Table No.4.6 Short Term Instruments. 43

Table No.4.7 Other Instruments. 44

Table No.4.8 Rating symbol of long term Instrument 45

Table No.4.9 Rating symbols for medium term 46

Instruments
Table Rating Symbols for Short term Instrument 47
No.4.10
Table Rating Symbols used for Mutual Funds 48
No.4.11 Grading
Table IPO Grading symbols 49
No.4.12

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 EXECUTIVE SUMMARY

Executive Summary With expansion of financial markets, Credit Rating Agencies (CRA)
started assessing borrowers (issuers of securities) by assigning credit rating symbols.
These ratings helped unaware investors to take informed investment decision at a price.
Rating Agencies not only assess the credit risk (probability of default) at the time of issue
of a security but also monitor the security & modify the ratings accordingly. Gradually
investors & regulators started giving more importance to investment graded (highly
rated) securities than non-investment/speculative graded securities. Due to incorporation
of ratings in investment guidelines/regulations for institutional investors, the borrowers
(issuers of securities) realized the importance of getting rated. So the payment model of
Credit Rating Agencies shifted from investors pay model to issuers (borrower) pay
model. During the past few financial crises like Asian Debt crisis, Subprime Crisis and
European Debt Crisis, the rating agencies have been criticized due to high investment
graded defaults like Lehman Brothers, Bear Stearns, Washington Mutual, Enron etc.
During Subprime Crisis the default rate in investment grade structured finance products
(like collateralized debt obligations, residential mortgage backed securities etc.) were
much more than usual default rate in investment grade securities. Hence, questions were
raised on issuer pays model of Credit Rating Agencies, which can lead to inflated ratings
The analysis of default rates showed that International Credit Rating Agencies (Standard
and Poor’s Ratings Services, Fitch Ratings, Moody’s Investors Service) had much higher
default rate in the investment graded structured products than Indian Credit Rating
Agencies (CRISIL, ICRA, CARE and Fitch India (India)). On the other hand in case of
normal non-structured products the situation was just the opposite i.e. the default rates in
investment graded normal debt products rated by Indian Credit Rating Agencies was
higher than International Credit Rating Agencies. Overall also based on Accuracy Ratio,
Indian Credit Rating Agencies lag behind the International Credit Rating Agencies.
Therefore, although International Credit Rating Agencies were widely criticized, Indian
Credit Rating Agencies also have to improve their accuracy in assessing the credit
worthiness of the borrowers. Among the Indian Credit Rating Agencies, accuracy ratio of
CRISIL was the best, followed by CARE, Fitch India and ICRA. The second method
used for the analysis of performance of Credit Rating Agencies was the analysis of the
case studies of the defaulters. As credit rating agencies provide two major services: credit
assessment of issuers at the time of issue of securities and monitoring services by
changing the ratings. So apart from accuracy of ratings assigned, timeliness of their
monitoring services is also an important aspect of rating agencies’ performance. Analysis
of rating modification along with changes in fundamentals of the rated company is
necessary to measure timeliness of ratings. So to measure the timeliness of rating
changes, case studies of six Indian and six International defaulters were analyses over a
time period of five years before the default. To analyse changes in fundamentals;
financial data (net profit, sales, total assets, cash flows etc.), financial ratios (current ratio,
debt equity ratio, net profit ratio, interest coverage ratio etc.)
 Chapter 1

Introduction to Credit Rating

Introduction

A financial system, comprising of financial institutions, financial services, financial

markets and financial instruments, aims at establishing and providing a regular, smooth,
efficient and cost effective linkage between depositors and investors. All the components
of a financial system work in connection with each other as financial institutions operate
in financial market by generating, purchasing and selling financial instruments and
rendering various financial services. Thus, financial institutions allocate savings of the
economy to useful investments. The financial markets on the other hand facilitate buying
and selling of financial claims, assets, services and securities. These financial claims,
assets, services and securities are the financial instruments which are periodical payments
of certain sum of money by way of principal, interest or dividend.

The financial services, dealt within the financial system, not only help in raising the
required funds but also in ensuring their efficient distribution. Financial services are at
heart of every economy. They are regarded as an engine of growth since financial
globalization can contribute significantly to promote growth both in developing countries
and countries in transition by augmenting domestic savings, reducing cost of capital,
transferring technology, developing domestic financial sector and fostering human
capital formation. Two characteristics of financial services must be emphasized at the
outset.

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One is that the financial services involve the creation, dissemination and use of
information. This is an information-based industry that has been transformed by the
information revolution.

The second common characteristic is that financial services require huge amounts of high
quality laour to deal with information and communication with the market. Financial
services involve at least two people or firms, the service provider and the user. Often
financial relationships will involve many parties as with securities offerings. It is the
differences in these parties that make financial services valuable (Bhalla). The financial
services industry serves the primary sectors of the economy by intermediating the flow of
funds and providing financial services.

Nationally and internationally, this industry is huge, growing and of critical significance
to the health of global economy as well as that of individual business, investors,
consumers and employees. The industry dominated the commanding heights of the Indian
economy. Financial services are provided by stock exchanges, specialized and general
financial institutions, banks and insurance companies. Each of the financial services can
be defined to include the provision of a financial service or the sale of a financial product
or both.

The products and services can be grouped under the sections: banking and credit;
insurance and securities and brokerage. Historically, there are four classes of financial
services firms:

1) Deposit taking firms;

2) Insurance type firms;

3) Investment companies; an

4) Securities firms.

Following are some of the examples of financial services:

1. Leasing, credit cards, factoring, portfolio management,

Technical and economic consultancy, credit information

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2. Underwriting, discounting and rediscounting of bills
3. Acceptances, brokerage and stock holding
4. . Depository, housing finance and book building
5. Hire-purchase and installment credit
6. Deposit insurance
7. Financial and performance guarantee
8. E-commerce and securitization of debts
9. Loan syndicating and credit rating.

Among the other financial services, credit rating is of most recent origin. Credit rating is
a financial service which is helpful to investors in taking their investment related
decisions. As the investors in search of profitable investment avenues have recourse to
various sources of information, such as research reports of market intermediaries, offer
documents of the issuer(s), media reports, etc. but in addition they can also base the
investment decision on the grading offered by Credit Rating Agencies. Rating agencies
are independent third parties that are consulted in the course of a market transaction.
Their goal is to assess the probability whether an issuer will meet its debt services
obligations in time by overcoming asymmetric information between both market sides by
evaluating financial claims according to standardized quality categories.

Overview of Credit Rating

The expansion of financial markets and ever increasing number of financial instruments
provide both borrowers and investors with large number of funding and investing
options. As the number of companies borrowing directly from the capital market
increases and as the industrial environment becomes more and more competitive and
demanding, it is difficult for investors to make a right choice among the multiplicity of
instruments and fund raisers particularly where all the borrowers have a good name and
reputation. Further, the growing number of cases of defaults and frauds in payment of
interest and repayment of principal sum borrowed has increased the importance of credit

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rating. Therefore, investors feel a growing need for an independent and credible agency
which judges impartially, the credit quality of debt obligations of different companies and
assist investors, individuals and institutions in making investment decisions (Singh,
1996). Thus, Credit Rating Agencies fulfill this need of investors as the main purpose of
credit rating is to provide investors with comparable information on credit risk based on
standard rating scales regardless of the specifics of the companies. According to Roman
Kraussl, Professor of Economics at University of Crete, The historical logic underlying
the existence of credit rating agencies has clearly resided within the basic problems of
financial markets information. Credit Rating agencies supply market participants with a
system of relative creditworthiness of all bond issues by incorporating all the components
of default risk into a single code.

Following developments also contributed to emergence of credit rating industry all over
the world.

