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Submitted to: Prof Meghana Patil
Group Members

Avinash Mugale Pooja Mukherjee Malay Patel Indraneel Patil
57 58 70 72
What Is Credit Rating?

A credit rating estimates the credit worthiness of an individual, corporation, o
r even a country. A credit rating is also known as an evaluation of a potential
borrower's ability to repay debt, prepared by a credit bureau at the request of
the lender.
Credit ratings are calculated from financial history and current assets and liab
ilities. Typically, a credit rating tells a lender or investor the probability o
f the subject being able to pay back a loan.

It provides guidance to investors or creditors in determining a credit risk asso
ciated with debt instrument or credit obligation. Establishes a link between ris
k and return. Helps investors in making investment decisions. Credit rating show
s the exact worth of the organization.
Credit rating Agencies In India

Credit Rating Information Services of India
Ltd. (CRISIL) (1987)

Investment Information and Credit Rating Agency of India (ICRA) (1991) Credit An
alysis & Research Ltd. (CARE) (1994) Duff & Phelps Credit Rating India Private L
td. (DCR India) (1996) ONICRA Credit Rating Agency of India Ltd.
Range of Rating & Grading Services
Banks and FI ratings IPO Grading SME/SSI ratings Corporate ratings
Structured Finance Ratings Sub-sovereign ratings Issuer Rating Insurance/ CPA ra
Infrastructure ratings
Corporate Governance ratings Construction Grading
Grading of MFI
Fund credit Quality rating
Ratings awarded by major Credit Rating Agencies
Who uses Credit Rating?
Investors In absence of credit rating system, risk evaluation depends on ³name reco
gnition´. Credit rating helps investors in selecting appropriate instrument from b
road spectrum of investment options. Banks use ratings of other banks for decisi
ons regarding interbank lending, swap agreements, etc. Credit rating agencies al
so provides services like industry reports, corporate reports, seminars and open
access to the analysts of the agencies.
IssuersCompared to unrated securities, issuers of rated securities have access t
o much wider investor base & more faith is placed. Investor confidence enables i
ssuers of highly rated instruments to access market even under adverse market co

IntermediariesMerchant bankers use rating for planning, pricing, underwriting, p
lacement. Brokers and dealers in securities use rating as an input for their mon
itoring of risk exposures.
RegulatorsRestrict entry to market of new issues rated bellow a particular grade
. Prohibit investors from purchasing or holding of instruments rated bellow a pa
rticular level.
What can be Credit Rated ?
Deposits Commercial Paper Term Loans Preference Shares Secured Debt Unsecured D
ebt Securities
The Rating Process
Initiated on a formal request
Providing information requirements
Secondary sources of information
Assessment of qualitative factors
Clarification & justification of fresh inputs
Right to appeal for a review
Communicate to the issuers
Preparing of Rating Report

A full service rating company that offers a wide range of rating and grading ser
vices across sectors. Incorporated in 1993 by consortium of Banks/financial inst
itutions in India. The three largest shareholders of CARE are IDBI Bank, Canara
Bank and State Bank of India.
Registered with SEBI under the Securities & Exchange Board of India (Credit Rati
ng Agencies) Regulations, 1999. CARE¶s Ratings are recognized by Govt. of India an
d all regulatory authorities like RBI and SEBI. CARE is a founder member of Asso
ciation of Credit Rating Agencies in Asia (ACRAA).
Quality of Ratings

Independent & