Credit Rating

• Presented By:-
– Pratik Patel
– Jay Jariwala
– Taral Patel
– Sanjay Patel
– Ajay Hariyani
 Introduction

• Financial markets play the role of efficient intermediary.

• Link between savers and investors, mobilizing capital on one hand,

and efficiently allocating them between competing users to the
other hand.

• To this an investor can also base the investment decision on the

grading offered by credit rating agencies.
 Concept of Credit Rating
• A credit rating is a measure used by creditors to determine how
much they can trust a certain borrower, whether the borrower is an
individual, a corporation, or a country. The credit rating is derived
using past financial data or the borrower’s credit history.

• Factors that affect credit rating:

– The person’s ability to pay a loan
– The amount of credit in existence
– Credit history
 Credit Rating Meaning
• Credit rating is an indicator that reflects how well or badly
individuals and corporations manage their financial matters.
• There are several credit bureaus that compile this kind of
information and later on sale it to their clients.
• According to CRISIL, “credit rating is an unbiased and independent
opinion as to issuer’s capacity to meet its financial obligations. It
does not constitute a recommendation to buy/sell or hold a
particular security.”
• According to ICRA,” Ratings are opinion on the relative capacity of
timely servicing of corporate debt and obligations. These are not
recommendations to buy or sell neither the accuracy nor the
completeness of the information is guaranteed.”
 Origin of Credit Rating
• The credit rating concept originated in USA.
• In 1860, Henry Vannum poor started publishing financial statics of railroad
companies.
• In 1909, Moody’s investor agencies started rating railroad giving more
thrust to concept. Since then importance has grown extensively in the
global market. System of ratings got institutionalised following the great
depression.
• In 1933, the US controller of currency enacted a rule that banks could
purchase the securities rated only BBB/BAA or above.
• In 1970, penn central, the largest railroad company in the world went
bankrupt with just under $100 million in outstanding commercial paper.
This forced investors to ask for rating for commercial paper.
• Consequently, today, almost 100% of the commercial paper volume and
99% of the corporate bond are rated in U.S.A.
 Features of Credit Rating
• Specificity.
• Relativity.
• Guidance.
• Not a Recommendation.
• Broad Parameters.
• No Guarantee.
• Quantitative and Qualitative.
 Benefits of Credit Rating
• Low cost information
• Quick investment Decision
• Independent Investment Decision
• Investors protection
 Benefits to Rated companies
• Source of additional certification
• Increase the investors population
• Forewarns risks
• Encourages financial discipline
• Merchant bankers job made easy
• Foreign collaborations made easy
• Benefits the industry as a whole
• Low cost of borrowing
• Rating as a marketing tool
 Limitations of Credit Rating in
India
• The credibility of rating is questionable. For e.g. CARE gave the
highest rating to CRB Capital, which failed.
• A frequent revision of grading by credit agencies, that is sometimes
upgrading and sometimes downgrading, creates a confusion among
investors questioning again the credibility of the expertise of rating
agencies.
 The ratings done by credit rating agencies are not accepted by the
clients. This has led to a competitive relaxation of the eating
standards by credit rating agencies. It should be mandatory to
obtain at least two ratings as risk perception of rating agencies
differ. Both the rating should be mandatory published in the
prospectus, advertisements, and newspapers.
 Cont…
 The rating agencies do not perform an audit but rely solely on
information provided by the issuer. If the information provided is
inaccurate and incomplete , the rating process is compromised.
 Often a credit rating agency high rating to one instrument of a particular
company on the one hand and on the other, frequently downgrades the
rating of another instrument of the same company.
 Rating agencies often fail to correctly predict a borrower’s financial
health in the short term. The latest case is the non-convertible debenture
(NCD) issue of BPL which was downgraded by CRISIL from A to D in
one stroke. In other words, CRISIL downgraded the instrument by 12
stages. The investor, who depends on these ratings, is not given any
warning by rating agencies to wind down his investment in time.
 Credit Score
• Credit score is a number which lenders use to assess the
risk of extending credit to the borrower.
• The FICO score is developed by Fair Isaac Corporation
and based on credit files maintained by consumer credit
reporting agencies.
• It is widely used by banks, credit unions, insurance
agencies, financing companies and other lenders
 FICO Score
• 760-850 -EXCELLENT
• 700-759 -VERY GOOD
• 660-699 -GOOD
• 687 -AVERAGE FICO SCORE
• 620-659 -NOT GOOD
• 580-619 -POOR
• 500-579 -VERY POOR
 Tips to improve and maintain a
good credit score
• If the persons who are managing the clients’
financial matters are cautious enough to pay all
the bills on time, they are doing the best thing to
achieve higher credit rating.
• If they make payments late, not only it adversely
affects their company's credit rating but also the
added interest makes their organization
indebted for a longer period of time.
 Introduction of
Credit Rating Agency
• Credit Rating Agency means any “commercial concern
engaged in the business of credit rating of any debt
obligation or of any project or programme requiring
finance, whether in the form of debt or otherwise, and
includes credit rating of any financial obligation,
instrument or security, which has the purpose of
providing a potential investor or any other person any
information pertaining to the relative safety of timely
payment of interest or principal.”
 SEBI Guidelines for Credit Rating
Agency
• The Credit Rating Agency is set up and registered as a company
under the Companies Act, 1956.
• It has in its Memorandum of Association, specified rating activity as
one of its main objects.
• It has a minimum net worth of rupees five cr.
• It has adequate infrastructure.
• Its promoters have professional competence, financial soundness
and a general reputation of fairness and integrity in business
transactions to the satisfaction of the SEBI.
• The promoters or any director of the CRA is not involved in any
legal proceeding connected with the securities market, which may
have an adverse impact on the interests of the investors.
• It has employed persons with adequate professional and other
relevant experience, as per the SEBI directions.
• Neither the applicant, nor any person directly or indirectly
connected with the applicant has in the past been –
• (i) Refused by the SEBI or
• (ii) Subjected to any proceedings for a contravention of the Act or of
any rules or regulations made under the Act.
• The applicant, in all other respects, is a fit and proper person for the
grant of certificate. Grant of certificate to the applicant is in the
interest of investors and the securities market.
• No CRAs shall rate a security issued by its promoters.
• SEBI has decided to incorporate a clause in the listing
agreement of stock exchanges requiring companies to
cooperate with agencies by providing correct
information. Refusal to do so may lead to breach of
contract between rating agencies and client.
• Period of validity of the registration shall be 3 years.
 