 The increasing role of capital and money markets consequent to disintermediation;

 Increased securitization of borrowing and lending consequent to disintermediation;

 Globalization of credit market;

 Continuing growth of information technology;

 Growth of confidence in the efficiency of the open market mechanism;

 Withdrawal of Government safety nets and the trend towards privatization.

Thus, in the changed scenario where corporates are increasingly dependent on public, the
removal of restrictions on interest rates and stipulation of a mandatory credit rating of a
number of instruments since 1991 by the government SEBI, credit rating has emerged as
a critical element in the functioning of Indian debt or financial markets. It is useful to
safeguard the interest of investors by guiding them towards the right path. Credit rating is
desirable and mandatory for certain instruments worldwide to caution the investors in

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advance about the strength and weaknesses of a fund raising company. Credit rating is
the symbolic indicator of the current opinion of rating agencies regarding the relative
capability of issuer of debt instrument, to service the debt obligations as per contract.
Rating is an independent, professional and impartial assessment of default risk in debt
obligation. It is a qualified assessment and formal evaluation of company‘s credit history
and capability of repaying obligations. This assessment is based on an objective analysis
of the information and clarifications obtained from different sources including the issuer.

One of the leading Indian Credit Rating Agency CRISIL defines credit rating as an
unbiased, objective and independent opinion as to an issuer‘s capacity to meet financial
obligations. It is the current opinion as to the relative safety of timely payment of interest
and principal on a particular debt instrument. Thus, rating applies to a particular debt
obligation of the company and is not a rating for the company as a whole.‖ According to
USA based internationally reputed credit rating agency, Standard and Poor‘s, credit
ratings are judgments of borrowers‘ creditworthiness based on relevant risk factors,
expressed by letter grade rating symbol, which markets have come to depend on as
reliable, user friendly tool for differentiating credit quality. Thus a rating, according to
credit rating agencies‘ definition, is an opinion on creditworthiness of an obligatory with
respect to a particular debt. In other words, the rating is designed to measure the risk of a
debtor defaulting on a debt. Credit rating establishes a link between risk and return. It
provides a yardstick against which one can measure the risk inherent in an instrument.
The investor uses the rating to assess the risk level and compares the offered rate of
return with his risk return trade off and takes his investment decision accordingly. Risk
evaluation is only one factor amongst various other factors, which also counts in taking
investment decisions. Thus, the credit rating agencies evaluate the intrinsic worth of a
company and assign ranks to the companies accordingly. These agencies have become
important in view of the increasing number of companies going to the public for funds
and also due to government stipulating that corporate bodies wanting to raise funds from
the market should have their debt instrument rated. The main objective of these agencies
is to restore the confidence in the capital market and to provide unbiased assessment of
credit worthiness of the companies issuing debt instruments.

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Credit Rating Agencies are essentially corporations with specialized functions, namely,
assessment of the likelihood of the timely payments by an issuer on a financial obligation
(known as credit rating). Thus, credit rating is essentially the task of determining the
strength and prospects of a security offered in the market and thereupon place it amongst
a band having predetermined standards called grades‘ (typically these grades are
symbolically represented, viz. A, AA, AAA, etc.). In underdeveloped markets credit
quality is often evaluated by Name Recognition which cannot be used as an effective tool
for systematic risk evaluation since it suffers from numerous avoidable limitations.
Because it is not necessary that every venture promoted by a well-known name will be
successful and free from default risk.

Credit rating has eliminated or at least minimized the role of Name Recognition and
replaces it with well researched and scientifically analyzed opinions as to the relative
ranking of different debt instruments in terms of credit quality.

Now, lesser known companies can also approach market on the basis of their ratings. As
a rated security is placed higher in the estimation of investors than an unrated security
irrespective of better financial standing or reputation of the Issuer or Sponsor Company
or the business house. Credit rating reforms the isolated function of credit risk evaluation
and reflects borrower’s accountability, expected capability and inclination to pay interest
and principal in a timely manner. Credit rating provides indicative guidance to the
prospective investors on the degree of risk involved in the timely repayment of principal
and interest thereof. The agencies ‘most important job is evaluation of various
instruments including debentures, bonds, preference shares, fixed deposits, certificates of
deposit, loans, commercial papers, bank deposits, IPOs, mutual funds and insurance
claims, etc. Normally, Credit Rating Agencies focus their evaluation on the
creditworthiness of a debtor. In most cases, agencies act on the request of the evaluated
firm.

A rating mandate is valid for several years, during which the rating agency monitors the
client firm and corrects the rating decision if there is any significant change in the clients’
financial situation. Credit rating reflects financial, sectorial, operational, legal and
organizational sides of companies which characterize ability and willingness duly and in

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full amount to repay debt obligations. Further, credit rating is a published ranking based
on detailed financial analysis by a credit bureau. Rating is a complex activity requiring
examination and appraisal of seemingly complex factors and attributes involving a
diverse mix of variables ranging from accounting to financial analysis and risk
ascertainment and many more. The rating process is a fairly detailed exercise. It involves
among other things, analysis of published financial information, visits to issuers offices
and works, intensive discussion with the senior executives of issuers, discussions with
auditors, bankers, creditors, etc. It also involves an in-depth study of the industry itself
and the degree of environment scanning.

It is, therefore, in human terms, rather impossible for a solo investor to undertake to rate
a security for chiefly two reasons;

(i) Lack of effective access to the information required to make an effective rating,
and
(ii) Being not in possession of the complex tools required to translate the data
available into effective information required for decision-making. The question
What‘s in a bond rating? Has been asked for at least since 1909 when such
ratings were started in the United States. Informed persons who answer this
question typically admit that ratings depend in part on readily available statistics
on a firm‘s operations and financial condition. But these individuals also
emphasize that an important, if not the most important, determinant of corporate
bond rating is the rater‘s judgment about the firm‘s ability to make the scheduled
interest and principal or sinking fund payments on time. This judgment, it is
asserted, is based on much more information than that contained in readily
available statistics. Bond ratings are the principal source of investor information
about the quality ‘and marketability of various bond issues. Better credit ratings
lead to better capital market access, both in terms of the cost of borrowing and
the amount of debt issued. Bond ratings have a direct and often dramatic impact
on the debt market. The cost of the firm and even the marketability of the issue
are in large part, determined by assigned ratings. The investment community
tends to regard the bond rating as an indication of the firms ‘overall investment

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 quality; thus bond ratings may influence both the cost of debt and cost of equity
to the firm. The impact of credit rating on capital market can easily be visualized
from the fact that it becomes easier for investors to distinguish the investment
opportunities with different issuers both rated and not rated going public for
raising funds. Investors are prepared about the risk, whereas the issuers are also
free and enthusiastic to go to the market with confidence created through rating
grade. Thus, capital market is driven to efficiency in true sense where there
remains no place for rumors and fancies of brand names. Further, credit rating
has proven itself to be effective instrument of risk assessment in countries with
advanced economies since it demonstrates transparency of an enterprise. Credit
rating facilitates the company in raising funds in the capital market and helps the
investors to select their risk return trade off (Sarkar, 1994). Credit ratings are
commonly used by lenders to assess the default risk because every credit is
connected with a possible loss. If the probability of a default is above a certain
threshold a credit will not be provided .
(iii) Thus, bond ratings are used extensively in the investment community as a
surrogate measure for the riskiness of bonds . Rating evaluates only a specific
instrument and indicates risk associated with such instrument only. Therefore,
credit rating is neither a general purpose evaluation of a corporate entity nor an
overall assessment of credit risk likely to be involved in all the debts or financial
instruments. A credit rating is a rating agency‘s credit quality assessment of a
debt issuer or a specific debt obligation. A credit rating consists of both a letter
rating (credit category) and (if provided) commentary. The commentary can
include a credit watch and/or credit outlook‖ modifier, assumptions, criteria and
methods used in determining the rating opinion, conditions under which the
rating may or will be changed and descriptions of the rated company and its lines
of business (Frost, 2006). The involvement of a specialized agency in this task of
rating increases the creditability of the process, so ratings serve as objective
criteria for the market players to base their self-purchase decision on . Credit
rating essentially indicates the credit worthiness of the borrowers and the
probability that the borrowers will pay the interest and principal on due dates. A

8
 credit rating system is considered of good quality if debtors with a lower credit
rating default more often than debtors with a higher credit rating.
Here are some important features/facts about credit rating:

(a) Rating can be revised.

(b) Rating is not based on audit.

(c) Rating only helps in investment decision-making.

(d) Rating is based on current information.

(e) Rating is assigned to specific instrument.

(f) Rating aims at guiding the investors.

g) Rating does not provide any recommendation to buy, hold or sell any instrument.

(h) Rating process is based on broad parameters of information supplied by the issuer
and collected from various other sources.

(i) The rating furnished by the agency does not provide any guarantee for the
completeness or accuracy of information on which it is based.

(j) In rating business, the users of the rating services such as investors, financial
intermediaries and other end users do not pay for it but the issuers, of the financial
instrument, who do not use rating, pay for it. This is one of the most peculiar features of
credit rating.

(k) A key feature of rating is that they contain a limited number of categories.

Hence, equally rated bonds are not claimed to be of identical quality and rating cannot be
inverted into unique default probabilities. Thus, Credit rating is expected to improve the
quality consciousness in the market and establish, over a period of time, a more
meaningful relationship between the quality of debt and the yield from it. Nowadays, the
outlook of credit rating industry appears to be positive but the industry has to
continuously strive to improve the professional capabilities and sustain credibility.

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 The credit rating agencies today have ample opportunities to play a unique role in
strengthening the capital market and building the investors ‘confidence in the financial
system. Clearly, accurate assessment of the credit worthiness of obligators is an
important precondition for the stability of a financial system since inadequately high
exposure to credit risk has been one of the leading sources for problems in financial
institutions worldwide for many decades .

DEFINITIONS

Some important definitions of credit rating given by various national and international
rating agencies are as under:

Moody’s Investor Service

Ratings are designed exclusively for the purpose of grading bonds according to their
investment qualities.

Investment Information and Credit Rating Agency of India Ltd. (ICRA)

Credit rating is a simple and easy to understand symbolic indicator of the opinion of a
credit rating agency about the risk involved in a borrowing programmed of an issuer with
reference to the capability of the issuer to repay the debt as per terms of issue. This is
neither a general purpose evaluation of the company nor a recommendation to buy, hold
or sell a debt instrument.

Credit Analysis and Research Ltd. (CARE)

Credit rating is, essentially, the opinion of the rating agency on the relative ability and
willingness of the issuer of a debt instrument to meet the debt service obligations as and
when they arise.

IMPORTANT DETERMINANTS OF CREDIT RATING

The ratings are so devised that they provide investors with a simple and easily understood
indicator expressing the underlying credit quality and the risk associated with an
instrument of debt. Each rating assigned to a security issue is a reflection of various

10
factors. Rating does not come out of a pre-determined mathematical formula, which fixes
the relevant variables as well as the weights attached to each of them. Rating agencies do
a great amount of number crunching, but the final outcome also takes into account factors
like quality of management, corporate strategy, economic outlook and international
environment.

While assigning ratings the credit rating agencies principally focus on the following
determinants:

(i) The character and terms of the particular security being issued;
(ii) The probability that the issuer will default on the security and the ability and
willingness of the issuer to make timely payments as specified in the indenture
(contract) accompanying the security;
(iii) The degree of protection granted to the investors if the security issuer is
liquidated, reorganized, and/or declares bankruptcy. The past and probable future
cash flows of the security issuer;
(iv) The volume and composition of outstanding debt;
(v) The stability of the issuer‘s cash flows over time;
(vi) The value of asset pledged as collateral for a security and security‘s priority of
claim against the issuing firm‘s assets; and
(vii) The interest coverage ratios and the liquidity of the issuing firm. Thus, credit
rating agencies use their understanding of companies ‘business and operations
and their expertise in building frameworks for relative evaluation, which are then
applied to arrive at performance grading of various instruments of the companies,
without disclosing the private information of the issuer companies. Therefore,
issuers willing to dissolve some of the asymmetric information risk with respect
to their credit worthiness and yet not wishing to disclose private information can
use rating agencies as certifiers. In such a case, ratings are supposed to convey
new information to investors. Ratings can also be used as regulatory licenses that
do or do not convey any new information.
effectively existence of the following ingredients is necessary.

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 1 ESSENTIALS OF A GOOD CREDIT RATING SYSTEM
Credit rating serves as a valuable input in the decision-making process of
different market participants in the capital market including the regulators.
A good credit rating system is one which serves the interests of all such market
participants and the regulators in an effective way. So, in order to fulfill this
requirement and the rating system to function.

Credible and Independently Derived Credit Ratings: Ratings should be credible and the
credibility arises only if the rating agency is independent of issuer‘s business, holds high
degree of professionalism and relevant expertise across the industry. Further, the ratings
will be credible if there exists impartiality of opinions, strict rules of confidentiality
relating to sensitive and confidential information of the issuer, timeliness of rating
reviews and announcement of changes, ability to reach a wide range of investors by
means of press reports, print and electronic publications and research services.

Every time a rating is assigned, the agency‘s name, integrity and credibility are on line
and subject to inspection by whole community.

 The Meaning and Use of Ratings should be Clear, including the Level of Risk
Inherent in the Rating:
Rating agencies should be transparent about the meaning and limitations of their ratings.
Further the rating agencies should use ―warning signals‖ whenever possible, such as
credit rating watch and rating outlook, in order to make the ratings more important to
investors. Thus, rating users might understand that ratings can change suddenly based on
market or industry-specific events.
 Disclosure Requirements:
One of the essential requirements of a good rating system is to make the adequate
corporate disclosures and to publish all the essential information required by the
investors.
 Investor Education

Along with the task of rating a particular instrument, the rating agencies should also
ensure that such information should not only reach the investors, but they should enable

12
 investors to make meaningful interpretations also. The investors should also be aware of
the limitations of credit rating. Regulation should require the rating firms to provide
publicly detailed explanations about the nature of their opinions and pertinent
information used in the rating process in order to enhance the investor knowledge.

 Transparency and Soundness of Credit Rating Analysis:

There should be transparency in ratings process, including criteria and methodologies for
assigning and updating ratings, which would give investors critical information they need
to make informed decisions, to compare ratings, and to form their own opinions on the
soundness of an agency‘s analytics

 Existence of Active Debt Market:

An active primary and secondary debt market is crucial for rating agencies to continue to
provide their services.
2 IMPACT OF CREDIT RATING: POSITIVES Vs NEGATIVES

Credit ratings have a direct and dramatic impact on the bond market and various parties
related directly or indirectly to credit rating since credit rating is a source of reliable
information for many users as rated instruments speak themselves about the soundness of
the company and the strength of the instrument rated by the credit rating agency. As
suppliers, corporate bond issuers rely on credit ratings to ensure the best possible interest
rate for their securities; as consumers, bond investors depend on credit ratings to
determine the credit worthiness of companies in which they invest (Mansi and Baker,
2001). As both pros and cons always exist, so credit rating also has both positive and
negative impact on the related parties in the form of advantages and disadvantages as
discussed below

3 Advantages of Credit Rating

Ratings provide great advantages to issuers and investors. To the investors, it

communicates the relative ranking of the default loss probability for a given fixed income
investment in comparison to other instruments. To the issuers, it is a marketing tool
which provides greater access to a much wider investor base as compared to unrated

13
securities. As ‗name recognition‘is replaced by objective rating the lesser known
companies are also able to access the money market and capital market. The companies
have the advantage of mobilizing resources at low-coupon rate and easy market
accessibility of fund mobilization.

