Chapter 18

Credit Rating

 THEORETICAL FRAMEWORK CREDIT RATING AGENCIES RATING PROCESS AND METHODOLOGY RATING SYMBOLS/GRADES

THEORETICAL FRAMEWORK
Credit rating is essentially a symbolic indicator of the relative grading of the investment/credit qualities of financial instruments and reflects the relative ability of the issuers of such instruments to meet the servicing obligations as and when they arise. In other words, credit rating provides simple system of gradation by which the relative capacities of companies (borrowers) to make timely repayment of interest and principal on a particular type of debt can be noted.

It is neither a general purpose evaluation nor an over-all assessment of the credit risk associated with all the obligations of the issuers/corporates. A rating is specific to an instrument. It does not amount to any recommendations to buy, hold or sell an instrument.
Although it is an opinion expressed by an independent professional organization, on the basis of a detailed study of all relevant factors, the rating does not amount to any recommendation to buy, hold or sell an instrument as it does not take into consideration factors such as market prices, personal risk preference of an investor and other consideration which may influence an investment decision.
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 Benefits of credit rating :-

As a fee-based advisory financial service, credit-rating is obviously useful to investors, corporates(borrowers), banks and financial institutions.
For investors,
it is indicator expressing the underlying credit quality of an (debt) issue programme.
The investor is fully informed about the company as any effect of changes in business/economic conditions on the company is evaluated and published regularly by rating agencies.

For corporates(borrowers),
they can raise funds at a cheaper rate, with a good rating. It minimizes the role of name recognition and lesser known companies can also approach the market on the basis of their rating.

For banks and other financial institution,

Credit rating is useful to decide on lending and investment srategies.

Although credit rating has been a long established part of the financial mechanism abroad, it is of relatively importance in India also. The first rating agency, the Credit Rating Information Services of India ltd (CRISIL), was started in 1988. initially, it played a rather passive role, because institutional investor did not require the need of a rating agency. In the changed scenario where corporates are increasingly dependent on public, the removal of restrictions on interest rates and stipulation of mandatory credit rating of a number of instruments, since 1991, by Government/ SEBI, credit rating is now a days gaining more and more importance in debt/ financial market. In response to this increasing trend, two more agencies were set up, the Information and Credit Rating services(ICRA) ltd in 1990 and Credit Analysis and Research(CARE) ltd in 1993.
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 The first private sector credit rating institution was set up as a joint venture between JM financials, Alliance Group and international rating agency Duffs NS Phelps, in 1995, known as Phelps Credit rating India Ltd. It is now known as FITCh India ltd. SIDBI (Small industrial bank of India) launched in September 2005 in association with Small and medium enterprises Rating Agency (SMERA).

CREDIT RATING AGENCIES

There are four credit rating agencies in the country which rate corporate entities: CRISIL, ICRA, CARE, FITCH, and SMERA.

Regulatory framework
Credit rating agencies are regulated by SEBI. The main elements of its Credit Rating Agencies Regulations are:
(1) (2) (3) (4) (5) Their registration Their general obligations Restrictions on the rating of securities Procedure for inspection and investigation Action in case of default.

(1) Registration of credit rating agencies

Credit rating agency means a body corporate engaged in the business of rating securities. Registration with the SEBI is mandatory for carrying on the rating business. The application for grant of certificate of registration should made to the SEBI in Forn A with a non-refundable fee of Rs.50,000. Rating is defined by SEBI as an opinion regarding securities, expressed in the form of standard symbols/ in any standardized form, assigned by a credit rating agency. Promoters of CRA: A CRA can be promoted by a
(1) (2) (3) (4) (5) Public financial institution, defined in section 4-A of the companies Act Scheduled bank Foreign bank operating in India with RBI approval Foreign credit rating agency, having at least 5 years of experience Any company incorporated under companies act having continues net worth of a minimum Rs.100 crore as per its audited annual accounts for the previous 5 years prior to filing of the application with SEBI for registration.
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Eligibility criteria
The agency:
(1) (2) (3) (4) (5) (6) Is set up and registered as a company Has specified rating activity as one of its main objective in its Memorandum of Association Has adequate infrastructure Its promoters have professional competence Has employed person with adequate rating knowledge, experience as per SEBI requirements Applicant or its promoters, any director of the applicant or its promoters
(i) is not involved in any legal proceeding connected with the securities market that may have an adverse impact on the interest of the investors, (ii) Has not any time in the past been involved in mal pracices.

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Grant of certification of registration

The SEBI will grant to eligible applicants a certificate of registration on the payment of a fee of Rs. 20,00,000 subject to the conditions specified below:
(1) The CRA would obey with the provisions of the SEBI act/ regulations and guidelines/directions/circulars and instructions issued by the SEBI, from time to time, on the subject of credit rating (A) Where any information/ particulars furnished to the SEBI by a CRA, (i) is found to be false/ misleading in any material particular or (ii) has undergone change subsequent to its furnishing at the time of application, it would immediately inform SEBI in writing, and
(B) the certificate of registration is valid for 3 years, renewal fee of Rs. 10,00,000 each time.

(2)

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(2) General obligation

The general obligations of CRA are as: CODE OF CONDUCT: A CRA should:
Make all efforts to protect the interest of investors. Fulfill its obligation in prompt, ethical and professional manner. At all times exercise due carefulness, ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process. Not treat in any unfair competition nor should it wean(take) away the client of any other agency on assurance of higher rating. Disclose its rating methodology to clients, users and the public. Not make any blown up(over stated) statement, whether oral or written, to the client either about its qualifications or capability to render certain services or its achievements with regard to the services rendered to other client. Not make any untrue statement, suppress any material fact or make any misrepresentation in any document, report, papers or information furnished to the board, stock exchange or public large. Provide adequate freedom and powers to its compliance officer for the 13 effective discharge of his duty.

 Agreement with client:- The CRA should enter into a written

agreement with each client containing the following provisions :
a. b. c. d. Rights and liabilities of each party in respect of rating of securities, Fee to be charged, A periodic review of the rating during the tenure of the rated instruments, Disclosure by CRA to the client regarding the rating assigned to its securities through regular methods of distribution, irrespective of whether the rating is or is not accepted by him. e. Clients agreement to obtain a rating from at least two different CRAs for any issue of debt securities for Rs. 100 crore or more.

Monitoring of ratings :- The CRA should continuously monitor the rating of securities
rated by it during their lifetime. It should disseminate information regarding newly assigned ratings and changes in the earlier rating promptly through press release and websites, and incase of securities (debt) issued by listed companies, provide such information simultaneously to the respective regional stock exchange(s) and to all the stock exchanges where the securities are listed. 14

 Procedure for reviewing of rating:-

The CRA should carry out periodic reviews of all published rating during the lifetime of the securities. If client does not cooperate, so as to enable it to comply with its obligations relating to monitoring of rating, the CRA should carry out the review on the basis of the best available information and should disclose this fact to the investors. It cannot withdraw the rating services, except where the company is wound up/merged/amalgamated with another company. rating agency should a) Make public clear about the concerned rating, along with the symbol, b) Also state the rating do not constitute recommendation to buy, hold or sell any securities, and also provide the rationale behind the rating and the risk associated with it.

Disclosure of rating definitions and rationale:- SEBI The credit

Submission of information to the SEBI:- when ever any information

called for by the SEBI, CRA must furnish such information (a) within the specified period, (b) if no such time is specified, with in a reasonable period of time.

The CRA have to comply with SEBI guidelines, directions, circulars and instructions issued from time to time.
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 Maintenance of books of account and records :a) b) c) d) e) f)

every CRA has to maintain for a minimum period of five years, the following books of accounts and intimate to the SEBI.

A copy of balance sheet A copy of P&L account A copy of auditors report on its accounts A copy of agreement entered into with each client Information supplied by each of clients Rating assigned to various securities, including up gradation and down gradation (if any). g) Rating notes, considered by the rating committee, h) Record of decisions of the rating committee
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 Rating process:- The CRA should;

Specify the rating process, file a copy of the same with the SEBI Follow, in all cases, a proper rating process Have professional rating committees, comprising members who are adequate qualified and knowledgeable, to assign rating Inform the SEBI about new rating instruments or symbols introduced by it; The CRA should not rate securities issued by it;
Not change rating definition with out prior information to the SEBI;

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3) RESTRICTIONS ON RATING SECURITIES

Restrictions on rating by CRAs relate to securities issued by (i) promoters (ii) certain other entities (i) Securities issued by promoters :- A CRA is prohibited from rating securities issued by its promoters, who holds 10%, or more, of its share,
If promoter is a lending institution, its chairman/directors/ employess can not hold a similar position in the CRA or its rating committee. The independent director does not participate in the discussion in the rating decision