Growth of Credit Rating Agencies
• 1841- Mercantile Credit Agency (USA)
• 1900- Moody’s Investors Services (USA)
• 1916- Poor Publishing Company (USA)
• 1922- Standard Statistics Company (USA)
• 1924- Pitch Publishing Company (USA)
• 1941- Standard and Poor (USA)
• 1074- Thomson Bank Watch (USA)
• 1975- Japanese Bond Rating Institution (JAPAN)
• 1987- CRISIL by ICICI (INDIA)
• 1991- ICRA by IFCI (INDIA)
• 1993- CARE by IDBI (INDIA)
Rating Process Flow Chart
 Rating Methodology
• In India, the rating exercise starts at the
request of the company.
• The rating of a financial instrument requires
a thorough analysis of relevant factors that
affect the credit worthiness of the issuer.
• Rating are based on an in- depth study of
the industry and an evaluation of the
strengths and weakness of the company
 Cont…
• Four broad areas for analytical framework.
• Business Analysis: This cover an analysis of
industry risk, market position in the country,
operating efficiency of the company, legal
position.
• Financial analysis: financial analysis includes an
analysis of accounting quality, earnings
protection, cash flow adequacy, and financial
flexibility
 Cont...
• Management Evaluation: This includes a study
of the track record of the management, the
management’s capacity to overcome adverse
situations, goals, philosophy, and strategies.
• Fundamental Analysis: this covers an analysis
of liquidity management, asset quality,
profitability and interest, and tax sensitivity.
 Credit Rating Agencies in
India
• Credit Rating Information Services of
India Limited. (CRISIL)
• Investment Information and Credit Rating
Agency of India Limited (ICRA)
• Credit Analysis and Research Limited
(CARE)
 Credit Rating Information Services of
India Limited. (CRISIL)
• CRISIL is India's leading Ratings, Research, Risk and
Policy Advisory Company. CRISIL, the first credit
agency was set up in January 1998.
• It was started jointly by ICICI & UTI with an equity
capital of Rs-4 cr. Each of them holds 18% of the capital.
• Other contributions to the capital are as follows.
Asian Development bank 15%
LIC, GIC & SBI 5% each
HDFC 6.2%
Banks (Indian) 19.25%
Banks (Foreign) 13.55%
• CRISIL Ratings is India's largest rating agency, having rated
more than 24,541 debt instruments, of more than USD 655
billion (Rs.30,71,459 cr.), issued by over 7938 companies.
• CRISIL has strong 60% penetration in the domestic bond
market and a 53% market share in the bank loan rating
segment.
• CRISIL Ratings rates virtually every kind of organization,
including industrial companies, banks, SMEs, non-banking
financial institutions, insurance providers, mutual funds,
infrastructure entities, state governments, and urban local
bodies. It also rates securitized paper.
 Objectives