- Rating helps investor to compare the issues by providing them a short and clear guide.

- Fair, honest and impartial rating motivates the public to invest their savings in company
debentures, deposits, etc.

- Credit ratings are guide posts to investors. Thus, credit rating is beneficial to various
parties like issuers, investors, regulators, brokers and financial intermediates. They all
have lot to gain from credit rating.

Various benefits derived from credit rating by different parties include:

To Issuers:

The benefit of credit rating for issuers stems from the faith placed by the market on the
opinions of credit rating and widespread use of ratings as a guide for investment decision.
Credit rating facilitates the borrower company or the issuer of securities to mobilize
savings from a wider section of interested investing public at a lower cost for the highly
rated company and helps a lesser known company to have easy access to the capital
market.

1. Rating provides access to international pool of capital as it creates a tendency amongst

the rated corporate units to maintain higher corporate standards and to remain healthy in
the business environment. This creates better image of the business class of the country
as a whole in the international market.

2. Rating reduces the cost of borrowing for the companies as companies with high rating
can quote lesser interest rate on fixed deposits or debentures or bonds. The investors with
low risk preferences would like to invest in such safe securities.

3. The wider access to investor base and investing instruments increase the financial
flexibility of the company.

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4. Rating leads the companies to self-discipline as it

encourages them to come out with more disclosures about their accounting system,
financial reporting and management pattern. Further, in order to maintain the standard of
rating attained, the companies try to improve their existing practices to match the
competitive standards.

5. Rating facilitates best pricing and timing of issues.

6. The rating leads the companies to assess their own performance. It provides motivation
to the companies for growth as the promoters of the companies feel confident in their
own efforts and are encouraged to undertake expansion of their operations or new
projects.

7. Companies with rated instruments avail of the rating as a marketing tool to create
better image in dealings with their customers, lenders and creditors.

8. Credit rating provides recognition to some unknown or new issuers as investors invest
their money after considering the rating grade given to them rather than just by their
names. So, a relatively new issuer with good credit rating can have a strong standing in
the financial market.

Investors

A rating is one of the inputs that is used by investors to make an investment decision.
Rating exercise adds to the structure and system of trading market as the debt securities
can be classified according to the ratings so that the investors can weigh the ratings vis-à-
vis advantages of securities.

Various benefits available to the investors from credit rating include:

1. Credit rating gives superior information about the rated product and that too at low
cost, which the investor, otherwise, would not be able to get so easily. Thus, the investor
can easily recognize the risk involved and the expected advantage in the instrument by

15
looking at the symbols. This helps the investors to take calculated risk. With the help of
credit rating the investors can take quick decisions about the investment to be made in
any particular security of the company.

2. Credit rating reduces the dependence of investors on advice of financial intermediaries,

the stock brokers, merchant bankers, the portfolio managers or financial consultants
about the good investment proposals. As the rating symbol assigned to a particular
instrument suggests the credit worthiness of the instrument and indicates the degree of
risk involved in it. Thus, investors can make independent investment decisions.

3. Highly rated securities/instruments of the company give an assurance to the investors

of safety of the instrument, thus, this safeguard the investors against bankruptcy as highly
rated securities are considered as safe ones.

4 Credit rating is done by the highly qualified analysts of the agencies, who recognize all
the quantitative and qualitative variables of the company before assigning the rating.
Thus, credit rating gives the clue of credibility of the issuer company. It relieves the
investors from botheration of knowing about fundamentals of a company; as such rating
saves time and energy of investors.

5. As investors need not to see into the fundamentals of the companies, so with the help
of rating they can compare many instruments of various companies at a time and they can
make choice depending upon their own risk profile and diversification plan.

6. Investors can make the correct investment decisions after considering or evaluating the
rating of instruments, without just relying on the criteria of name recognition. As the
well-known or a prominent group‘s companies often go sick and investors‘funds
deposited with them are rendered unsafe.

7. After rating the instruments, the rating agencies are involved in the ongoing
surveillance of the instrument being rated. The rating agencies downgrade or upgrade the
instruments after considering the subsequent financial strength of the company whose
instrument is rated by it. This ongoing surveillance gives a great benefit to the investors
as they can change their investment decision accordingly.

16
8. Credit rating encourages the investors to invest in securities or instruments of
companies as rating gives them clear cut idea about the financial strength of the company
without putting any extra efforts. Thus, rating induces/encourages habit of saving among
investors.

9. The investing community is also benefited from the allied services provided by credit
rating agencies such as research in the form of industry reports, corporate reports,
seminars and open access to the analysis of agencies. Thus, credit rating helps the
investors in numerous ways by safeguarding their interests. According to US Credit
Rating Agency Standard and Poor‘s Credit ratings help investors by providing an easily
recognizable, simple tool that couples a possibly unknown issuer with an informative and
meaningful symbol of credit quality.

Brokers and Financial Intermediaries

The brokers and other financial intermediaries also gain benefits from credit rating as
through rated instruments these parties need to make less efforts in studying the
company‘s credit position to convince their clients to select a particular investment
proposal. The time, cost and energy of brokers and financial intermediaries is saved.

Regulators

Credit rating is also helpful to regulators as Rated securities bring improvement in capital
market and reflect upon its efficient functioning. With the help of the symbols assigned
to the rated company the regulators can differentiate between good and bad companies
without incurring any financial burden. Thus, this helps them to take timely action
against defaulted companies. The credit rating and the related detailed analysis by the
Credit Rating Agencies help in disseminating information to all, and thus, impart
transparency in the system, which is very helpful to small investors, who otherwise may
not have access to such information and who in turn may rely on regulators for such
transparency. Thus, this task of regulators of providing transparency to investors is done
by Credit Rating Agencies thereby making the regulators‘ task less onerous. Regulators
rely on credit rating for various other purposes also.

17
4 Disadvantages of Credit Rating
Despite various benefits to different parties including investors, issues or rated company,
etc. credit rating also has many disadvantages as the system relies heavily on expert
judgments and subjective information. So, there is difficulty in objectively comparing
and re-examining past credit assessments. Some of the drawbacks of credit rating are
stated below:
To Investors
1. Credit rating is given on the basis of past and present performance of the company and
once the rating is assigned to any instrument it is rarely revised. Thus, this rating exercise
is a static process and not beneficial for investors who rely on rating for their future
investment decision.
2. Credit rating is an indication and no full proof reliability of assessment as Issuer
Company might conceal material information from the investigating team of the credit
rating agency. In such cases, quality of rating suffers and renders the rating unreliable.
3. Owing to time and cost constraints, credit rating agencies are not able to capture all the
characteristics of an issuer and issue. This may lead to biased rating.
4. Rating is done for a particular instrument of the company and not the company as a
whole. Therefore, rating is no guarantee for the soundness of the company. But many
investors do not know this fact and they take high rating as a certificate of soundness of
the company and other instruments of the company, and therefore, they lose their money
sometimes.
5. The issuer companies have a choice to accept or not to accept rating; and only favorable
ratings are accepted by the companies and made public.
6. This misleads the investors if the rating given by one agency is not acceptable by the
company, they may go to other agencies to get their instruments rated. This is called
Rating shopping. In order to compete for clients, agencies will be tempted to hand out
more favorable ratings and to compete for lower fees for by lowering their research and
analysis cost .
7. The issuers are paymasters, thus, independence of ratings becomes questionable and the
issuers may influence the rating decision according to their own needs.

