1

PROJECT REPORT
ON
CREDIT RATING

Submitted in partial fulfillment for the award of the
Degree of Master in Business Administration

In the university school of business
Punjabi university (2012- 2014)









Supervised By: Submitted By:
MRS ARUNDEEP KAUR KAMALDEEP KAUR
MBA 4
th
Semester
ROLL NO: 2095






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DECLARATION


I hereby declare that, the project entitled “credit rating” assigned to me for the
Partial fulfillment of MBA degree from Punjabi University, Patiala. The work is originally
completed by me and the information provided in the study is authentic to the best of my
knowledge.





Place:
Date: Signature of student














3







CERTIFICATE


This is to certify that the project entitled “ CREDIT RATING” is a bonfire record of research
work carried out by Kamaldeep Kaur during 2013-14, submitted to the Punjabi university,
Patiala in partial fulfillment of the requirement for the award of degree of MASTER OF
BUSINESS ADMINISTRATION and that the Project has not previously formed the basis
for the award of any other Degree, Diploma, associate ship, Fellowship or other title and that
the dissertation represents the independent and original work on the part of candidate under
my guidance.



Signature of Candidate Signature of Supervisor









4














ACKNOWLEDGEMENT

No work is completed until due reverential are paid to all those who helped to make that work a
success. I have made best efforts to present the project matter in a simple and understandable
form. Thorough attempt has been made to explain the concept in depth by moving form unknown
to all type of study of project material.
It is opportunity of immense pleasure to study under the guidance of MRS.ARUNDEEP
KAUR under whose supervision and guidance, I could accomplish this research work. All the
chapters of this project bear the stamp of her scholarly guidance.
I must utilize this opportunity to express my heartfelt gratitude to all those who helped me in
making this project work a success especially the library staff of Punjabi University Patiala. I am
greatly indebted to them for taking great pains in giving me guidance.
Finally I am highly indebted to my parents and my family members for help given to me to
complete my research work.



(KAMALDEEP KAUR)




5














DECLARATION



I hereby declare that, the project entitled “credit rating” assigned to me for the
Partial fulfillment of MBA degree from Punjabi University, Patiala. The work is originally
completed by me and the information provided in the study is authentic to the best of my
knowledge.


Place:
Date: Signature of student










6














CERTIFICATE

This is to certify that the project entitled “ CREDIT RATING” is a bonfire record of research
work carried out by kamaldeep Kaur during 2012-14, submitted to the Punjabi university, Patiala
in partial fulfillment of the requirement for the award of degree of MASTER OF BUSINESS
ADMINISTRATION and that the Project has not previously formed the basis for the award of
any other Degree, Diploma, associate ship, Fellowship or other title and that the dissertation
represents the independent and original work on the part of candidate under my guidance.



Signature of Candidate Signature of Supervisor






7





ACKNOWLEDGEMENT


No work is completed until due reverential are paid to all those who helped to make that work a
success. I have made best efforts to present the project matter in a simple and understandable
form. Thorough attempt has been made to explain the concept in depth by moving form unknown
to all type of study of project material.
It is opportunity of immense pleasure to study under the guidance of Mrs arundeep kaur I
could accomplish this research work. All the chapters of this project bear the stamp of her
scholarly guidance.
I must utilize this opportunity to express my heartfelt gratitude to all those who helped me in
making this project work a success especially the Punjabi University Patiala. I am greatly
indebted to them for taking great pains in giving me guidance.
Finally I am highly indebted to my parents and my family members for help given to me to
complete my research work.



(KAMALDEEP KAUR)














8










CONTENTS

PAGE NO

CHAPTER 1: INTRODUCTION TO CREDIT RATING 9-42
Introduction 9-10
Nature function 10-14
Types 14-29
Rating process 29-32
Rating methodology 32-42


CHAPTER 2: LITERATURES REVIEW 43-44

CHAPTERS 3: OB JECTIVES 45-46

CHAPTERS 4: RESEARCH METHODOLOGY 47-50

CHAPTER 5: ANALYSIS AND INTERPRETATION 51-63

CHAPTER 6: FINDINGS 64-65


CHAPTER 7: SUGGESTION 66-67


CHAPTER 8: SUMMARY 68-69

BIBLIOGRAPHY 70-71
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ANNEXURE 72-75








CHAPTER – 1

INTRODUCTION
OF THE
“CREDIT RATING”






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 EVOLUTION OF CREDIT RATING AGENCIES

Louis Tappan established the first mercantile credit agency in New York in 1841, after the
financial crisis of 1837. So the origin of credit rating can be traced to the era of 1840‟s. The
agency rated the ability of merchants to pay their financial obligations. Another similar agency
was set up by John Bradstreet in 1849, which published a rating book in 1857. These two
agencies were merged together to form Dun and Bradstreet in 1933, which became the owner of
Moody‟s Investors Service in 1962. The history of Moody‟s itself goes back about 100 years. In
1900 John Moody founded Mooky‟s Investors Service, and in 1909 published his Manual of
Railroad Securities. This was followed by the rating of utility and industrial bonds in 1914, and
the rating of bonds issued by U.S. cities and other municipalities in the early 1920s.

Further expansion of the credit rating industry took place in 1919, when the Poor‟s Publishing
Company published its first rating followed by the Standard Statistics Company in 1922, and Fitch
Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form Standard
and Poor‟s which was subsequently taken over by McGraw Hill in 1966. For almost 50 years,
since the setting up of Fitch Publishing in 1924, there were no major new entrants in the field of
credit rating and then in the 1970s, a number of credit rating agencies commenced operations all
over the world. These included the Canadian Bond Rating Service (1972), Thomson Bank watch
(1974), Japanese Bond Rating Institute (1975) Dominican Bond Rating Service (1997), IBCA
Limited (1978), and Duff and Phelps Credit Rating Company (1980).

There are credit rating agencies in operation in many other countries such as Malaysia,
Philippians, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia. In India, the
Credit rating and information Services of India Ltd. (CRISIL) was set up as the first rating
agency in 1987, followed by ICRA Ltd. (formerly known as Investment Information and Credit
Rating Agency of India Limited) in 1991, and Credit Analysis and Research Ltd. (CARE) IN
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1994. The ownership pattern of all the three agencies is institutional. Duff and Phelps has tied up
with two Indian NBFCs to set up Duff and Phelps Credit Rating India Pvt. Ltd. in 1996.







 MEANING OF CREDIT RATING

Credit rating is an assessment of the creditworthiness of individuals and corporations. It is an
assessment of an issuer of debt security, by an independent agency, to pay interest and repay the
principal as per the terms of the issue of the debt. In other words, Credit rating is the opinion of
the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet
the debt services obligation as and when they arise.

 DEFINITION
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 property”.

 NATURE / FEATURES OF THE CREDIT RATING

 Rating is based on information
Any rating based entirely on published information has serious limitations and the success of a
rating agency will depend, to a great extent on its ability to access privileged information.
Cooperation from the issuer as well as their willingness to share even confidential information is
important pre-requisites. The rating agency must keep information of confidential nature
possessed during rating process, a secret.

 Many factors affect rating
Rating does not come out of a pre-determined mathematical formula. Final rating is given taking
into account the quality of management, corporate strategy, economic outlook and international
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environment. To ensure consistency and reliability a number of qualified professionals are
involved in the rating process

 Rating by more than one agency
In the well –developed capital markets, debt issues are more often rated by more than one
agency. It is natural that rating given by two or more agency agencies differ from each other e.g.
a debt issue, may be rated „AA+‟ , by one agency and „AA‟ or „AA-„ , by another .



 Monitoring the already rated issues
A rating is an opinion given on the basis of information available at particular point of time.
Many factors may affect the debt servicing capabilities of the issuer. It is, therefore, essential that
rating agencies monitor all outstanding debt issues rated by them as part of their investor‟s
services. The rating agencies should put issues under close credit watch and upgrade or
downgrade the ratings as per the circumstances after intensive interaction with the issuers.

 Publications of ratings
In India, ratings are undertaken only at the request of the issuers and only those ratings, which
the issuers accept are published. Thus, once a rating is accepted it is published, and subsequent
changes emerging out of the monitoring by the agency will be published, even if such changes
are not found acceptable by the issuers.

 Right of appeal against assigned ratings
Where an issuer is not satisfied with the rating assigned, he may request for a review, furnishing
additional information, if any, considered relevant. The rating agency will undertake a review
and thereafter give its final decision. Unless the rating agency had overlooked critical
information at the first stage chances of the rating being changed on appeal are rare.

 Rating of rating agencies
Informed public opinion will be the touchstone on which the rating companies have to be
assessed and the success of a rating agency is measured by the quality the services offered,
consistency and integrity.

 Rating is for instrument and not the issuer company
The important thing to note is that rating is done always for a particular issue and not for a
company or the issuer. It is quite possible that two instruments issued by the same company carry
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different ratings, particularly if maturities are substantially different or one of the instruments is
backed by additional credit reinforcements like guarantees.

 Rating not applicable to equity shares
By definition, credit rating is an opinion on the issuer‟s capacity to service debt. In case of equity
there is no pre-determined servicing obligation, as equity is in the nature of venture capital. So,
credit rating does not apply to equity shares.



 Time taken in rating process
The rating process involves analysis of published financial information, visits to the issuer‟s
offices, intensive discussions with the senior executives of issuer‟s, discussion with auditors,
bankers, creditors etc. It also involves an in depth study of the industry itself and a degree of
environment scanning. All this takes time; a rating agency may take 6 to 8 weeks or more to
arrive at a decision. For rating short term instruments like commercial papers (CP), with the time
taken may vary from 3 to 4 weeks as the focus will be more short term liquidity rather than on
long term fundamental. Rating agencies do not compromise on the quality of their analysis or
work under pressure from issuer for quick results.

 OBJECTIVES OF CREDIT RATING AGENCIES

 To provide superior and low cost information to investors for taking a decision
regarding risk-return trade off.
 To shift the primary burden of establishing corporate credit quality from the broker or
underwriter.
 To encourage the direct mobilization of the savings from individuals rather than from
intermediary lending institutions.
 To provide adequate funds for the high rated companies at a low rate of interest.
 To provide a marketing tool in placing its debt obligations with an investor base that is
aware of and comfortable with the level of risk.




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 FUNCTIONS OF A CREDIT RATING AGENCY.

A credit rating agency serves following functions:.

 Provides quality and dependable information
A credit rating agency is in a position to provide quality information on credit risk which is more
authenticated and reliable because:

1. It has highly trained and professional staff that has better ability to assess risk.
2. It has access to a lot of information, which may not be publicly available.

 Provides information at low cost
Most of the investors rely on the rating assigned by the ratings agencies while taking investment
decisions. These ratings are published in the form of reports and are available easily on the
payment of negligible price. It is not possible for the investors to assess the creditworthiness of
the companies on their own.

 Provides basis for investment
An investment rated by a credit rating enjoys higher confidence from investors .Investors can
make an estimate of the risk and return associated with a particular rated issue while investing
money in them.

 Healthy discipline on corporate borrowers
Higher credit ratings to any credit investment enhance corporate image and builds up goodwill
and hence it induces a healthy discipline on corporate borrower.

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 Formation of Public Policy:
Once the debt securities are rated professionally, it would be easier to formulate public policy
guidelines as to the eligibility of securities to be included in different kinds of institutional
portfolio can be developed with great confidence






 TYPES OF CREDIT RATING

 Equity Rating
Equity rating refers to the rating of equity issued in the capital market. The concept of equity
rating is still not adopted by the rating agencies in India.

 Bond Rating :
It refers to the rating of bonds, debentures issued by a government body or a company.

 Short term Instrument Rating :
In this kind of rating we include the rating of commercial papers, short-term public deposits etc.

 Customer or Borrower Ratings:
Customer/Borrowers rating require the assessment credit worthiness of the customers to whom
the credit sale is being made or grant of loan is under consideration.


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 Sovereign Rating:
Sovereign rating refers to evaluation of credit worthiness of a country in which investment by a
foreign body (foreign Government or corporate body) is envisaged or to which a loan is to be
given. This kind of rating is generally done by the international rating agencies.





Types of
credit
rating

Bond Rating

Compulsory
Rating

Individual’s
Rating


Sovereign
Rating

Customer or
Borrower
Ratings
Short-term
Instrument
Rating

Equity
Rating:
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Individuals Rating:

Rating of individuals is called as individual‟s credit rating

 Compulsory Rating:
The rating at which the government bounds the obligation is called the compulsory rating like
commercial papers etc

 CREDIT RATING AGENCIES IN INDIA
There are five credit rating agencies in India:
A. Credit Rating Information Service of India Ltd. (CRISIL)
B. Investment Information and Credit Rating Agency. (IICRA)
C. Credit Analysis and Research Ltd. (CARE)
D. Duff & Phelps Credit Rating India Ltd. (DCR)
E. Onida Individual Credit Rating agency. (ONICRA)

A. CRISIL (Credit Rating Information Service of India Ltd)

CRISIL (Credit Rating Information Services of India LTD.) was promoted by Industrial Credit
and Investment Corporation of India Ltd., (ICICI) along with (UTI ) Unit Trust of India Ltd. as a
public limited company in 1987. Other shareholders include the Asian Development Bank Life
Insurance Corporation of India, HDFC Ltd., General Insurance Corporation of India and several
foreign and India banks. It was the first one to develops the methodology to rate debt
instruments in the light of India‟s financial, monetary, economic and regulatory environment.
CRISIL was the first agency to rate commercial paper program in 1989, debt instruments of
financial institutions and banks in 1992 and asset backed securities in 1992.It offered its share
capital to the public in 1993.







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OBJECTIVES OF CRISIL

 To assist both individual and institutional investors in making investment decisions in
fixed interest securities.

 To guide the investors as to risk of timely payments of interest and principal on a particular debt
instrument;
 To help the companies to raise funds from a large number of investors in large amounts at
a lesser cost.
 To create awareness of the concept credit ratings amongst corporations, merchant
bankers, brokers, regulatory authorities and help in creating environment that facilities the
debt ratings.
 To provide regulators with a markets driven system in order to ensure discipline and a
healthy growth of capital markets.

CRISIL FUNCTIONS / SERVICES

 Credit Rating Services
Credit rating services include the rating of long, medium and short term credit instruments such
as debentures, preference shares, deposits, commercial papers and structured obligations of
manufacturing or finance companies, banks, financial institutions builders, insurance companies
in addition to the debt obligations. In addition CRISIL also assigns ratings to the real estate
builders/developers, chit funds, bank loans etc.

 Advisory Services
CRISIL offers advisory services in the form of consultancy to various state governments in the
matters relating to private sector participation in infrastructure development, disinvestments
plans, and assistance in privatization process. It helps the effects in identifying and reducing risk
and formulating strategies and implementing the same.





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 Research and information services
CRISIL undertakes in-depth studies in areas like Indian economy, Indian capital markets, Indian
industries and Indian Corporate sector, clients include institutional investors, investment bankers,
commercial banks, financial institutions, corporate planners, mutual funds and asset management
companies.

CRISIL Research and Information Services include value-added research activities and
customized studies in following areas.
-Indian Capital Market
-Indian Industries, and
-Indian Corporate Sector.

 International information Vending.
CRISIL provides on line services to its international clients about us research activities. It has
tied up all the leading international clients about us research activities. It has tied up all the
leading international information vendors like Returns Inc. Knight Ridder Information Inc.
Matrix Service Pvt. Ltd., to disseminate its research and analysis worldwide.
CRISIL RATING SYMBOLS

CRISIL rating symbols are symbolic expression of opinion/assessment of the credit rating
agency. Here is a brief summary of CRISIL‟s rating symbols used for the rating of:
1. LONG TERM INSTRUMENTS
High investment grade
AAA - highest safety
AA - high safety.

I. Investment grades
A - adequate safety
BBB - moderate safety

II. Speculative grades
BB - inadequate safety
B - high risk
C - substantial ris
D - default

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1.MEDIUM TERM INSTRUMENTS

FAAA - highest safety
FAA - high safety.
FA - adequate safety
FB - high risk
FC - substantial risk
FD - default

1. SHORT-TERM INSTRUMENTS

P1 - highest safety
P2 - high safety.
P3 - adequate safety
P4 - inadequate safety
P5 - default

B. IICRA (Investment Information and Credit Rating Agency)
Investment Information and Credit Rating Agency has been promoted by IFCI (Industrial
Finance Corporation Of India) on 16
th
January,1991. It is the public limited company with an
authorized share capital of 100 crores. IFCI holds 26% stake in IICRA and the other
shareholders, which are UTI, Banks, LIC, GIC, HDFC and Exem Bank, hold rest. IICRA has
entered into a memorandum of understanding (MOU) with Monday‟s Investors Services in order
to bring international experience and practices to the Indian capital market.

IICRA has diversified the range of its services. It currently provides three types of services
namely:
i. Rating Services
ii. Information Services
iii. Advisory Services




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 Rating Services: - In these services, IICRA rates debt instruments issued by
Manufacturing companies, Commercial Banks, Non-Banking Finance Companies, Financial
Institutions, Public Sector Undertaking etc. Apart from this Rating Services includes credit
assessment of large, medium and small-scale enterprises, which are looking for financial
assistance from commercial banks, financial institutions and financial services companies.
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. The service is aimed at enabling Small and Medium
Enterprises (SMEs) improve their access to institutional credit, increase their competitiveness,
and raise their market standing.

 Information Services: - Information Services offered by IICRA focuses on providing
authentic and unbiased information to various intermediaries, financial institutions, banks,
assets managers, individuals and institutional investors etc. This includes corporate reports,
equity assessment, mandate based studies and industry specific publications.

 Advisory Services: - Under these services, IICRA provides consultancy to the various
player in financial markets such as investors, issuers, regulators, intermediaries and the
media on business and organizational issues. For this, it has also signed a MOU with
international credit rating agency “Moody Investor Services”.

IICRA Rating Symbols: -
The IICRA rating is a symbolic indicator of the current opinion of the relative capability of
timely servicing of the debt obligations. IICRA rates long term, medium term and short-term debt
instruments.








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Following is a brief summary of the rating symbols used by IICRA for the following: -

1. LONG TERM INSTRUMENTS

LAAA - highest safety
LAA - high safety.
LA - adequate safety
LBBB - moderate safety
LBB - inadequate safety
LB - risk prone
LC - substantial risk
LD - default extremely speculative

2. MEDIUM TERM INSTRUMENTS

MAAA - highest safety
MAA - high safety.
MA - adequate safety
MB - inadequate safety
MC - risk prone
MD - default


3. SHORT-TERM INSTRUMENTS

A1 - highest safety
A2 - high safety.
A3 - adequate safety
A4 - risk prone
A5 - default




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C. CARE (Credit Analysis and Research Ltd)
Credit analysis and research Ltd. was promoted by IDBI (Industrial Development Bank Of India)
jointly with financial institution, banks and private finance companies. It started its operation in 1993
and now it offers a wide range of products and services in the field of credit information and equity
research. CARE Ratings has completed over 8488 rating assignments having aggregate value of about
Rs.26609 billion (as at Sep 2010), since its inception in April 1993. CARE is recognized by Securities
and Exchange Board of India (SEBI), Government of India (GOI) and Reserve Bank of India (RBI)
etc.

CARE Ratings is well equipped to rate all types of debt instruments like Commercial Paper, Fixed
Deposit, Bonds, Debentures, Hybrid instruments, Structured Obligations, Preference Shares, Loans,
Asset Backed Securities(ABS), Residential Mortgage Backed securities(RMBS).

CARE Ratings has been recognized by statutory authorities and other agencies in India for rating
services. The authorities/agencies include: Securities and Exchange Board of India (SEBI), Reserve
Bank of India (RBI), Director General, Shipping and Ministry of Petroleum and Natural Gas (MPNG),
Government of India (GOI), National Housing Bank (NHB), National Bank for Agriculture and Rural
development (NABARD), National Small Scale Industries Commission (NSIC). CARE Ratings has
also been recognized by RBI as an Eligible Credit Rating Agency (ECRA) for Basel II
implementation in India.
These services are categorized into the following categories:-
i. Credit Rating Services
ii. Information Services
iii. Equity Research

 Credit Rating Services:-
CARE rates all types of debt instruments including long term. It is the core business of this
rating agency.

 Information Services:-
Like CRISIL and IICRA., it also provides information services to various players in the
financial market. It provides information on any company, industry or sector to individuals,
mutual funds, and investment companies. So that they can take well informed investment.


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 Equity Research-:
Equity Research involves extensive study of the shares listed or which are going to be listed
on stock exchange and forecasts potential looser and winner on the basis of this study. For
this purpose, it analyzes all the fundamentals affecting the industry, market share,
management capabilities etc.

CARE Rating Symbols:-
CARE rating symbols are related with the rating of following:

 LONG TERM INSTRUMENTS

CARE AAA - highest safety
CARE AA - high safety.
CARE A - adequate safety
CARE BB - inadequate safety
CARE B - risk prone

 MEDIUM TERM INSTRUMENTS

CARE AAA - highest safety
CARE AA - high safety.
CARE A - adequate safety
CARE B - inadequate safety
CARE C - risk prone

 SHORT-TERM INSTRUMENTS

PR1 - highest safety
PR2 - high safety.
PR3 - adequate safety
PR4 - inadequate safety
PR5 - high risk




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C. Duff and Phelps Credit Rating Private Ltd.
It is the latest entrant in the credit rating business in the country as a joint venture between the
international credit rating agency “Duff and Phelps” and “James Martin Financial and Alliance
Group”. In addition to debt instruments it also rates companies and countries on request.

Rating services:

 Credit Rating Services: - Duff and Phelps rates all types of debt instruments including
long term. It is the core business of this rating agency.

 Company rating services: - Duff and Phelps rates all types of company.

 Country rating services: - In addition to debt instruments it also rates companies and
countries on request.

Duff and Phelps’s Rating Symbols :-

The DCR‟s rating is given in respect of the following instruments :

1. LONG TERM & MEDIUM – TERM INSTRUMENTS

Ind AAA - highest safety
Ind AA + - high safety.
Ind A - adequate safety
Ind BBB - moderate safety
Ind BB - inadequate safety
Ind B - high risk
Ind C - substantial risk
Ind D - default risk






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1. MEDIUM TERM INSTRUMENTS

Ind D-1+ - highest safety
Ind D-1 - high safety.
Ind D-2+ - adequate safety
Ind D-2 - moderate safety
Ind D-3 - inadequate safety
Ind D-4 - high risk
Ind D-5 - default risk

E. ONICRA (Onida Credit Rating Agency)

ONICRA is the first individual credit agency in India promoted by famous „ONIDA‟ group
known for consumer durables. ONIDA covers approximately, 75 million households owning
three popular items TVs, refrigerators and washing machine. Other product like music system, air
conditioners, microwaves etc. are also very popular and are in great demand among customers.

ONICRA makes an objective assessment of the risk attached to a financial transaction with
respect to an individual. Individual credit rating is gaining importance because of the following:

1. India moving rapidly towards a cashless society based on credit and consumerism.

2. The changing customer profiles, the customers are no longer restricted to upper strata ,
middle class is going to for credit purchases.

Through individual credit rating , an effort is made to measure the risk attached to fulfilling a
financial obligation for a desired financial transaction for an individual.

Onicra Rating Scale: -

ONICRA has been pioneer to introduce the concept of individual credit rating.It has developed a
rating system for various types of credit extension by conducting in-depth study of all aspects of
the behaviour of credit seekers. Rating system takes into account number of parameters which
influence individual‟s credit behaviour.

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Every individual being rated is issued a certificate which helps him in obtaining loan/credit.
The creditworthiness of the individual is measured on various parameters divided into 100 point
scale .The parameters include-
 Age
 Qualifications
 Occupation
 Stability at work
 Saving
 Extent of payment i.e. the amount of loan that an individual can avail of
 History of repayment.

Every bank or financial institution wants to know creditworthiness of its potential customers so
as to minimize the financial risk. In India there has been no agency to rate the individuals. But
ONICRA has filled in this gap. It provides credit ratings of individuals on international patterns,
for use of banks and financial institutions.
(i) An individual cannot get rated himself directly. ONICRA takes up the credit rating for
individuals at the request of lending institution.
(ii) A lending institution/firm writes to the ONICRA whenever a potential customers visit
the firm for customer‟s credit.
(iii) The customer is required to fill in a prescribed form.
(iv) ONICRA uses 100 point scale to rate the individual on various parameters.
(v) Depending upon rating assigned by ONICRA the lending institutions proceed with
granting of consumer credit.

 INTERNATIONAL CREDIT RATING AGENCIES

At international level there are basically two important credit rating agencies which require
special mention , namely:

 Standard and Poor‟s
 Moody‟s



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A. STANDARD AND POOR’S CREDIT RATING AGENCY

Standard & Poor was created in 1941 through the merger with the Standard Statistics &Poor
Publishing. The company has evolved from the days of Henry Varnum Poor to now provide a
wide range of information on financial products and markets. In 1966, McGraw Hill companies
acquired Standard & Poor‟s

Standard & Poor offered a variety of services -:

 Corporate value consulting
 Advisor insight
 Equity credit rating
 Fund advisor
 Governance services
 Research insight

The credit rating assigned to corporate and municipal bonds by standard and poor‟s corporation
are listed below along with the interpretation used by S and P for each category :
The Rating Symbol of The S&P Rating Agency :

AAA - highest quality
AA - high quality
A - strong payment capacity
BBB - adequate payment capacity
BB - likely for full obligations, ongoing services



B - high risk obligations
CCC - current vulnerability to default
C - in bankruptcy or in default or other marked shortcomings .


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B. MOODY’ S INVESTOR SERVICES

Moody‟ Investor Services is a subsidiary of Moody‟s Corporation. The Investors Services
subsidiary provides ratings, research and risk analysis for a broad scope of debt instruments. This
agency uses a combination of quantitative and qualitative factors for rating. Quantitative
measures are used to evaluate historical performance and trends, while qualitative measures are
made to assess the data in the context of the sovereign‟s economic, political and social forces.

Services offered by Moody’s

 Bank loan research
 Corporate credit research
 Life and health insurance credit research
 Property credit research

Moddy’s Rating Symbols:-

1. CORPORATE BONDS
Aaa - highest safety
Aa - high safety.
A - adequate safety
Baa - moderate safety
Ba - inadequate safety
B - high risk
C aa - substantial risk
C a - default

2. MUNICIPAL BONDS
Aaa - highest safety
Aa - high safety.
Baa - moderate safety
Ba - inadequate safety
B - high risk
C aa - substantial risk
Ca - default
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 RATING PROCESS
In India all the credit rating agencies adopt almost a similar rating process for rating new
debt issues and reviewing the rating of existing instruments. The steps generally taken by the
rating agencies in rating process are shown as under: -














No


Yes







The process /procedure followed by all the major credit rating agencies in the country is almost
similar and usually comprises of the following steps-:



Issuer
request
for rating
CRISIL
Assigns an
analytical
team
Analytical
team collects
and analyses
information
Meets
Company‟s
management
and resolves
Questions
Interaction
with back up
team for
industrial
formation
Findings
presented
to a
rating
committe
e
Rating
committee
decides the
rating
Notification
of rating to
issuer

Does issuer
wants to
appeal
Rating is
released
Additional data
provided is
reviewed and
rating revised if
necessary
31


1. Receipt of the request.
The ratings process begins with the receipt or formal request for rating from a company desirous
of having its issue obligations under proposed instruments rated by credit rating agencies. An
agreement is entered into between the rating agency and Issuer Company.

The agreement spells out the terms of the rating assignment and covers the following aspects:
 It requires the CRA (Credit Rating Agency) to keep the information confidential.
 It gives right to the issuer company to accept or not to accept the ratings.
 It requires the issuer company to provide all material information to the CRA for rating and
subsequent surveillance.

2. Assignment to analytical team
On receipt of the above request, the CRA assigns the job to an analytical team. The team usually
comprises of two members/analysis who have expertise in the relevant business area and are
responsible for carrying out the rating assignments.

3. Documentation Preparation
After assignment to analytical team, the issuer company prepares all documents for CRA so as to
get Credit rating for its debt instruments.

4. Collection of Information
The analytical team obtains the requisite information from the client‟s company. Issuers are
usually provided a list of information requirements and broad framework for discussions. These
requirements are derived from the experience of the issuers business and broadly confirm to all
the aspects, which have a bearing on the rating. The analytical team analyses the information
relating to its financial statements, cash flow projections and other relevant information.

5. Plant visits and meetings with management
To obtain classification and better understanding of the client‟s operations the team visits and
interacts with the company‟s executives. Plants visits facilitates understanding of the production
process, assess the state of equipment and main facilities, evaluate the quality of technical
personnel and form a opinion on the key variables that influence level, quality and cost of
production. A direct dialogue box is maintained with the issuer company as this enables the CRA
to incorporate non –public information in a rating decision and also enables the rating to be
forward looking. The topic discussed during the management meetings are wide ranging
32


including competitive position, strategies, financial policies, historical performance, risk profile
and strategies in addition to reviewing financial data.

6. Rating Committee assigns rating
After completing the analysis the findings are discussed at length in the internal committee,
comprising senior analysis of the credit rating agency. All the issue having a bearing on rating is
identified .An opinion on the rating is also formed. The findings of the team are finally presented
to rating committee and hence rating committee gives a rank to the instruments of the issuer
company.

7. Communication of ratings to the issuer.
The assigned rating grade is communicated finally to the issuers along with the reasons or
rationale supporting the rating. The ratings, which are not accepted, are either rejected or
reviewed in the light of additional facts provided by the issuer. The rejected ratings are not
disclosed and complete confidentially is maintained.

8. Dissemination of the rating/publication
Once the issuer accepts the rating, the credit rating agencies disseminates through printed reports
to the public.

9. Monitoring for possible change
Once the company has decided to use the rating, CRAs are obligated to monitor the accepted the
ratings over the life of the instruments. The CRAs constantly monitor all rating with reference to
new political, economic and financial developments and industrial trend. All this information is
reviewed regularly to find company for major rating changes .Any changes in the rating are made
public through published reports by CRAs.








33


 RATING METHODOLOGY

Rating methodology used by the major Indian credit rating agencies is more or less the same.
The rating methodology involves an analysis of all factors affecting the credit worthiness of
an issuer company e.g., business, financial and industry characteristics, operational,
efficiency, management quality, competitive position of the issuer and commitment to new
projects etc. A detailed analysis is made to estimate the future earnings. The company‟s
ability to service the debt obligations over the tenure of the instrument being rated is also
evaluated. In fact, it is the relative comfort level of the issuer to service obligations that
determines the ratings. While assessing the instrument the following are the main factors that
are analyzed into detail by the credit agencies.

1. Business risk analysis
2. Financial analysis
3. Management evolution
4. Geographical analysis
5. Fundamental Analysis
6. Regulatory and Competitive Environment


These are explained as under.

1. Business Risk Analysis
This includes an analysis of industry risk, market position of the company, operating efficiency
of the company and legal position of the company.

(a) Industry Risk
The rating agencies evaluates the industry risk by taking into consideration various factors like
strength of the industry prospects, nature and basis of the completion, demand and supply
position, structure of the industry, pattern of business cycle, etc. Industries complete with each
other on the basis of price, product quality, distribution capabilities etc., are in a stronger
position and therefore enjoy better credit rating.


34


(b) Market position of the company.
Rating agencies evaluate the market standing of a company taking into account:]
Percentage of market share
Marketing infrastructure
Competitive advantages.
Selling and distribution channel
Diversity of products
Customers base
Research and development projects undertaken to identified obsolete products.
Quality Improvement programmes etc.

(c) Operating efficiency
Favorable location advantages, management and labour relationships, cost structure, availability
of raw –materials, labour ,compliance to pollution control, programmes, level of capital
employed and technological advantages etc. affect the operating efficiency of every issuer
company and hence the credit rating.

(d) Legal position
Legal position of a debt instrument is assured by letter of offer containing. Terms of issue, mode
of payment of interest and principal in time, provision for protection against fraud etc. affect the
creditworthiness

(e) Size of business
The size of business of the company is a relevant factor in the rating decisions .Smaller
companies are more prone to risk due to business cycle changes as compared to larger
companies. Smaller companies operations are limited in terms of product, geographical area and
number of customers .Whereas large companies enjoy the benefit of diversification owing to
wide range of products, customers spread over larger geographical area.
2. Financial Analysis
This includes an analysis of four important factors namely:
(a) Accounting quality
(b) Earnings potential/profitability
(c) Cash flows analysis
(d) Financial flexibility
35



Financial analysis aims at determining the financial strength of the issuer company through
quantitative means such as ratio analysis .Both past and current performance is evaluated to
comment the future performance of accompany. The areas considered are explained as follows

(a) Accounting quality
As credit rating agencies rely on the audited financial statements, the analysis of statement begins
with the study of accounting quality .For the purpose, qualification of auditors,
overstatement/understatement of profits, methods adopted for recognizing income, valuation of
stock and charging depreciation on fixed assets are studied.

(b) Earnings potential/Profitability
Profits indicate company‟s ability to meet its fixed interest obligations in time. A business with
stable earnings can withstand any adverse conditions and also generate capital resources
internally. Profitability ratio‟s like operating profit and net profits and net profits ratio to sales are
calculated and compared with last 5 years figures or compared with the similar other companies
carrying on same business. As a rating is a forward –looking exercise more emphasis is laid on
the future rather than the past earning capacity of the issuer.

(c) Cash flow analysis
Cash flow analysis is undertaken in relation to fixed and working capital requirements of the
company. It indicates the usage of cash for different purposes and extent of cash available for
meeting fixed interest obligations. Cash flows analysis facilities credit rating of a company as it
better indicates the issuer‟s debt servicing capability compared to reported earnings.

(d) Financial flexibility
Existing capital structure of a company is studied to find the debt/equity ratio, alternative means
of financing used to raise funds, ability to raise funds, asset deployment potential etc. The future
debt claims on the issuer‟s as well as the issuers ability to raise capital is determined in order to
find issuer‟s financial flexibility.

(3) Management Evaluation
Any company‟s performance is significantly affected by the management goals, plans and
strategies, capacity to overcome unfavorable conditions, staffs own experience and skills,

36


planning and control system etc. Rating of a debt instrument requires evaluation of the
management strength and weaknesses.


(4) Geographical Analysis
An issuer company having its business spread over large geographical area enjoys the benefits of
diversification and hence gets better credit rating. A company located in backward area may
enjoy subsidies from government thus enjoying the benefit of lower cost of operation .Thus
geographical analysis is undertaken to determine the locational advantages enjoyed by the issuer
company.

( 5) Regulatory and Competitive Environment
Credit rating agencies evaluated structure and regulatory framework of the financial system in
which it works. While assigning the rating symbols, CRAs evaluate the impact of
regulation/deregulation on the issuer company.

(6) Fundamental Analysis
This includes an analysis of liquidity management, profitability and financial position, interest
and tax rates senility of the company.

(a) Liquidity management involves study of capital structure, availability of liquid
assets corresponding to financing commitments and maturing deposits, matching
of assets and liabilities
.
(b) Assets quality covers factors like quality of company„s credit risk management,
exposure to individual borrowers and management of problem credit etc.

(c) Profitability and financial position covers aspects like past profits, funds
deployment, revenues on non-fund based activities, adding to reserves.

Interest and tax sensitivity reflects sensitivity of company following the changes in interest rates and
changes in tax law. Fundamental analysis is undertaken for rating debt instruments of financial
institutions, banks and non-banking finance companies.

37


 SEBI GUIDELINES FOR CREDIT RATING AGENCIES

1. Every credit rating agency shall enter into a written agreement with each client whose
securities it proposes to rate, and every agreement shall include the following provisions,
namely-:
a. The rights and liabilities of each party in respect of rating of securities shall be
defined.
b. The fees being charged by the rating agency shall be specified.
c. The client shall agree to co-operate with the credit rating agency in order to arrive at
an accurate rating of the client‟s financial instruments.

2. No credit rating shall rate the securities issued by its promoters.

3. Dual rating is compulsory for public and rights issue of debt instruments of Rs. 100 crore
or more.

4. No chairman, director or employee of the promoters shall be a chairman, director or
employee of the CRA or its rating committee.

5. A credit rating agency shall ensure that the senior management, particularly decision
makers have success to all relevant information about the business on a timely basis.

6. A credit rating agency shall maintain an arm‟s length relationship between its credit rating
activity and any other activity.
7. Every credit rating agency shall keep and maintain, for a minimum period of five years,
the following books of accounts, records and documents, namely:
a. Copy of its balance sheet, as on the end of each accounting period;
b. A copy of its profit and loss account for each accounting period.
c. A copy of the auditor‟s report on its accounts for each accounting period.
d. A copy of the agreement entered into, with each client;
e. Information supplied by each of the clients;
f. Correspondence with each of the clients.


38



8. Rating assigned to various securities including up gradation and down gradation (if any)
of the ratings so assigned.

9. A credit rating agency shall not withdraw a rating so long as the obligations under the
security rated by it are outstanding, except where the company whose security is rated is
wound up or merged of dissemination, irrespective of whether the rating is or is not
accepted by the client;

10. All rating decisions, including the decisions regarding changes in rating, shall be taken by
the rating committee.

11. Every credit rating agency shall be staffed by analysts qualified to carry out a rating
assignment.

12. Every credit rating agency shall inform the Board about new rating instruments or
symbols introduced by it.

13. Every credit rating agency, shall, while rating a security, exercise due diligence in
order to ensure that the rating given by the credit agency is fair and appropriate, A credit
rating agency shall not rate securities issued by it.

14. Rating definition, as well as the structure for a particular rating product, shall not be
changed by a credit rating agency, without prior information to the Board.

15. A credit rating agency shall disclose to the concerned stock exchange through press
releases and websites for general investors, the rating assigned to the securities of a client,
after periodic review, including changes in rating, if any.






39


 ADVANTAGES OF CREDIT RATING

Different benefits accrue from use to rated instruments of different class of investors or the
company. These are explained as under:

A. Benefits to Investors

 Safety of investment
Credit Rating means an assessment of the creditworthiness of the issuer company. It proves to be
an effective tool while making investment decisions. Highly rated instruments provides an
investor a safety of investments and minimize his risk.

 Recognition of risk and returns
Credit rating symbols indicate both the returns expected and risk attached to a particular issue. It
becomes easier for the investors to understand the worth of the issuer company just by looking at
the symbol because the issue is backed by the financial strength of the company.

 Freedoms of investment decisions
Investors need not seek advice from the stockbrokers, merchant bankers or the portfolio
managers before making investments. Investors are free and independent to take investment
decisions themselves. They base their decisions on rating symbols attached to a particular
security. Each rating symbol assigned to a particular investment suggests the creditworthiness of
the investment and indicates the degree of risk involved in it.

 Wider choice of Investments
As it is mandatory to rate debt obligations for every issuer company. At any particular time,
wide range of credit rated instruments are available for making investment. Depending upon his
own ability to bear risk, the investor can make choice of the securities in which investment is to
be made.