• To assist both individual & institutional

investors in making investment decisions in
fixed income securities.
• To enable corporate to raise large amounts at fair
cost from a wide spectrum of investors.
• To enable intermediaries in placing their debt
instruments with investors by providing them.
 CRISIL Group Businesses

Ratings
Research
Advisory
 CRISIL Ratings
• CRISIL Ratings plays a leading role in the
development of the debt markets in India. The
Rating Criteria & Product Development Centre,
responsible for policy research, new product
development and ratings' quality assurance, has
developed new ratings methodologies for debt
instruments and innovative structures across
sectors.
 CRISIL Research
• CRISIL Research is India's largest independent
integrated research house providing accurate
and reliable research, analysis and forecasts on
the Indian economy, industries and companies
to over 500 Indian and international clients
across financial, corporate, consulting and public
sectors.
 Advisory
• CRISIL Infrastructure Advisory
• CRISIL Infrastructure Advisory blends the best
global practices with analytical excellence and a
deep understanding of the local environment to
provide policy, regulatory and transaction level
advice to governments and leading
organizations across sectors.
Investment and Risk Advisory
• CRISIL Risk Solutions: business provides
integrated risk management solutions and
advice to Banks and Corporate by
leveraging the experience and skills of
CRISIL in the areas of credit and market
risk.
 CRISIL Rating Symbols
CRISIL Rating Symbols For Long Term Ratings (Debentures)
• AAA:Instruments rated 'AAA' are judged to offer the highest degree of
safety with regard to timely payment of financial obligations. Any adverse
changes in circumstances are most unlikely to affect the payments on the
instrument
AA: Instruments rated 'AA' are judged to offer a high degree of safety with
regard to timely payment of financial obligations. They differ only
marginally in safety from `AAA' issues.
A: Instruments rated 'A' are judged to offer an adequate degree of safety
with regard to timely payment of financial obligations. However, changes
in circumstances can adversely affect such issues more than those in the
higher rating categories.
BBB : Instruments rated 'BBB' are judged to offer moderate safety with
regard to timely payment of financial obligations for the present; however,
changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal than for instruments in higher rating
categories.
 Cont…
• BB: Instruments rated 'BB' are judged to carry inadequate safety with
regard to timely payment of financial obligations; they are less likely to
default in the immediate future than instruments in lower rating categories,
but an adverse change in circumstances could lead to inadequate capacity
to make payment on financial obligations.
• B: Instruments rated 'B' are judged to have high likelihood of default; while
currently financial obligations are met, adverse business or economic
conditions would lead to lack of ability or willingness to pay interest or
principal.
• C: Instruments rated 'C' are judged to have factors present that make them
vulnerable to default; timely payment of financial obligations is possible
only if favorable circumstances continue.
• D: Instruments rated 'D' are in default or are expected to default on
scheduled payment dates.
• NM: Instruments rated 'NM' have factors present in them, which render the
outstanding rating meaningless. These include reorganization or
liquidation of the issuer, the obligation being under dispute in a court of
law or before a statutory authority etc.
 CRISIL Rating Symbols For Fixed
Deposits
• FAAA :This rating indicates that the degree of safety regarding timely payment of
interest and principal is very strong.
• FAA : 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 fixed
deposits with 'FAAA' ratings.
• FA : This rating indicates that the degree of safety regarding timely payment of interest
and principal is satisfactory. Changes in circumstances can affect such issues more than
those in the higher rated categories.
• FB: This rating indicates inadequate safety of timely payment of interest and principal.
Such issues 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: This rating indicates that the degree of safety regarding timely payment of interest
and principal is doubtful. Such issues 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.
 CRISIL Rating Symbols For Short Term
Instruments
• P1: This rating indicates that the degree of safety regarding timely payment
on the instrument is very strong.
• P2: 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 'P1'.
• P3: 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.
• P4: 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 favorable conditions.
• P5: This rating indicates that the instrument is expected to be in default on
maturity or is in default.
 Investment Information and Credit
Rating Agency of India (IICRA)
The IICRA was set up by industrial finance corporation
of India on 16th January 1991. It is a public ltd company
with an authorized share capital of Rs 101 cr. The initial
paid up capital of Rs. 3.50 cr. is subscribed by IFC, UTI,
LIC, GIC, SBI & 17 other banks. IICRA started its
operation from 15thmar. 1991.
IICRA was set up by ICICI and other leading investment
institutions and commercial banks and financial services
companies. IICRA is a Public Limited Company, with its
shares listed on the Bombay Stock Exchange and the
National Stock Exchange. 
 Cont…
• During 09-10 IICRA rated over 3300 debt
instruments covering a debt volume of Rs.
17,638 cr.
 Objective
•Provide information and guidance to institutional
and individual investors/creditors.
• Enhance the ability of borrowers/issuers to access
the money market and the capital market for tapping
a larger volume of resources from a wider range of
the investing public.
• Assist the regulators in promoting transparency in
the financial markets .
• Provide intermediaries with a tool to improve
efficiency in the funds raising process.
 Range of Services
1. Rating Services :
IICRA Rates rupee denominated debt instruments issued by
manufacturing companies, commercial banks, non-banking
finance companies, financial institutions, public sector
undertakings and municipalities, among others.
IICRA also Rates structured obligations and sector-
specific debt obligations such as instruments issued by Power,
Telecom and Infrastructure companies.
IICRA, along with National Small Industries
Corporation Limited (NSIC), has launched a Performance and
Credit Rating Scheme for Small Scale Enterprises in India.
2. Grading Services
The Grading Services offered by ICRA employ
pioneering concepts and methodologies, and include Grading
of Construction Entities, Real Estate Developers and Projects,
Healthcare Entities, Maritime Training Institutes, and Initial
Public Offers (IPOs).