(ii)Securities issued by certain entities:the securities of any entity cannot be rated by a CRA if it is (a ) borrower of its promoters (b) a subsidiary of its promoters (c) an associate( having at least 10% of the share capital) of its promoters

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4) Procedure for inspection/investigation

The SEBI is empowered to appoint inspecting officer to undertake inspection/ investigation of the books of accounts/records/documents of the CRA
i. ii. To ascertain whether they are being maintained properly To ascertained whether the provisions of the SEBI act are being followed properly or not iii. To investigate into the complaints form investors iv. In the interest of the securities market/ investors

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5) Action in case of default

The CRAs that
a. b. Fail to comply with any condition, subject to which certificates of registration had been granted Break any of the provisions of the SEBI act/ any other regulation under the SEBI act, would be dealt with in the manner provided under the SEBI procedure for Holding Enquiry Officer and Imposing Penalty Regulation,2002

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CRISIL
CRISIL the first credit rating agency in India, the CRISIL was promoted in 1987 jointly by the ICICI Ltd & the Unit Trust of India. Other shareholder include the Asian Development Bank, Life Insurance Corporation of India, HDFC Ltd, GIC of India . It commence operation on January 1,1988. CRISIL did a strategic alliance with the Standard & Poor (S&P), newyork. In May 1997, S&P acquired stake in the CRISIL. Apart from the financial collaboration, the CRISIL, derives other benefits from this alliance, such as international experience, revamping (restoring) of operating systems, application of new methodologies and assistance to client companies in raising funds across the country.

Initially, the CRISIL was set up to rate Debt obligation that would guide investors as to the risk of timely payment of interest and principal. Over the years it has take shape the following main objectives:
To support both individual and institutional investors in making investment decisions in fixed interest securities; To facilitate companies to mobilize funds in large amounts from a wide investor base, at a fair cost. To facilitate intermediaries to place debt instruments with investors by providing them with an effective marketing tool To achieve these objectives, currently CRISIL perform the following functions : 1. Credit rating services 2. Advisory services 3. Creditability rating and evaluation services 4. Training services

CRISIL has three subsidiaries:

CRISInfac:- leader in research & information services business Global Data Services of India Ltd. :- provide reliable database and analysis of Indian corporates Information Solution Company Ltd (CRIS-RISC):- Capital market Research

CRISIL
CRISIL is the most important rating agency in the country. Its main business is rating services although it has diversified into information and advisory services. While it undertakes rating of mandated instruments, namely, debentures, deposits, commercial papers, LPG/kerosene dealers, its rating services also extend to preference shares, structured obligations, chit funds, real estate developers/builders, banks and states. The
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extensive compilation and analysis of data for rating business is also used by CRISIL to provide information services to corporate clients. It has leveraged its information base and expertise in credit rating to provide counseling to government, banks and financial institutions on aspects such as privatization of PSUs, debt securitization, credit evaluation and so on.

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ICRA
The ICRA Ltd has been promoted by the IFCI (Industrial Financial Corporation Of India) as the main promoter to meet requirements of companies based in the northern parts of the country Apart form the main promoter, which holds 26% of the share capital, the other shareholders are the Unit Trust of India, banks, LIC, GIC, EXIM BANK, HDFC LTD. It started operations in 1991. The main objectives of ICRA are :
To assist investors, both individual and institutional, in making decisions To facilitates issuers in raising funds, from large investors, in large amounts and at a lower cost for highly rated entities To enable banks, investment bankers, brokers in placing debt with investors by providing them marketing tool

Over the years, the ICRA has diversified the range of its services, It currently provides three services :
1. 2. 3. Rating services Information services Advisory services

ICRA
ICRA focuses on rating of instruments for which credit rating is mandatory, namely, debentures/ bonds, deposits, commercial papers, kerosene/LPG dealers. In addition, it rates banks. It has also ventured into EPRA (earning Prospects & Risk Analysis) for grading the primary market at the instance of the issuing companies and assessing the secondary market for the investors. It also provides credit assessment and general assessment services.
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Earnings Prospects & Risk Analysis(EPRA)

EPRA provides authentic information on the relative quality of equity shares in diverse corporate. The quality of equity of a company and the growth, stability and composition of its earnings is assessed by analyzing the underlying fundamentals that would affect its future performance over the medium-term. The EPRA includes (1) equity grading, (2) equity assessment Equity grading :The equity grading is done at the request of the prospective issuer, on receipt of required information from him, and culminates (ends) in an opinion from the ICRA, expressed symbolically as an equity grade. A team of analyst take up the work of collection of data and information from the books and records of the concern and meets with its executives management). After interacting with the management and analyzing the data, the analysts present their finding to a committee, which then decides on the relative equity grade of the issuer. The process generally takes three to four weeks from tie of receiving the required data from the management.