18
8. Further, credit rating agencies are not accountable for the ratings given by them. If they
do not work with high integrity and devotion, their ratings may mislead the investors.
Further, the issuer company‘s image may also be on stake due to this.
9. There is a possibility of confusion due to existence of many credit rating agencies, which
rate the same instrument differently. This difference in rating may be due to no common
rigid formula for rating with all agencies. Therefore, subjective bias in the area, viz.
management quality, asset quality, auditor‘s quality, accounting accuracy, etc. may arise
in credit ratings.
10. In western countries, the rating agencies undertake voluntary rating even if the issuer
company does not approach them. This unsolicited rating is primarily intended towards
protection of the interest of the common investors. However, this aspect is lacking in
India.
11. Time factor affects ratings, so sometimes misleading conclusions may be drawn as
particular company in certain industry may get low rating due to temporary adverse
condition of that particular industry, which may adversely affect the company‘s interest
and goodwill.
12. Sometimes rating agencies in order to attract business lure a corporate with a prospective
high rating. Subsequently, after 2-3 months, the rating is downgraded and the issuer does
not have any choice but to accept it.
13. Validity of rating ends with the maturity of a debt instrument and it no longer
subsequently benefits the issuer company, because a rating is valid for the life time of the
debt instrument being rated. Therefore, for a short period its validity amuses the investors
but over a long period it cannot escape uncertainty and doubts.
14. Another major controversy surrounding corporate ratings is rating agencies providing
consultancy services to the firms whom they rated.

5 HISTORICAL PARALLELS OF CREDIT RATING

• The World Scene
US has been the birth place of rating agencies as in the background of great financial
crisis in USA the need was felt to predict the ability of merchants and traders to pay their
financial obligations. In this context, one of the pioneer professional thinkers, Louis

19
Tappan established the first mercantile bank credit rating agency in New York in, which
rated the debt paying ability of the merchants. This mercantile rating agency was further
acquired by Robert Dun, and its first rating guide was published in. Another similar
agency was set up by John Bradstreet, a financial analyst, who published the analytical
work done by it in its rating book. The mercantile rating agency acquired by Robert Dun
and agency set up by John Bradstreet were merged together to form Dun & Bradstreet.
Corporate bond ratings were developed prior to World War-I in response to a
commercially viable need for independent and reliable judgment about the quality of
corporate bonds. As such John Moody founded Moody‘s Investors Service in US and in
published his Manual of Railroad Securities‘ with comments on 200 major railroad
companies by John Moody. Further, utility and industrial bonds were rated by the
Moody‘s followed by bonds issued by US cities and other municipalities in the early.
Moody‘s also assigned sovereign ratings to debt of various nations including Britain,
Italy, Japan, China, etc. Further, the Moody‘s started rating the debt of international
issues in 1950 by rating the Yankee bond issue of Canada and the World Bank. The
purpose of Moody‘s ratings is to provide the American investor with a simple system of
gradation by which the relative investment qualities of bonds may be noted. Gradations
of investment qualities are indicated by rating symbols representing a group in which the
quality of characteristics is broadly the same. Thus, Moody‘s was the first to use the
alphabetical symbols like A, and so on in the credit rating system which became the base
of modern credit rating. The Dun and Bradstreet which was formed, acquired the
Moody‘s Investor Services. Evidence of the application of credit rating to corporate
instruments. The manual reported financial and operating statistics covering several years
for most of the major American rail roads. After John Moody began his ratings of
railroad bond, the Poor‘s company also entered the bond rating business, by publishing
its first ratings. A new entrant in information and rating business by the name of Standard
Statistics Company also started its operations. The Poor‘s Publishing Company and
Standard Statistics Company merged together to form Standard and Poor‘s (S&P). The
credit rating agencies expanded, when John Moody introduced the concept exclusively
following financial institutions including banks, securities firms and finance companies.
Economic Journal rating agencies in Japan such as Japan Bond Research Institute, Japan

20
Credit Rating Agency, long and short-term debts of corporations, sovereign nations and
financial institutions, concept of credit rating but now with the development of capital
markets the world over, it is becoming a universal. Now there are credit rating agencies
operating in many other countries of the world also including Bangladesh, China,
Indonesia, Pakistan, Thailand, Australia.

 Origin and Growth in India

In India, the rating activities started with the incorporation of the Credit Rating
Information Services of India Ltd. (CRISIL) Industrial Credit and Investment
Corporation of India Ltd. (ICICI) and Unit Trust of India (UTI). Thus, India became the
first among the developing world to set up a credit rating agency. CRISIL has its
association with internationally recognized rating agency Standard and Poor‘s (S&P).
The second rating agency Investment Information and Credit Rating Agency of India Ltd.
(ICRA) was jointly sponsored by Industrial Finance Corporation of India (IFCI) and
other Financial Institutions and banks. ICRA is an associate of the International Rating
Agency Moody‘s Investors Services. The other rating agency, Credit Analysis and
Research Ltd. (CARE), is a credit rating information and advisory services company
promoted by Industrial Development Bank of India (IDBI) jointly with Canara Bank,
Unit Trust of India (UTI), private sector banks and financial services companies. . One
more rating agency, SME Rating Agency of India Limited (SMERA) which was a joint
venture of SIDBI, Credit Information Bureau of India Limited (CIBIL), first rating
agency that focuses primarily on Indian SME sector.

Table 1.1
Growth of Credit Rating Agencies
Country Credit Rating Agency
USA Mercantile Credit Agency
USA Moody‘s Investors Service
USA Poor Publishing Company
USA Standard Statistics Company
USA Fitch Publishing Company

21
 USA Dun & Bradstreet
USA Standard & Poor
USA McGraw-Hill
Canada Canadian Bond Rating Service
Canada Thomson Bank watch
Japan Japanese Bond Rating Institute
USA McCarthy Crisanti & Maffei
Canada Dominican Bond Rating Service
UK IBCA Limited
USA Duff & Phelps Credit Rating Company
India CRISIL
India ICRA
India CARE
India Duff & Phelps Credit Rating India (P) Limited
(Now Fitch Ratings India Private Ltd.)
India SME Rating Agency of India Limited (SMERA)
India Brickwork Ratings India Pvt. Ltd (BWR)

6 GLOBAL Scene

Credit rating agencies conduct business in numerous countries, and have a great impact
on the financial system across the globe. Thus in view of the critical role played by credit
rating agencies and their increased importance in the modern financial architecture the
International Organization of Securities Commission (IOSCO), the United States
Securities and Exchange Commission (SEC).

Table 1.2.

Asian Credit Rating Agencies which are Members of ACRA

22
Country Credit Rating Agency
China China Chengxin International Credit Rating Co., Ltd. (CCXI)
Dagong Global Credit Rating Co. Ltd. (Dagong) Shanghai Far
East Credit Rating Co. Ltd. (SFECR) Taiwan Ratings Corp.
(TRC), Taipei Shanghai Brilliance Credit Rating & Investors
Service Co. Ltd
India Brickwork Ratings India Pvt. Ltd.(BWR) Credit Analysis and 41
| P a g e Research Ltd.(CARE) CRISIL Ltd. ICRA Ltd.
Indonesia PEFINDO Credit Rating Indonesia (PEFINDO)
Japan Japan Credit Rating Agency Limited (JCR)
Pakistan JCR-VIS Credit Rating Co. Limited (JCR-VIS) Pakistan Credit
Rating Agency Limited (PACREDIT RATING AGENCY)
Thailand TRIS Rating Co. Limited (TRIS)

ACRA was formed to promote:

 Exchange of skills and ideas amongst Asian rating agencies,

 Promotion of best practices and norms of conduct among Asian rating agencies, and

 Development of financial markets in Asia.