3. Information Services
The Information Services Division focuses on
providing authentic data and value-added products used by
intermediaries, financial institutions, banks, asset managers,
institutional and individual investors, and others.
4. Research & Publications
ICRA has built up a research programme to
analyse contemporary developments that influence the Indian
money and finance world. The ultimate objective is to develop
analytical models that can explain the inter-related
movements of the principal macro-variables that define the
monetary and fiscal sector of the Indian economy.

5. The ICRA Bulletin

Money & Finance is a periodical publication
directed towards institutions and individuals with an interest
in understanding the reasons underlying policy initiatives and
outcomes.
 IICRA’s Ratings Scale
1. Long-Term rating Scale
All Bonds, NCDs, and other debt instruments (excluding Public
Deposits) With original maturity exceeding one year.

1. LAAA The highest-credit-quality rating assigned by IICRA.

2. LAA The high-credit-quality rating assigned by IICRA.
3. LA The adequate-credit-quality rating assigned by IICRA.
4. LBBB The moderate-credit-quality rating assigned by IICRA.
5. LBB The inadequate-credit-quality rating assigned by IICRA.
6. LB The risk-prone-credit-quality rating assigned by IICRA.
7. LC The poor-credit-quality rating assigned by IICRA.
8. LD The lowest-credit-quality rating assigned by IICRA.
 
2. IICRA’s Medium-Term Rating Scale
(only for Public Deposits)

• MAAA The highest-credit-quality rating assigned by

IICRA.
• MAA The high-credit-quality rating assigned by IICRA.
• MA The adequate-credit-quality rating assigned by
IICRA.
• MB The inadequate-credit-quality rating assigned by
IICRA.
• MC The risk-prone-credit-quality rating assigned by
IICRA.
• MD The lowest-credit-quality rating assigned by IICRA.
3. ICRA’s Short-Term Rating Scale
All instruments with original maturity within
one year.

•A1 The highest-credit-quality rating assigned by IICRA to

short-term debt instruments.
•A2 The above-average-credit-quality rating assigned by
IICRA to short-term debt instruments.
•A3 The moderate-credit-quality rating assigned by IICRA to
short-term debt instruments.
•A4 The risk-prone-credit-quality rating assigned by IICRA to
short-term debt instruments.
•A5 The lowest-credit-quality rating assigned by IICRA to
short-term debt instruments.
Credit Analysis and Research Ltd.
(CARE)
The CARE was promoted in 1993 jointly with
investment companies, banks & finance companies. CARE was
promoted by leading financial institutions, banks and private
sector finance companies. Services offered by CARE are –
(1) Credit rating
(2) Information service
(3) Equity research
(4) Rating & Parallel market of LPG & kerosene.
 Missions of CARE
• To offer a range of high quality services to investors, issuers of debt,
equity and other instruments and other participants in the capital
market.

•To build a pre-eminent position for ourselves in India in securities

analysis, information and related services and to be an international
credit rating agency.

•To earn customer satisfaction and investor confidence through fairness

and professional excellence.