 The ICRA offers the issuer an opportunity to get itself analyzed confidentially and also and option regarding use of ICRAs grade. Once the issuer decides to use grade, the ICRA monitors the working of the company on a continuous basis. Based on the information provided by the company or collected by ICRA on its own, during the period, equity grade may be changed suitably. Equity Assessment The equity assessment process commence at the request of an investor and the consent of the company being assessed. The ICRA may or may not disclose the investors identity to the company depending upon the investors prefrence. The rest of the process is similar to the equity grading process, except that the end result is not in the form of a symbol but as an assessment report specific to the investors need and intended to be used by the investor only.

CARE(credit analysis and research limited)

The CARE is a credit rating and information services company promoted by the Industrial Development Bank of India (IDBI) jointly with financial institutions, public/private sector banks and private finance companies. It started its operation in 1993 and offers a wide range of products and services in the field of credit information and equity research. CARE offers following services :
1. 2. 3. 4. 5. Advisory services Information services Equity research Publications Other services

1. Advisory services :- The CARE provides advisory services in

Securitization transaction Structuring financial instruments Financing of infrastructure projects Municipal finances

2. Information services :- The objective of information services is to make available information on any company, industry or sector required by a business enterprise. 3. Equity Research :- Equity research involves an extensive study of the shares listed/to be listed in the major stock exchanges, and identification of the potential winners and losers among them, on the basis of fundamentals affecting the industry, market shares, management capabilities. 4. Publications :- The CAREs publications include (1) rating Reckoner:- updated on its accepted rating, (2) CAREVIEW :- a quarterly bulletin providing information on its rating. 5. Other services :- (1) CARE loan rating (2) credit analysis rating (3) interest rate structural model (4) performance rating of parallel marketers of LPG and kerosene oil, (5) rating of collective investment schemes of plantation,

 CARE loan rating (CLR) :- The CARE loan ratings are obligations on the ability and willingness of a borrower to make timely payments on the specific loan obligation, over its life. Commercial banks, whose traditional strong point has been working capital lending, are increasingly moving into term financing, while DFIs (Development Financial Institutions), are moving into working capital financing. In this context, the CLR is aimed at providing a valuable input in assisting the decision making process in banks and DFIs. So, banks and DFIs often use credit rating on debt securities or fixed deposits as an indicator of the issuers ability to honor its obligations on loans. CLR fulfils following purposes of banks and institutions :
1. Assessing the creditworthiness of borrowers. 2. Determining the premium to be charged 3. Making quick credit decisions.

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 Credit Analysis Rating(CAR)/ credit assessment :- credit analysis rating are useful for those business entities which need funds from banks/financial institutions/NBFC and so on. It indicates the overall debt management capability of entity. The assessment indicates the opinion of the CARE on the entitys capability to make timely payments of interest and principal on its debt obligations.

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CARE
CARE confines to normal rating business only and has not diversified its operations. The instruments credit-rated by CARE are debentures, deposits, commercial papers and structured obligations. It also undertakes general credit analysis of companies for the use of banks, other lenders and business enterprises.

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FITCH rating India Itd.

It is a joint venture between the international credit rating agency Duff and Phelps and JM financial and Alliance group. In addition to the debt instrument it also rates companies and countries on the request.

SMERA(small and medium enterprises Rating Agency

it is latest entrant in the credit rating business. It has been launched by SIDBI in association with several banks to focus on rating small and medium enterprise. It has commenced operation only recently.

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Rating Process/Methodology
Procedurally, credit rating is done in India at the request of the issuers of the instruments. Unsolicited rating at the initiative of the rating agencies has still not emerged. The clients have, moreover, the option not to accept the ratings.

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Rating is a search for fundamentals and the possibilities of change in these in the long-term. All the credit agencies follow broadly the same analytical framework of rating methodology. It comprises of three broad sets of factors: (i) business analysis in terms of analysis of industry risk, market position, operating efficiency and legal position; (ii) financial analysis on the basis of consideration of accounting quality, earnings protection, adequacy of cash flows and financial flexibility and (iii) management
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evaluation. 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.