ACRA has been active in bringing together rating agencies from across Asia for regular
interchange of experiences. It has been instrumental in arranging world-class training for
persons involved in the rating process in member agencies. A significant initiative
undertaken by the Best Practices Committee of ACRA was to create the ACRA Best
Practices Checklist. All Member Agencies are expected to declare their positions on each
of the items in the checklist. Moreover in India as SEBI administers the activities of
credit rating agencies with respect to their role in securities market only there are
different regulatory authorities connected to different instruments which require
mandatory rating for issuance of certain instruments. The list of various products, and the
relevant regulators are shown in

23
 Table 1.3.

Products / Instruments Requiring Mandatory Rating Before

Issuance

S. No. I Instrument Regulator

1 Public/Rights/Listed issue of bonds SEBI
2 IPO Grading SEBI
3. Capital protection-oriented funds SEBI
4 Collective Investment Schemes of plantation companies SEBI
5. Commercial Paper RBI
6 Bank loans RBI (Basel-II capital
computation for banks)
7. Security Receipts RBI (For NAV declaration)
8. Securitized instruments (Pass Through Certificates) RBI (Basel-II capital
computation for banks)
9 Fixed Deposits by NBFCs & HFCs RBI
10 LPG/SKO Rating Ministry of Petroleum and
Natural Gas
11 Maritime Grading Directorate General of
Shipping

As clear from the table, the regulators such as Reserve Bank of India (RBI), Ministry of
Petroleum, IRDA and Directorate General of Shipping have incorporated ratings into the
investment guidelines for the entities they regulate. It may be stated ay the end that in the
environment of uncertainty, bond ratings serve as an important source of information for
comparing and evaluating the credit worthiness of debt. Thus, credit rating‘is index
assigned by rating agencies as a measure of credit worthiness and default probability of a
company regarding its debt obligations. It is a professional opinion given after studying

24
all available information at a particular point of time. Credit Rating Agencies influence
investor behavior and regulate issuer‘s access to financial markets as thus, they act as
market. Nevertheless, rating is essentially an investor service and a rating agency is
expected to maintain the highest possible level of analytical competence and integrity.
So, in the long run, credit rating agencies have to build their credibility on the quality of
its services. And believe me, it‘s not clear sometimes who‘s more powerful.

25
CHAPTER –II

REVIEW OF

LITERATURE
LITERATURE REVIEW

Galil and soffer (2011) in this study, “Good News, Bad News and Rating Announcement.
An Empirical Investigation “, employed a new approach to test the contribution of
information in rating announcement .This was the first study to the test and corporate
how to CDS market response to rating action after the controlling the present of
concurrent public and private information. This study explain that since the clustering of
rating announcements characterized economically significant development the common
practice of using “uncontaminated samples underestimated market response.

Mohd (2011) in this study, performance of credit rating agencies in India. A perceptional
study of credit rating Agencies”. Focused on the assessment of overall performance of
rating agencies in India from the agencies point of view. The analysis of perception of
agencies had made it very clear that the role of rating agencies was prominent and
prospective in India.

Posch (2011) in his study , Time to change , rating changes and policy Implication “
explore the resent financial crisis that manifested the criticism another rating agencies of
being slow in adjusting their rating to current conditions this study examined the timeless
of rating changes and identified factors which result in stickiness of rating action.

Mariano (2012) in this research, “market power and reputational concerns in the rating
Industry “studied the incentive s of rating agencies to reveal the information n that they
obtained about their clients firms. In the model, rating agencies sought to maximizes their
reputation and protect their market power.

27
Schroeter (2013) in his study “credit Rating handbook of key Global Financial Market”.
Explored the characteristics of credit rating agencies and their credit rating The study
address possible object of credit rating, the business model of credit rating (including the
conflict of interest potentially resulting their form ) the functions of credit rating the
oligopolistic structure of the credit rating ,the oligopolistic structure of the credit rating
agencies market and the present legal regulation of credit rating agencies.

Innotta (2012) in their study, “Do Investor care about credit rating an analysis through the
cycle”, investigated how the credit cycle affect the link between the bond spared and
credit rating. Using a simple model of the credit the information content of rating
deteriorated crediting an incentive for the investor to increase the amount spent on private
information. The Researcher tested this hypothesis empirically

Christian (2012) in their study,” Rating agencies in the Face Of Regulation “. Have
Discussed rating issued by credit rating and dual role. The study was provided
information to investor and used to regular institutional investor the study showed that,
introducing rating contingents regulation that Favored highly rated securities may
increase or decrease rating in formativeness but unambiguously increase the volume of
highly rated securities.

Winnie (2013) in their study “Does having a Credit rating leave less money on the table
when raising capital? A study of credit rating & seasoned Equity offering in china “,
examined the impact of unsolicited credit rating on seasoned equity offering SEO
underpricing in china using issuer credit rating data of listed companies on the
shanghai and Shenzhen stock Exchange for the period 2002

28
Schorter in this study, “Rating and credit rating handbooks of key global financial market
“, explored the characteristic of credit rating and their credit ratings. The study addressed
possible objects of credit rating , the business model of credit rating agencies (
including the conflict of interest potentially resulting therefrom) the functions of credit
ratings and credit rating agencies , the oligopolistic structure of the credit rating agency
market , and the present legal regulation of credit rating agencies

29
 CHPTER NO –III

Research Methodology
 Research Methodology

3.1 objective of study:

(1) To understand the concept of credit rating.

(2) To examine and compare the rating symbols of Indian credit rating agencies.

(3) To study and compare the rating methodology, process and Indian credit rating
agencies.

3.2 Need and Importance of the study:

In this project different factor are compared. It includes rating process, Methodology
adopted by different credit rating , activity undertaken by different credit rating and
different research service, and type of instrument, symbols used for different instrument,
all this factor are compared .It will help to client to identify which is better, which
agencies provide different activity for rating . What is the process of credit righting and
methodology of project? All this thing will help client to take proper decision for credit
rating. Therefore, considering the importance of credit rating, different aspects of credit
rating need to be studied deeply so that it can be of mare help to the client.

3.3 Scope of the Study

The study focuses on the four SEBI recognized credit rating in India. The are:

1. CRISIL (Credit Rating Information Services of India Limited)

2. ICRA (Indian independent and professional investment information and credit rating
agencies.

31
 3. CARE (Cooperative for Assistance and Relief Everywhere)
4. FITCH (Fitch Ratings is an international credit rating agency New York City
and London. It was one of the three Nationally Recognized Statistical Rating
Organizations (NRSRO) designated by the U.S.

CRISIL, ICRA, CARE and FITCH. Only secondary data has been used for study. This
study will be useful for client to comparison of different credit.

3.4 Data Collection -

Only secondary data are used for this project

1. News papers
2. Magazines
3. Websites

3.5 Tools of Analysis

 Chart and diagrams in used to analysis the data

3.6 Limitations of the study

 Only secondary data used. Only secondary data are used for this project. It may
not show accurate information of credit rating.
 Not compare all factor of credit rating in this project only some of the factors are
compared. Not study on all factors.

32
 CHPTER NO –IV

Data Analysis & Interpretation

Data Analysis & Interpretation

4.1 CREDIT RATING IN INDIA

In the Indian context, the scope of credit rating in limited generally to debt commercial
paper, fixed deposits, mutual fund and late IPO’s as well. Therefore, it is the instrument,
which is rated, and not the company. In other words, credit quality is not general
evolution of issuing organization, i.e. if debt of company XYZ is rated AAA and debt of
company ABC is rated BBB, then is done not mean firm XYZ is better than firm ABC
.However, issuer company gets strength and credibility with the grade of rating awarded
to the credit instrument it intends to issue to the public to raise funds. Rating in a way,
reflect the issue’s strength and soundness of operation and management. It expresses
view on its prospective composite performance and the organization behavior based on
the study of past result.

Table no 4.1

CRAs registered with SEBI.

Name of the CRA Year of

commencement of
Operations
CRISIL 1988
ICRA 1991
CARE 1993
Fitch India 1996

33
CRISIL

4.2 Credit Rating Information Services of India Limited (CRISIL).

Has been promoted by Industrial Credit and Investment Corporation of India Ltd.
(ICICI) and Unit Trust od India Ltd . (UTT) as a public limited company with its
headquarters at Mumbai. CRISIL, incorporated in 1987, pioneered the concept of credit
rating in India and development the methodology for rating of debt on the context of
India’s financial, monetary and regulatory system. If was the first rating agency to rate
Commercial paper Program in 1989, debt instrument of financial institution and banks in
1992 and asset-backed securities in 1992.