•To be deeply committed to our customers, our employees and the

community in which we serve.

•To apply the most advanced techniques of securities analysis and

information and communications technology for ensuring efficiency and
high quality.
 Cont...
•To apply the most advanced techniques of securities analysis and
information and communications technology for ensuring
efficiency and high quality.

•To provide state-of-the-art services of securities rating,

information and related services of international standard.

• To provide state-of-the-art services of securities rating,

information and related services of international standard.
 Range of Services

1. CARE Research
CARE Research & Information Services is an independent
division of CARE. CARE Research services a variety of
business research needs with credible, high quality research
and analysis on various facets of the Indian Economy and
Industries.

The research division has a two pronged objective of

providing an in-house support to the ratings division as also
high quality sectoral research to financial intermediaries,
corporate, analysts, policy makers etc, as an aid to their
decision making process.

CARE Research is committed to provide accurate, reliable

research to its clients with consistent updates in timeframe.
2. Customized Research
The rising level of volatility in complex markets with lots of
opportunities to tap necessitates thorough understanding and
guidance provided by a well known research firm. To address
such needs CARE Research offers need-based solutions by
completely checking the facts, market scenario, past trends, etc
to help you realize your futuristic goals and transform your
businesses.

3. Sector Research
In depth analysis of business environment of industry, trends,
future direction, coverage on sectors in India, including
updates at regular intervals for a year forward. A dedicated
team of sector specialists track various industries on daily
basis.
4. Sector Research
In depth analysis of business environment of industry, trends,
future direction, coverage on sectors in India, including
updates at regular intervals for a year forward. A dedicated
team of sector specialists track various industries on daily
basis.
5. The Research Report includes
SWOT analysis of the industry along with three year forward
analysis and free updates one year forward. The industry
research report incorporates demand/supply situation, price
variations, cost estimation, analysis on new and existing
policies, business trends, etc.
6. Research Report services
CARE Research is known as a leading provider of value
research. Investors, bankers, analyst, etc use CARE Research
reports for in-depth understanding of present situation, issues
etc to arrive at opinion. The reports contain high quality data,
trends, opinions and outlook. The services are today
subscribed to by a vast number of clients.
 Credit Rating Scale
Credit Rating of Debt instruments

A.Long/medium term instruments

CARE AAA Instruments with this rating are considered to be of
the best credit quality offering highest safety for timely servicing of
debt obligations. Such instruments carry minimal credit risk.
CARE AA Instruments with this rating are considered to offer
high safety for timely servicing of debt obligations. Such
instruments carry very low credit risk.
CARE A Instruments with this rating are considered to offer
adequate safety for timely servicing of debt obligations. Such
instruments carry low credit risk.
 CARE BBB Instruments with this rating are considered to offer
moderate safety for timely servicing of debt obligations. Such
instruments carry moderate credit risk.

 CARE BB Instruments with this rating are considered to offer

inadequate safety for timely servicing of debt obligations. Such
instruments carry high credit risk.

 CARE B Instruments with this rating are considered to offer low

safety for timely servicing of debt obligations and carry very high
credit risk. Such Instruments are susceptible to default.

 CARE C Instruments with this rating are considered to be having

very high likelihood of default in the payment of interest and
principal.

 CARE D Instruments with this rating are of the lowest category.

They are either in default or are likely to be in default soon.
B. Short term instruments
 PR1
Instruments with this rating would have strong capacity for timely
payment of short-term debt obligations and carry lowest credit risk. Within
this category, instruments with relatively better credit characteristics are
assigned PR1+ rating.
 PR2
Instruments with this rating would have adequate capacity for timely
payment of short-term debt obligations and carry higher credit risk as
compared to instruments rated higher.
 PR3
Instruments with this rating would have moderate capacity for timely
repayment of short term debt obligations at the time of rating and carry
higher credit risk as compared to instruments rated higher.
 PR4
Instruments with this rating would have inadequate capacity for timely
payment of short-term debt obligations and carry very high credit risk.
Such Instruments are susceptible to default.
 PR5
The instrument is in default or is likely to be in
default on maturity. As instrument characteristics or
debt management capability could cover a wide
range of possible attributes whereas rating is
expressed only in limited number of symbols, CARE
assigns'+' or '-' signs to be shown after the assigned
rating to indicate the relative position within the band
covered by the rating symbol.
Rating Experience of CARE: (As on March 2010)

Total Assignments Completed 7654

Total Instruments Rated 7206

Total Volume of Debt Rated Rs.23121 bn

Total Issuers Rated 2811

Thank You