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Rating process and methodology3

The process/ procedure followed and the methodology used generally by CRAs in respect of mandated and other instruments are briefly outlined in this section. Rating process/ procedure All four rating agencies in the country adopts a similar rating process. The steps followed by them are 1) rating of new issues/instruments (2) review of rating (3) flow chart of rating.
Rating agreement and assignment of analytical team:- the rating process starts with the issue of the rating request letter by the issuer of the instrument and signing of the rating agreement. On receipt of the request, the CRA assigns an analytical team, comprising two/ more analysts, one of whom would be lead analyst. Meeting with management :- prior to meeting with the issuer, the analytical team obtains and analyses information relating to its financial statements, cash flow projections and other relevant information like:
Annual reports for the past five years and short-term reports for past three years

1. Rating process of new issues :- the following steps are involved,

 2.

3.

Two copies of latest prospectus offering statements and applications for listing on any major stock exchanges. Consolidated financial statements for the past three fiscal years. Two copies of the statements of projected sources and application of funds, balance sheets and operating statements for at least three years. List of banks, showing lines of credit and contact officers for each, Rating committee - After meeting with management, the analysts present their report to a rating committee, which then decides on the rating. The rating committee meeting is the only aspect of the prospect in which the issuer does not participate directly. The rating is arrived at after a composite assessment if all the factors concerning the issuer. Communication to the issuer:- After the committee has assigned the rating, the rating decision is communicated to the issuer, with the reasons or rationale supporting the rating. Rating to have value, thoroughness and transparency of its rating methodology and the integrity and fairness of its approach are important factors in establishing and maintaining credibility. The rating process, form the initial management meeting to the assignment of the rating, normally takes three to four weeks. However, when required, the CRA deliver the rating decision in shorter time frames.

4.

1.

2.

Dissemination to the public - Once the issuer accepts the rating, the CRAs disseminate it, along with the rationale, through the print media. Rating review for possible change :In case of rated instrument, the rated company is on the observation system of the CRA, and from time to time, the earlier rating is reviewed. The CRA constantly monitors all rating with reference to new political, Economic and financial developments and industry trends. New data of the company :- Analysts review the new information or data available on the company, which might be sent by the company or might have been procured through new channels. Rating change :- On the basis of the analysis of the new data, if the analysts feel that there is a possibility for changing the rating, then the analysts request the issuer for a meeting with its management and proceed with a comprehensive rating analysis.

Rating methodology The rating methodology involves an analysis of the industry risk, issuers business and financial risks. A rating is assigned after assessing all the factors that could affect the credit worthiness of the entity. Typically, the industry risk assessment sets the stage for analyzing more specific company risk. In other words, industry risk sets the ground for analyzing the company risks. For instance, if the industry is highly competitive, careful assessment of the issuers market position is stressed. If company has large capital requirement, examination of cash flow adequacy is importance. Both quantitative and qualitative criteria are taken in to consideration in evaluating and monitoring the rating. The methodology is illustrated below with reference to (1) manufacturing companies and (2) financial services companies.

For manufacturing companies

The main elements for manufacturing companies are : 1. Business risk analysis :- The rating analysis begins with an assessment
of the companys environment, focusing on the industry prospects, pattern of business cycles as well as the competitive factors affecting the industry. (i) Industry risk :- nature and basis of competition, key success factors, demand and supply position, structure of industry, cyclical/ seasonal factors, government policies and so on. (ii) Market position of the company within the industry :- Market share, competitive advantages, selling and distribution arrangements, product and customer diversity and so on. (iii) Operating efficiency of the borrowing company :- Locational advantages, labour relationship, cost structure, technological advantages and manufacturing efficiency. (iv) Legal position :- Terms of the issue document/prospectus, trustees and their responsibilities, systems for timely payment and for protection against fraud/ forgery and so on.

2. Financial risk analysis :- After evaluating the issuers competitive position and operating environment, the analysts proceed to analyzed the financial strength of the issuer. Financial risk can be analyzed through financial ratios, past financial performance is also important in the financial analysis. Emphasis is also laid on an analysis of cash flow patterns, as it provides a better indicator of the issuers debt serving capability, compared to reported earnings. 3. Management Risk :- A proper assessment of debt protection levels requires an evaluation of the management philosophies and its strategies. The analysts compares the companys business strategies and financial plans to provide insights into a managements abilities with respect to forecasting and implementing of plans.