4.3 CRISIL’s Rating Process

CRISIL’s Rating Processes in as given below:

1. Request of the company

2. Assignment to Analytical Team

3. Obtaining and Processing of Data

4. Findings Presentation

5. Communication of Decision

6. Monitoring of Change of Rating

34
4.4 ICRA

ICRA Limited (as Associate of Moody’s Investors Service) was incorporated in 1991 as
an independent and professional company. ICRA is a leading provider of investment
information and credit rating services in India. ICRA’s major shareholders include
Moody’s investors Service and leading India financial institution and banks. With the
growth and globalization of the Indian capital markets leading to an exponential surge in
demand for professional credit risk analysis, ICRA has been protective in widening its
service offerings, equity grating, specialized performance grading and mandated studies
spanning diverse industrial sectors.

4.5 ICRA’s Rating Process

The Rating Process Follows:

Rating Request

1. Rating Term

2. Information Requirement

3. Secondary Information

4. Management Meeting and Plant Visits

5. Preview Meeting:

6. Rating committee Meeting

7. Rating Communication

8. Rating Reviews

9. Surveillance

CARE

35
4.6 Credit Analysis & research ltd.(CARE)

Incorporated in 1993,is a credit rating, information and 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 ha 14 shareholders.

4.7 CARE’s Rating Process

The process involves:

1. Clint gives request for rating and submit information and details schedules;
2. CARE assigns rating team and team analyses the information;
3. The team interacts with the clients, undertakes site visits;
4. The clients interacted with the team respond to queries raised and provides any
additional data necessary for the analyses;
5. The team analyses the data submitted by the client and put up to internal
committee of CARE for preview analyses;
6. rating committee of CARE awards rating to the client;
7. client may ask for the review of the rating assigned and furnish additional
information for the purpose . client has the option not to accept the final rating in
which case will not publish the rating or monitor it; and, finally,
8. if the rating is accepted by the client , CARE gives it for notification and a
periodic surveillance is undertaken by CARE.

India

36
Ratings & research

A Fitch Group Company

4.8 FITCH RATINGS INDIA PRIVET LTD. (FITCH)

Fitch Rating India privet Ltd. Formerly Duff and Phelps Credit rating (DCR), was
established in 1996. Duff & Phelps India became wholly-owned subsidiary of FITCH
in November 2001. Fitch ratings” credit rating ability of an entity to meet financial
commitments, such as interest , preferred dividends, repayment of principal,
insurance claims or counterparty obligations. FITCH rates sovereigns, financial
institutions, insurance companies, corporates, municipalities, structured finance
obligation, etc. FITCH has been recognized by SEBI under the Securities &.
Exchange Board of India (Credit Rating Agencies) Regulation, 1999.

4.9 FITCH Rating process

1 Rating agreement signed.

2 Review of publicly available information.

3 Question send to issuer.

4. Management meeting.

5. Future analysis.

6. Credit committee presentation and draft report.

7. Rating committee Review and discussion.

37
 Table No 4.2

Methodology adopted

CRISIL ICRA CARE FITCH

 BUSINESS Industries And  Economic and  Past year rating

ANALYSIS characteristic Industrial risk methodology
 Regulatory Competitive  Business Risk  Past year rating
and Competitive position of issuer (competitor Financial data
environment Financial assignment)  Competitive
 Fundamental position of issuer  Instrument position of the
Analysis Operational Terms company
 Management efficiency Management  Forecast of
analysis Management assessment future performance
 Financial efficiency  Financial Risk  Analysis of
analysis Commitment of company’s
new project financial position
Funding polices and ability to
of the issuer generate cash

Analysis:

Every agencies has adopted different methodology for Rating Instruments.

CRISIL adopted Business analysis, Regulatory and competitive environment.

Fundamental analysis. CARE adopted economic and industry risk, financial risk. And
ICRA adopted industry characteristics, competitive position of issuer, management
efficacy, commitment to new project, funding policy of issuer.

38
 Table No. 4.3

Activities Undertaken

Activities CRICIL ICRA CARE FITCH

 Rating and Yes Yes Yes Yes
Grading
 Information Yes Yes Yes Yes
Advisory
Service
 Research Yes Yes Yes Yes
Services
 Business Yes Yes No No
Process
Outsourcing
 Information No Yes No No
Technology
Services

Analysis:

The table showing that all the agencies provide Rating and Grading Services.
Advisory service and CRICIL and ICRA provide the business process outsourcing.

39
 Table No 4.4

Research Services

Services CRICIL ICRA CARE FITCH

 Industrial Yes Yes Yes Yes
sector analysis
 Corporate Yes Yes Yes Yes
analysis
 Customized Yes Yes Yes No
Research
 Equity Yes No Yes No
Research

Analysis:

The Research related activities done by various agencies are highlighted in table. All
the agencies are engages in industry/sector and corporate analysis. Customized
research is done by CRICIL, ICRA and CARE. The customized research solutions are
meant to meet the specific requirement of particular companies and provide
information advantages to them. Equity research done by CRICIL and CARE only.

40
 Table No 4.5

Long term and medium term instruments.

Services Long Term Instruments

CRICIL Debenture, Bonds, preference share, Structure
obligation, Fixed deposit, Certificate of Deposit,
Loan.
ICRA Debenture, bonds, Preference share, LOAN,
Fixed Deposits, Certificate of Deposits and
loan.

CARE Non-convertible debenture, Bond, Fixed

deposit certificate of deposit, structure
obligation, convertible preference share,
non-convertible preference share, loan.
FITCH Debenture, bonds, loan, Fixed Deposit,
Certificate of Deposit.

41
 Table No 4.6

Short Term Instruments.

Services Short Term Instruments

CRICIL Commercial
l Paper Short Term deposit, Loan
ICRA Commercial Paper, Loan.

CARE Commercial Paper, Loan

FITCH Commercial Paper, Loan, Preference stock.

Analysis:

All Credit rating agencies provide rating on long term and medium term instrument.
In long term instrument CRISIL. Provide rating on debenture, Bonds Preference
share, structure obligation, fixed deposit, certificate of deposit, loan and ICRA
provide Rating on Debenture, Bonds, preference share, loan Fixed Deposit, certificate
of Deposit, loan. In short term Instrument CRICIL provide rating on commercial
paper, loan.

42
 Table No 4.7

Other Instruments.

Services Instruments

CRICIL IPO, Mutual Fund.

ICRA IPO, Mutual Fund.

CARE IPO, Mutual Fund.

FITCH IPO, Mutual Fund.

Analysis:

All agencies provided rating on same Instrument. I.e. IPO, Mutual Fund.

43
 Table No 4.8

Rating symbol of long term Instrument

CRICIL ICRA CARE FITCH Explanation

AAA LAAA CARE AAA (ind) Highest

AAA Safety

AA LAA CARE AA (ind) High Safety

AA
A LA CARE A A (ind) Adequate
Safety
BBB LBBB CARE BBB (ind) Moderate

BBB Safety

BB LBB CARE BB BB(ind) Inadequate

Safety
B LB CARE B B(ind) High Risk (
ICRA risk
prove
C LC CARE C C (ind) Substantial
risk (ICRA
poor credit
quality)
D LD CARE D D (ind) Default
(ICRA
lowest credit

Analysis

As depicted in table, for rating long debt instrument all the agencies using similar
basic symbols from AAA through D. In order Differentiate their symbol from one
another, the agencies use various prefixes/ suffixes: CRICIL used only the basic
symbol, ICRA uses prefix of letter “L” in every symbol. CARE uses prefix the Word
“CARE” in every symbol. Whereas FITCH used suffix “(ind)” in every symbol.