 Easy understanding of investment proposals
Investors require no analytical knowledge on their part about the issuer company. Depending
upon rating symbols assigned by rating agencies they can proceed with decisions to make
investment in any particular rated security of a company.
40


 Low cost
The rating as provided by professional credit rating, is of significance not just for the individual
investor, but also for an organized institutional investor. It provides a low cost supplement to
their in- house appraisal system.


 Relief from botheration to know about company
Credit rating agencies relieve investors from the botheration of knowing the details of the
company, its history, nature of business, financial position , liquidity and profitability position,
composition of management staff and board of directors,etc. Credit rating by professional and
specialized analysts builds a confidence in investors to rely upon the credit symbols for taking
investment decisions

 Advantages of continuous monitoring
Credit rating agencies not only assign symbols but also continuously monitor them .The rating
agency downgrades or upgrades the rating symbols after following the decline or improvement in
the financial position respectively.

A. Benefits to the company

A company who has got its credit instrument or security rated is benefited in the following ways.

 Easy to raise resources
A company with highly rated instrument finds it easy to raise resources from the public. Even
though investors in different sections of the society understand the degree of risk and uncertainty
attached to a particular security but they still get attracted towards the highly rated instruments.

 Reduced cost of borrowing
Investors always like to make investments in such instrument, which ensure safety any easy
liquidity rather than high rate of return. A company can reduce the cost of borrowing by quoting
lesser interest on those fixed deposits or debentures or bonds which are highly rated
 Reduced cost of public issues A company with highly rated instruments has to make
least efforts in raising funds through public. It can reduce its expenditure on press and
publicity .Rating helps in best pricing and timing of issues.
41

 Rating builds up image
A company with highly rated instruments enjoys better goodwill and corporate image in the eyes
of customers, shareholders, investors and creditors. Customers feel confident of the quality of
goods manufactured, shareholder are sure of high returns, investors feel secured of their
investments and creditors are assured of timely payments of interest and principal.

 Rating facilitates growth
Rating motivates the promoters to undertake expansion of their operations or diversify their
production activities and thus leading to the growth of the company in future. Moreover highly
rated companies find it easy to raise funds from public through new issues or through credit from
banks and financial institutions to finance their expansion activities.

B. Benefits to Intermediaries

Stockbrokers have to make less effort in persuading their clients to select an investment proposal
of making investment in highly rated instruments. Thus rating enables brokers and other financial
intermediaries to save time, energy costs and manpower in convincing their clients.

 DISADVANTAGES OF CREDIT RATING

Credit rating suffers from the following limitations

 Non –disclosure of significant information
Firm being rated may not provide significant or material information, which is likely to affect
decision of the investigation team of Credit Rating Company. Thus any decisions taken in the
absence of such significant information may put investors at a loss.
 Static Study
Rating is a static study of present and past historic data of the company at one particular point of
time. Number of factors including economic, political, environment, and government policies has
direct bearing on the working of a company. Any changes after the assignment of rating symbols
may defeat the very purpose of risk indicative nets of rating.
 Rating is no certificate of soundness
Rating grades by the rating agencies ~ re only an opinion about the capability of the company to meet its
interest obligations. Rating symbol do not pinpoint towards quality of the products or management or staff
etc. In other words rating does not give a certificate of the complete soundness of the company. Users
should form an independent view of the rating symbol.
42


 Rating may be biased
Personal bias of the investigating team might affect the quality of the rating. The companies having lower
grade rating do not advertise or use the rating while raising funds from the public. In such a case the
investors cannot get the true information about the risk involved in the instrument.

 Rating Under unfavorable conditions
Rating grades are not always, representative of the true image of a company. A company might
be given low grade because it was passing through unfavorable conditions when rated .Thus
misleading conclusions may be drawn by the investors which hamper the company‟s interest.

 Difference in rating grades
Same instrument may be rated differently by the two rating agencies because of the personal
judgment of the investigating staff on qualitative aspects. This may further confuse the investors.

 Does not recommend, provides only guidance
A Credit Rating provides only guidance to the investors and creditors in determining the risk
associated with a instrument. It does not recommend buying selling a particular security because
it does not take into account factors like: market prices and personal risk preferences, which
might influence investor‟s decision. So apart from Credit Rating, investors should analyze all
those factors depending on his proposed investment decision

 Credit rating as a tool to cheat the investors-
Some companies use Credit Rating as a tool to cheat the investors. They get rating done by more
than one rating agency and publish only that rating which reflects highest safely. But this
published rating may not be true which can mislead investor‟s decision.








43








CHAPTER- 2

REVIEW OF LITERATURE









44


 REVIEW OF LITERATURE

Ravimohan. R (2005) study found that as rating agencies gain experience, they involve their own
ways of looking at companies. It found CRISIL has a special group devoted to the task of
monitoring its rated portfolio ,compiling statistics and benchmarks for the rating process and it
found that forgetting the right rating for any issue, read CRISIL‟s CEO and managing Directors
views which means that what actually they speak on the process and method of credit rating. This
study took the overall framework that Credit Rating involves four areas, Business, Financial,
Management and Project Risks. Azhagaiah .R (2004) study in union territory of pond cherry
reveals that the analysis of the basis of investment shows that only 35% (53 out of 150) of the
respondents depend on credit rating for their investment in debt instruments. Among various
CRA‟s, majority of the respondents depend on a CRISIL than other rating Agencies like Care,
ICRA etc. Mohammed K(2003)Study was a case on the evaluation of performance of Credit
Rating Agencies in India and it found that CRISIL is ranked No.1 in accordance with the other
CRA‟s in India and Indian topmost Companies are rated by the CRISIL. On the basis of financial
profitability CRISIL is making the 20%-50% more than the other CRA‟s and it is making the
1800 + ratings and this study has found that SEBI played an important role in the guidelines for
the credit ratings agencies. Chawla V (2004) study was also a case study on the critical analysis
of CRA‟s in India and it found that rating levels should be similar for all agencies and the rating
agencies in India can hardly achieve international performance standard and creditability. This
study also found that the all time influencing political factors are not at all considered in giving a
rating to a company .and sometimes the rating agency is bound to give the issuer company a
good rating irrespective of whether he issuer deserves the respective ratings or not .Credit ratings
in recent times is being looked upon as an important investment advisory function .In countries
with highly developed markets, such as the US ,and Japan, Though there is no statutory
requirement to have the securities rated, as high as 90% of the securities floated are voluntarily
rated due to the pressure exerted by the investors and bankers. In India, a beginning has been
made with the establishment of CRISIL and the RBI insisting that all commercial papers prior to
their issue must be rated. With the growth in the volume and depth of the capital markets and the
increasing knowledge and awareness of the investors, it can be expected that voluntary credit
rating would be on the increase. Gupta R (2000) study took as the choice of variables an it found
that turnover ratio plays a major role in the rating the debentures. It carries discriminating
capacity of about 16% and short –term liquidity and stability ratio does not play major role in
rating and discriminating debentures issues.
45


.

.




CHAPTER -3

OBJECTIVES















46

 OBJECTIVES OF THE STUDY


“Good better best, never let it rest till your good is better and your better is best”.


Following are the objectives

 To know the awareness and impact of Credit Rating Agencies on the investor‟s and
brokers decisions.

 To know the trustworthiness of Credit Rating Agencies among the investor‟s and brokers.

 To study the need and importance of credit rating agencies in corporate sector.

 To know the effect on the returns of investments followed according to CRA

 To know the services provided by CRA

 To study the relationship between the type of the investor and preference given to the
ratings by the CRA.














47







CHAPTER –IV
RESEARCH METHODOLOGY
























48

 MEANING

Research Methodology is a systematic way of conducting a project. It is a series of steps, which
are undertaken in order to reach at the final conclusion. Research methodology is also called as a
way to systematically solve the problem. It may be understood as a science of studying how
research is done scientifically. In order to achieve the objectives mentioned, systematic
methodology norms were followed. Every minute detail of data was collected by direct method
i.e. through interaction as well as by indirect method i.e. by assessing the written records. The
work was preceded under the direction of manager and category wise report was prepared.