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Financial services sector

When rating debt instrument of financial institutions, banks and nonbanking finance companies the assessment also lays emphasis on the following factors : 1. Regulatory and competitive environment
1. 2. 1. 2. 3. 4. 5. 6. Structure and regulatory framework of the financial system Trends in regulation/deregulation and their impact on the company/institution. Capital adequacy Resources Asset quality Liquidity management Profitability and financial position Interest and tax sensitivity

2. Fundamental analysis :- fundamental analysis should include :

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Rating Symbols
The technique of credit rating is rating symbols. They group together similar entities in terms of their relative capacity of timely servicing of obligations as per the terms of the contract. The suffixes plus (+) or minus () are added to the symbols to indicate the relative position of the instrument within the group covered by the symbol. Appropriate prefixes and suffixes such as
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(FD)/(CD)/Pf/SO/L/F/M/P/A/PR are used to denote specific instruments such as fixed/certificates of deposits, preference shares, long-term, medium term, commercial paper and so on. The rating of LPG/Kerosene dealers is expressed as good, satisfactory, low risk and high risk. The credit assessment symbols are numerals ranging between 1-14, while the credit analysis has five ranges between 1-5. Crisil uses five-bold classification as in the case of debentures with the word CHIT as a prefix for chit funds andPA for builders. The grading the primary 47 market by ICRA is classified into four broad

categories in descending order of earnings prospects. Each group has three sub-grades correlated with the degree of risk as a result of changes in economic and business conditions, the letters (ER) added as a prefix to each grade. The opinion of Icra is not expressed in terms of symbols but in terms of a report specific to the needs of the investor in the case of assessment of secondary markets. Similarly, the ratings of the banks and states are also submitted as reports rather than symbols.
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CRISIL Rating Symbols

The rating symbols of the CRISIL are illustrated with reference (1) debentures, (2) fixed deposits, (3) short-term instruments (commercial papers), (4) credit assessment, (5) structured obligations, (6) bond funds, (7) bank loans (8) collective investment schemes, (9) Indian states, (10) chit funds and (11) real estate developers/builders. Debentures The rating of debentures is mandatory. The CRISIL assigns an alpha based rating scale to rupee denominated debentures. It categorises them into three grades namely, high investment, investment and speculatives. High Investment Grade High investment includes: AAA - (Triple A) Highest Security The debentures rated AAA are judged to offer the highest safety against timely payment of interest and principal. Though 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. AA - (Double A) High Safety The debentures rated AA are judged to offer high safety against timely payment of interest and principal. They differ in safety from AAA issues only marginally. Investment Grades Investment grades are divided into:

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A- Adequate Safety The debentures rated A are judged to offer adequate safety against timely payment of interest and principal; however, changes in circumstances can adversely affect such issues more than those in the higher rated categories. BBB- (Triple B) Moderate Safety The debentures rated BBB are judged to offer sufficient safety against timely payment of interest and principal, for the 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. Speculative Grades Speculative grades comprise: BB- (Double B) Inadequate Safety The debentures rated BB are judged to carry inadequate safety of the timely payment of interest and principal. While 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. B- High Risk The debentures rated B are judged to have greater susceptibility to default. While 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. C- Substantial Risk The debentures rated C are judged to have factors present that make them vulnerable to default; timely payment of interest and principal is possible only if favourable circumstances continue.
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D- Default The debentures rated D are in default and in arrears of interest or principal payments or are expected to default on maturity. Such debentures are extremely speculative and returns from these debentures may be realised only on reorganisation or liquidation. Note: (1) The CRISI may apply + (plus) or (minus) signs for ratings from AA to C to reflect comparative standing within the category. The contents within parentheses are a guide to the pronunciation of the rating symbols. Preference shares rating symbols are identical to debenture rating symbols except that the letters pf are prefixed to the rating symbols for example pf AAA (pf Triple A).
Fixed Deposits The fixed deposits are divided into six broad groups. The + (plus)/ (minus) signs may be applied for ratings from grade two to grade six to reflect comparative standing within the grade/category. The symbols and their implications are described below. FAAA-(F-Triple A) Highest Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. FAA-(F-Double A) High Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. However, the relative degree of safety is not as high as for the fixed deposits with FAAA rating.

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FA-Adequate Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. Changes in circumstances can affect such deposits more than those in the higher-rated categories. FB-Inadequate Safety This rating indicates inadequate safety of timely payment of interest and principal. Such 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. FC-High Risk This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such deposits have factors at present that make them vulnerable to default; adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. FD-Default This rating indicates that the deposits are either in default or expected to be in default upon maturity. Short-Term Instruments Such instruments include commercial papers. Their rating is also mandatory. The CRISIL grades them into five broad groups, as listed below.