44
 Table No 4.9

Rating symbols for medium term Instruments

CRICIL ICRA CARE FITCH Explanation

FAAA MAAA CARE AAA tAAA(ind) Highest
(FD)/(CD)
Safety
FAA MAA CARE AA tAA(ind) High Safety
(FD)/(CD)
FA MA CARE tA(ind) Adequate
AA(FD)/(CD)
Safety
-- -- CARE -- Sufficient
BBB(FD)/(CD) (CARE only)
-- -- CARE -- Inadequate
BB(FD)/(CD)
Safety
FB MB CARE tB(ind) Inadequate
B(FD)/(CD)
Safety
(CARE
susceptible to
default)
FC MC CARE tC(ind) High Risk
C(FD)/(CD)
FD MD CARE tD(ind) Default
D(FD)/(CD)

Analysis

Table highlight that for rating medium term instrument the basic symbol used by
CRICIL, ICRA and FITCH are AAA, AA, A, BBB, BB, B, C & D. whereas CARES
symbol range through AAA, AA, A, BBB, BB, B, C & D. the letter “F” is prefixed by
CRICIL for rating fixed deposit of companies whereas for rating certificate of deposit the
letter “M” is used by ICRA as a prefix for rating medium term Instrument. CARE use as
the word “CARE” and the word “FD” and “CD” as a suffix for rating fixed deposits and
certificate of deposit respectively. FITCH uses the letter “t” as a prefix and “(ind)” as a
suffix for the rating all medium term instrument.

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 Table No 4.10

Rating Symbols for Short term Instrument

CRICIL ICRA CARE FITCH Explanation

P1 A1 PR1 F1(ind) Highest credit

quality/safety
P2 A2 PR2 F2(ind) Above average credit
quality/strong safety
P3 A3 PR3 F3(ind) Adequate credit
quality/safety
P4 A4 PR4 F4(ind) Risk prone/ highly
uncertain
P5 A5 PR5 F4(ind) Lowest Credit Quality
Default

Analysis:

As is evident from Table for rating Short Term instrument the basic parameter in the
form of a five- point. Sale ranging from 1 to 5 is similar for all the agencies but different
prefixes are used by all the agencies under the study as CRICIL uses letter “P”. ICRA
used the letter “A”. CARE uses PR and FITCH uses the suffix “(ind)”.

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 Table No 4.11

Rating Symbols used for Mutual Funds Grading

CRICIL ICRA CARE FITCH Explanation

AAAf mfAAA CARE AAA Minimum credit risk

AAAf (ind)
AAf mfAA CARE AA Very low credit risk
AAf (ind)

Af mfA CARE Af A (ind) Low credit risk

BBBf mfBBB CARE BBB Moderate credit risk

BBBf (ind)
BBf mfBB CARE BB(ind) High credit risk
BBf
Bf mfB CARE Bf B(ind) Very high credit risk

Cf mfC CARE Cf C (ind) Extremely Higher

credit risk

Analysis:

It is clear from table that for grading of mutual funds. Along with basic symbols ranging
from AAA through C.CRICIL uses suffix “f. ICRA uses prefix “mf”, CARE as well as
suffix “f”. Whereas FITCH uses suffix (ind) for the purpose.

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 Table No 4.12

IPO Grading symbols

CRICIL ICRA CARE FITCH Explanation

5/5 IPO CARE FITCH Strong fundamentals

Grade 5 IPO IPO of the issuer
Grade 5 Grade concerned
5(ind)
4/5 IPO CARE FITCH Above average
Grade 4 IPO IPO fundamental of the
Grade 4 Grade issuers concerned.
4(ind)
3/5 IPO CARE FITCH Average funding of
Grade 3 IPO IPO the issuer concerned
Grade 3 Grade
3(ind)
2/5 IPO CARE FITCH Below average
Grade 2 IPO IPO fundamentals of the
Grade 2 Grade issuer concern
2(ind)
1/5 IPO CARE FITCH Poor fundamentals of
Grade 1 IPO IPO the issuer concerned.
Grade 1 Grade
1(ind)

Analysis

Table reveals that the IPO grades are assigned on a five-point scale ranging from 5 to 1.
CRISIL uses the numerical symbol ranging from 5/5 (denoted as five on five) to 1/5
(denoted as one on five). ICRA “s 5- point IPO grade ranges from IPO Grade 5 to IPO
Grade 1 FITCH agency uses word “FITCH”. As prefix and “(ind)” as suffix to each
grade.

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 CHPTER NO –V

CONCLUSIONS
5.1 FINDING:

 Every credit rating agency has their own different process for rating instrument.
CRISIL HAS 6 STEP Process ICRA has 10 step process , Care has 8 step
process, Fitch has 7 step process for rating instrument
 Every Credit Rating Agency has their own Different Methodology for credit
rating i.e. CRISIL used finding analysis, fundamental analysis, management
analysis, Regulator competitive environment analysis Fitch used past rating year
methodology past year financial data etc.
 All the agencies are engaged in industry / sector and corporate analysis
customized research is done by CRICIL, ICRA and CARE.
 All agencies provided Rating & grading service, advisory services and research
services and research service only CRICIL and ICRA provided business process
outsourcing
 For rating long term debt instrument all the agencies used similar basic symbol
From AAA through D For rating medium term instrument the basic symbols used
by CRICIL ICRA and Fitch are AAA, AA,A, A,B C AND D whereas CARE’S
symbol range through AAA,AA,A,BBB, B ,C and D.
 For rating short term instrument, the basic parameter in the form of a five point
scale ranging from 1 to 5 is similar for all the agencies but different prefix used
by different agencies.
 For grading for mutual fund along with basic symbols ranging from AAA through
C, CRICIL used suffix, f” whereas FITCH used suffix (ind) for the purpose.

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5.2 CONCLUSION:

The rating agencies in India have to evolve their own methodologies, process and
symbols within the context of macro-economic environment. Every credit rating agency
have their own different process for rating instrument and their own different
methodology for credit rating. In research service all the industries are engaged in their
Industries/sector and corporate analysis. Customized research is done by CRICIL, ICRA
and CARE. All the agencies provide Rating and Grading services, advisory services and
research services. And for rating short term instruments, the basic parameter in the form
of a five point scale is similar for all the agencies but different prefixes are used by all the
agencies. And for rating long- term debt instrument all the agencies use similar basic
symbols. In order to different their symbols from one another, the agencies use various
prefixes/ suffixes.

5.3 SUGGESTION

CRISIL and ICRA are undertaking many different type of activity like Business Process
Outsourcing, information process. CARE and RITCH need to enter into different type of
activities. It will help to increase their competitive edge over it competitors.

Rating provided by FITCH for long term instrument are less as compared to CRISIL,
ICRA, CARE, FITCH has to provide rating for different credit rating instrument. So it
will help company to attract more clients, and gain more profit.

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Reference

 Chuan, D. and laere. E, (2012) A public Good Approach to credit rating forms
concept to reality (12thED). America, John wiley & sons.

 Lannotta, N.(2012) An. Annalysis through the cycle (5th ED). America,
Lawreence white.

 Posch. P, (2011) time to change, rating changes and policy implementation (9th
ED ). American. Economic behavior & organization.

 Winnie, H.(2013) A study of credit rating and seasoned Equity offering in India ,
(7th ED) pacific basin finance.

 Kumar, s. and Rao,s.(2012). Credit rating role in modern financial system (8th
ED) Mumbai, century publication

 Schroeter. G. (2013) rating and credit rating and credit rating agencies ,handbook
of key global financial market, institution and infrastructure ,(8th ED). America,
john wiley &sons.

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WEBSITES

 www.crisil.com
 www.care.org
 www.wikipEDia.org
 www.icra.in

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