 NEED OF STUDY

Earlier the investors put their funds in the debt instruments without analyzing because no rating
of the instruments was done and in case the companies liquidate ,the investors could not able to
get the principal amount. But with rating agencies, now before investing into any kind of debt
instrument the investors can check their ratings and can invest accordingly. Because now a day
everyone wants to grow and expand business, irrespective whether it is an institutional investors
or individual investors. So credit rating agencies provide a proper guidance and road map for the
investment decisions as these agencies provide knowledge regarding those companies whose
instruments are rated highly safe and liquid.

 OBJECTIVES OF THE STUDY

“Good better best, never let it rest till your good is better and your better is best”.

Following are the objectives

 To know the awareness and impact of Credit Rating Agencies on the investor‟s and
brokers decisions.
 To know the trustworthiness of Credit Rating Agencies among the investor‟s and brokers.
 To study the need and importance of credit rating agencies in corporate sector.
 To know the effect on the returns of investments followed according to CRA
 To know the services provided by CRA
 To study the relationship between the type of the investor and preference given to the
ratings by the CRA.

49

 RESEARCH DESIGN

Research design is the conceptual structure within which research is conducted. It constitutes the
blue print for the collection, measurement and analysis of the data. Descriptive and analytical
research design is used in this project.

 SOURCES OF DATA COLLECTION
Both Primary and Secondary data has been used in this study.

 Primary Data
Primary data is the data is which collected first time is or it is also called as fresh data. In this
study, personal interviews will be taken using structured questionnaire.

 Secondary Data
Secondary data is data which is collected by one and used by the other person. It is not a fresh
data. In this project data is collected from secondary sources such as internet, brochures, books,
newspapers magazines etc.

 SAMPLE SIZE

This refers to the numbers of items to be selected from universe to constitute a sample. In this
project sample size is 100.

 SAMPLING TYPE

Convenient sampling technique is used in this project work

 STATISTICAL TOOLS-

Tabulation, charts, figures and various other statistical tools like chi- square are used to represent
and analyze the data‟s




50

 SCOPE OF THE STUDY

This project helps the investors and the researcher to get further insights and knowledge about
the credit rating Agencies. It will provide the opportunity to use the professional skills to solve
the real business problems through the market research.

 LIMITATIONS OF THE STUDY

 Sample size is 100
 Research work was carried out in Ropar and near areas only. So the findings may not be
applicable to the others parts of the country.
 Shortage of time was reason for the incomprehensiveness.
 The respondents did not give the true and fair information. Therefore, the result of the
research is not hundred percent accurate.
 Have to rely upon the data available and collected.














51






CHAPTER-5

DATA ANALYSIS
AND
INTERPRETATIONS

















52

1. Profile of an investor ?


Profile Respondent
Institutional 10
Brokers 20
Individuals 70
Total 100






Interpretation:

The above table and chart shows that 70% of respondents are individuals while 20% of
respondents are brokers and rest are institutional investors.

10
20
70
0
10
20
30
40
50
60
70
80
Institutional Broker Individual
Profile of an investor
Profile of an investor
53

2. Where do you like to invest your money?


Investment Avenues Number of investors
Shares 45
Debentures 13
Mutual funds 12
Insurance 11
Others 19
Total 100






Interpretation:

The above table and chart shows that 45% of investors invest in shares while 13% of
investors invest in debentures and 12% in mutual funds and the remaining 30% invest in other
investment avenues.




45
13
12
11
19
0
5
10
15
20
25
30
35
40
45
50
Shares Debentures Mutual fund Insurance Others
Investment Avenues
Investment Avenues
54

3. Which of the following credit rating agencies do you recognize?

Agency Number of investors
CRISIL 38
CARE 20
ICRA 8
ONICRA 2
DUFF AND PHELPS 2
S&P 8
Moody 6
NONE OF THESE 16
Total 100



Interpretation:

The above table and chart shows that 38% of the investors recognized the CRISIL, 20%
recognized the CARE, 8% recognized ICRA & S&P, 6% recognized MODI and very few
investors recognized ONICRA & D&P.




38
20
8
2
2
8
6
16
0
5
10
15
20
25
30
35
40
CRISIL CARE ICRA ONICRA DCR S&P MODDY NONE
OF
THESE
Recgnization of CRA
Recgnization of
CRA
55

4. Can you recognize credit rating agencies with its rating symbols?


Response Number of investors
Yes 45
No 25
Can‟t Say 30
Total 100




Interpretation:

Almost half of the investors can recognize credit rating agency from its symbols. As shown in
the table and chart, 45% of those investors who give yes answer, while only 25% investors
say no.






0
5
10
15
20
25
30
35
40
45
YES NO CAN'T SAY
45
25
30
Recognization with its rating symbol
Recognization with its rating
symbol
56

5. Do you invest on the basis of rating provided by any of the CRA?


Response Number of investors
Always 8
Sometimes 45
Often 23
Seldom 9
Never 15
Total 100




Interpretation:

45% of the investors sometimes follow the ratings while making investments. 23% are often
following the ratings and 15 % never follow the ratings of the agencies.






8
45
23
9
15
0
5
10
15
20
25
30
35
40
45
50
Always Soetimes Often Seldm Never
Invest according to ratings
Invest according to ratings
57

CHI- SQUARE TEST

 Find out that there exist a relationship between type of investor and
preference given to the ratings by the CRA?

Always Sometimes Often Seldom Never Total
Institutional 2 15 1 1 1 10
Broker 3 10 2 3 2 20
Individual 3 30 20 5 12 70
Total 8 45 23 9 15 100

Solution :

Null hypothesis -: There exists a relationship between type of investor and preference given to
the ratings by the CRA.


Calculation for calculated value

Observed frequency (O)

Expected frequency (E) (O – E)
2
/ E
2

(8*10) / (100) = 0.8 ( 2-0.8)
2
/ 0.8 = 1.8
5

(45*10) / (100) = 4.5 (5-4.5)
2
/ 4.5 = 0.05
1

(23*10) / (100) = 2.3 (1-2.3 )
2
/ 2.3 = 0.7
1

(9*10) / (100) = 0.9 (1-0.9)
2
/ 0.9 = 0.01
1

(15*10) / (100) = 1.5 (1-1.5)
2
/ 1.5 = 0.17
3

(8*20) / (100) = 1.6 (3-1.6)
2
/ 1.6 = 1.225
10

(45*20) / (100) = 9 (10-9)
2
/ 9 = 0.1
2

(23*20) / (100) = 4.6 (2-4.6)
2
/ 4.6 = 1.47
3

(9*20) / (100) = 1.8 (3-1.8)
2
/ 8 = 0.8
2

(15*20) / (100) = 3 (2-3)
2
/ 3 = 0.33
3


(8*70) / (100) = 5.6 (3-5.6)
2
/ 5.6 = 1.21
30


(45*70) / (100) = 31.5 (30-31.5)
2
/ 31.5 = 0.07




20

(23*70) / (100) = 16.1

(20-16.1)
2
/ 16.1 = 0.9
58

5

(9*70) / (100) = 6.3 (5-6.3)
2
/ 6.3 = 0.27
12

(15*70) / (100) = 10.5 (12-10.5)
2
/ 10.5 = 0.21
Total

9.315

Thus, chi- square, α
2
= ∑ (O – E)
2
/ E\

= 9.315

Also α
2
0.005
= the tabulated value

of α
2
at 5% level of significance for (n-1)

= (15-1)

= 14 degree of freedom

= 23.685( tabulated value from chi square table)

Coclusion

Since calculated value is less than tabulated value, i.e. 23.685 > 9.315

Thus null hypothesis is accepted.

This implies that there exist a relationship between type of investor and preference given to
the ratings by the CRA.


















59

6. While making investment decisions, rate the following factors importance
(“1” being the most important, “4” being the least important)?