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P-1 (Highest Safety) This rating indicates that the degree of safety, regarding timely payment of the instrument, is very strong. P-2 (High Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is strong; however, the relative degree of safety is lower than that for instruments rated P-l. P-3 (Adequate Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is adequate; however, the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories. P-4 (Inadequate Safety) This 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-term adversity or less favourable conditions. P-5 (Default) This rating indicates that the instrument is expected to be in default upon maturity or is in default. The CRISIL may apply + (plus) sign for ratings from P-l to P-3 to reflect a comparatively higher standing within the category. Credit Assessment The assessment indicates the CRISILs 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. It indicates credit assessment symbols (as distinct from credit rating symbols) by numerals ranging from 1 to 14, detailed below, which roughly correspond to the medium-term instruments rating symbols.
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1-Very Strong Capacity This indicates that the capacity for timely payment of interest and principal is very strong. 2, 3, 4 Strong Capacity This indicates that the capacity for timely payment of interest and principal is strong. However, the capacity is not as strong as for borrowers with a credit assessment of 1. 5, 6, 7 Adequate Capacity This indicates that the capacity for timely payment of interest and principal is satisfactory. Changes in circumstances can affect the capacity of the borrower, more than those in the stronger credit assessment categories. 8, 9, 10 Inadequate Capacity This indicates inadequate capacity for timely payment of interest and principal. Such 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. 11, 12, 13 Poor Capacity This indicates that the capacity for timely payment of interest and principal is doubtful. At present, such borrowers face circumstances that make them vulnerable to default; adverse business or economic conditions would lead to a lack of capacity to pay interest or principal. 14 Default This indicates that the borrower is either in default or is expected to be in default upon the maturity of the debt.
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Structured Obligations The structured obligations ratings are based on the same scale (AAA through D) as ratings for long-term instruments. However, reflecting the distinction of structured obligations from a debt instrument, the rating symbols are defined differently. Grades are classified into (1) high investment, (2) investment and (3) speculative. High Investment Grades These grades comprise: AAA(SO) Highest Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. Any adverse changes in circumstances are most unlikely to affect payments on the instruments. AA(SO) High Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. This differs only marginally in safety from AAA(SO) instruments. Investment Grades Investment grades include: A(SO) Adequate Safety This rating indicates adequate degree of certainty regarding timely payment of financial obligations on the instrument. Changes in circumstances can adversely affect such instruments more than those in the higher-rated categories.

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BBB(SO) Moderate Safety This rating indicates a moderate degree of certainty regarding timely payment of financial obligations on the instrument. However, changing circumstances are more likely to lead to a weakened capacity to meet financial obligations than for instruments in higher-rated categories. Speculative Grades Speculative grades consist of: BB(SO) Inadequate Safety This rating indicates an inadequate degree of certainty regarding timely payment of financial obligations on the instrument. Such instruments are less susceptible to default than instruments rated below this category. B(SO) High Risk This rating indicates high risk and greater susceptibility to default. Any adverse business or economic conditions would lead to a lack of capability or willingness to meet financial obligations on time. C(SO) Substantial Risk This rating indicates that the degree of certainty regarding timely payment of financial obligations is doubtful unless circumstances are favourable. D(SO) Default This rating indicates that the obliger is in default or expected to default. Note: The CRISIL may apply + (plus) or (minus) signs for ratings from AA(SO) to C(SO) to reflect comparative standing within the category.

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Bond Funds The rating symbols and their interpretation are as follows: AAAf The funds portfolio holdings provide very strong protection against losses from credit defaults. AAf The funds portfolio holdings provide strong protection against losses from credit defaults. Af The funds portfolio holdings provide adequate protection against losses from credit defaults. BBBf The funds portfolio holdings provide moderate protection against losses from credit defaults. BBf The funds portfolio holdings provide inadequate protection against losses from credit defaults. Cf The funds portfolio holdings have factors present that make them vulnerable to credit defaults. Bank Loan Ratings (BLRs) The BLRs and their interpretation are given below. BLR-l A strong likelihood of repayment of interest and principal on the bank loan. BLR-2 A good likelihood of repayment of interest and principal on the bank loan. BLR-3 A satisfactory likelihood of repayment of interest and principal on the bank loan.
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BLR-4 A moderate likelihood of repayment of interest and principal on the bank loan. BLR-5 Sub-standard; vulnerability to loss. BLR-6 Loss; high likelihood of loss. Collective Investment Schemes The CRISIL has developed a framework for the rating of collective investment schemes of plantations and other companies. The 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. The rating is not a comment on the quality of the produce or the monetary value that all the investors will get from the produce. The methodology broadly assesses the scheme-related risk factors as well as promoter-related risk factors. Under each of these, the CRISIL has identified factors that it believes, would have impact on the degree of certainty of the scheme providing an assured return to the investor. These factors are crystallised into a composite rating expressed in the form of grades. The symbols divide them into five grades, as detailed below: Grade I (High Certainty) This rating indicates high certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Grade II (Adequate Certainty) This rating indicates adequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash.
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Grade III (Moderate Certainty) This indicates moderate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Grade IV (Inadequate Certainty) This rating indicates inadequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Risk factors for the scheme are high and the scheme is prone to default. Grade V (High Uncertainty) This rating indicates high uncertainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Risk factors for the scheme are extremely high expectation of default on obligations.

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Rating of Chit Funds The CRISIL 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. Such rating is, however, not mandatory. The purpose of the rating of chit funds is to assess their ability to make timely payment of the prize money to the subscribers. It also reflects the relative degree of risk associated with subscription to the chit series floated by chit 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. The rating process and methodology is the same as in the case of mandated instruments. The rating symbols and their broad interpretations are listed below. Investment Grade: CHIT AAA-Very High Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is very strong. CHIT AA+/CHIT AA/CHIT AA-High Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is strong. CHIT A+/CHIT A/CHIT A-Adequate Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is satisfactory.

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Speculative Grade: CHIT B+/CHIT B/CHIT B- Inadequate Safety This rating indicates inadequate safety of timely payment to subscribers. While 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. CHIT C+/CHIT C/CHIT C-High Risk This rating indicates that the degree of safety regarding timely payment to the subscriber is doubtful. Such chit funds have factors at present which make them vulnerable to default; adverse business conditions would lead to lack of ability or willingness to pay subscribers. CHIT D Default This indicates that the chit fund is either in default or is expected to be in default. Rating of Real Estate Developers/Builders The CRISIL undertakes rating of real estate projects. The rating pertains to a particular project and not to the company as a whole. Only projects with an approved plan and planning permit from the appropriate local authorities are considered for a rating. Methodology The CRISIL 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. The ratings are based on current information provided to the CRISIL. The considered factors are: (i) project risk analysis and (ii) developer risk analysis.
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Project Risk Analysis The 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. The analysis of quality takes into account the specifications agreed upon by the developer and the buyers. Developer Risk Analysis The 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. The key documents for scrutiny at the time of rating are: Registered sale deeds for all transfers over the past 30 years or from the time a clear proof of title is established; A report on the title, from a reputed legal firm/lawyer or from the appropriate authority; Copy of the sanctioned plan, together with commencement and completion certificates, as applicable; Copies/formats of all agreements between the developer and the buyer(s); Receipts of all municipal and government rates, duties and taxes in respect of the property paid to date; Exemption order under the Urban Land Ceiling Act, 1976, from a competent authority, if applicable and Clearance certificate under the Income Tax Act.
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Rating Symbols The rating of builders is not mandatory. The CRISIL, however, rates them as a part of its diversification strategy. It uses the prefix (PA) to the rating symbols to indicate the project development ability of the developer. The rating symbols it uses and their interpretation are indicated below. PA1 Highest Ability Projects rated PA1 indicate the highest ability of the developer to specify and build to the agreed quality levels, and transfer clear titles within stipulated time schedules. PA2 High Ability The developers ability to build the project to specified quality levels and time schedules and transfer clear title is high. Project risks are marginally higher in this category as compared to projects in the PA1 category. PA3 Adequate Ability Adequate ability of the developer to build to reasonable quality levels and time schedules and transfer clear title for the present. However, changing circumstances are likely to adversely affect these projects more than those in the higher rated categories. PA4 Inadequate Ability The developers ability to build to specified quality levels and adhere to time schedules is inadequate. Uncertainties facing the project could result in inability and/or unwillingness to complete projects. PA5 Inability Projects rated PA5 indicate the inability of the developer to complete projects or transfer clear titles. Note: The CRISIL may apply + (plus) sign for ratings PA1 to PA3 to reflect comparative standing within the category.
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