Factor Rank Number of investors
(Weight)
Safety of principal 1 53
High Risk 3 14
High Return 2 26
Maturity period 4 7
Total 100



Interpretation:
Safety of the principal is the most important factor which is considered by the investors
while making their investment decisions, followed by the high return, high risk &
maturity period.

1
3
2
4
0
10
20
30
40
50
60
Safety of
principal
High Risk High Return Maturity period
Rank
Number of investor
60

7. Credit Rating Agencies prove to be an effective tool for risk management?

Response Number of investors
Strongly agree 15
Agree 23
Neutral 17
Disagree 33
Strongly disagree 12
Total 100





Interpretation:

Only 23% of the investors have agree that credit rating agencies will prove to be an effective
tool for risk management, 33% of the investors disagree from the statement, while 17% said
neutral.




15
23
17
33
12
0
5
10
15
20
25
30
35
Strongly
agree
Agree Neutral Disagree Strongly
disagree
CRA, an effective tool for risk management
CRA, an effective tool for risk
management
61

8.How much returns have you earned if you follow the ratings of CRA?


Returns Number of investors
0-15% 26
15-30% 55
30-45% 11
45-above 8
Total 100




Interpretation:
55% of the investors earned that 15- 30% return of the investments. And less than 15% return
is expected by the 20% of the investors.







20
55
11
8
0
10
20
30
40
50
60
0-15% 15-30% 30-45% 45%&above
Returns on investment
Returns on
investment
62

9. Credit rating agencies monitor the issue already rated?

Response Number of investors
Strongly agree 10
Agree 25
Neutral 11
Disagree 38
Strongly disagree 16
Total 100



Interpretation:

25% of the investors said that rating agencies monitor the issue already rated, while 38%
totally disagree from this statement and 11% of the investors give neutral answer.




10
25
11
38
16
Monitoring of issues already rated
Strongly agree
Agree
Neutral
Disagree
Strongly disagree
63

9. What are the services provided by CRAs?

Services Number of investors
Credit Rating Services 56
Advisory Services 2
Research and Information Services 2
Information assistant to Govt. 1
None of these 39
Total 100



Interpretation:

It is shown from the above table and chart that only one service i.e. credit rating service is
recognized by the respondents while the have full ignorance regarding others.








56
2 2 1
39
Credit rating services
Credit rating
Advisory
Research & information
Information assisstance to
government
None of these
64
















CHAPTER- 6

FINDINGS













65


Following are the findings-:

 It is found that most of the investors are individuals and they invest maximum amount in
shares.

 CRISIL & CARE are the two popular agencies recognized by the investors.

 45% of the investors can recognize the CRA with its ratings symbols and invest according
to the rating given by the credit rating agencies.

 Safety of the principal is the most important factor which is considered by the investors
while making their investment decisions, followed by the high return, high risk &
maturity period.

 Only 23% of the investors have agree that credit rating agencies will prove to be an
effective tool for risk management, 33% of the investors disagree from the statement,
while 17% said neutral.

 55% of the investors earned the 15- 30% return of the investments.

 25% of the investors said that rating agencies monitor the issue already rated, while 38%
totally disagree from this statement and 11% of the investors give neutral answer.

 Only one service i.e. credit rating service is recognized by the respondents while the have
full ignorance regarding others.

 There exit a relationship between the type of investment and the preference given to the
ratings by the CRA and is verified through chi- square test.






66








CHAPTER – 7

SUGGESTIONS



















67

Following are the suggestions-:

 Credit rating agencies should create awareness and attract more with the institutional and
broker investor to enhance the business

 To know the investors about the credit rating agencies other than CRISIL & CARE
through advertising and through any other method.


 Enhance the knowledge regarding the different symbols used by the different agencies so
that they can earn more returns from their investment in various financial instruments.

 Credit rating agencies should also create awareness regarding investment avenues other
than shares.

 Credit rating agencies provides an almost accurate rating of the financial instruments so
that
 It proves to be an effective tool for risk management
 Investors can earn more returns.

 Rating agencies should monitor all outstanding debt issues rated by them as part of their
investor‟s services.

 Credit rating agencies should provide knowledge to the investors regarding the various
services offered like advisory, research and informative and information assistance to
Government.








68






CHAPTER - 8

SUMMARY











69

 SUMMARY
The origin of credit rating can be traced to the era of 1840‟s. Credit rating is an assessment of the
creditworthiness of individuals and corporations. It is also defined as an assessment of an issuer
of debt security, by an independent agency, to pay interest and repay the principal as per the
terms of the issue of the debt. There are five credit rating agencies in India. CRISIL & CARE are
the two popular agencies recognized by the investors. At international level there are basically
two important credit rating agencies which require special mention, namely: Standard and Poor‟s,
Moody‟s credit rating agency. In the project named effectiveness of credit rating it is found that
credit rating agencies will prove to be an effective tool for risk management by very less people.
Most of the investors are individuals and they invest maximum amount in shares. Credit rating
agencies should create awareness and attract more with the institutional and broker investor to
enhance the business and also create awareness regarding the investment avenues other than
shares. Safety of the principal is the most important factor which is considered by the investors
while making their investment decisions. The investors can recognize the CRA with its ratings
symbols and invest according to the rating given by the credit rating agencies. Investors earned
that 15- 30% return on the investments according to the ratings by the agencies. Only one
service i.e. credit rating service is recognized by the respondents while have full ignorance
regarding others like advisory, research and informative and information assistance. It is found
that there exist a relationship between the type of investment and the preference given to the
ratings by the credit rating agencies. These agencies should enhance the knowledge regarding the
different symbols used by the different agencies so that they can earn more returns from their
investment in various financial instruments. Rating agencies monitor all outstanding debt issues
rated by them as part of their investor‟s services. In short it is said that credit rating is the opinion
of the rating agency on the relative ability and willingness of the issuer of a debt instrument to
meet the debt services obligation as and when they arise and by following the recommendations
it proves to be an effective tool for risk management by almost all the investors.






70










BIBLIOGRAPHY









71

Biblography

 Data collected from websites:

 www.credit rating.com
 www.crisil.com
 www. iicra.com
 www.care.com

 Data collected from books :
 Financial Services by Shashi K Gupta and Aggarwal Nisha Services;
Kalyani Publisher
 Management of Financial servicesb by Bhalla , Anmol Publishers 4.
Merchant banking and financial services by Bansal
 Finanacial mar kets & services by Gordon & Natarajan












72












ANNEXURE













73

QUESTIONNAIRE

Hello………, I am student of M.B.A. I am doing my project on effectiveness of credit rating
agencies. Please fill the questionnaire and provide a true and fair information.

1. Demographic profile of investor:-
Occupation…………………………………………………………………
Qualification……………………………………………………………….
Age:-
Less than 25 years 2 5 – 50 years Above 50 years

2. Where do you like to invest your money?

 Shares
 Debentures
 Insurance
 Mutual funds
 Others

3. Which of the following credit rating agencies do you recognize?

(a) CRISIL (b) CARE

(c) ICRA (d) ONICRA

(e) DUFF AND PHELPS (f) S&P

(g) Moody‟s (h) None of these

4. Can you recognize credit rating agencies with its rating symbols?
(a) Yes
(b) No
(c) Can‟t say

74

5. Do you invest on the basis of rating provided by any of the CRA?

Always

Sometimes

Often

Seldom

Never

6. While making investment decisions, rate the following factors importance (“1” being
the most important, “4” being the least important)?

Safety of principal High Risk
High Return Maturity period

7. Credit Rating Agencies prove to be an effective tool for risk management?
Strongly agree

Agree

Neutral

Disagree

Strongly disagree

8. How much returns have you earned if you follow the ratings of CRA?
0-15%

15-30%

30-45%

45-above
75


9. Credit rating agencies monitor the issue already rated?

Strongly agree

Agree

Neutral

Disagree

Strongly disagree



10. What are the services provided by CRAs?

 Credit Rating Services

 Advisory Services


 Research and Information Services

 Information assistant to Govt.


Thank you












76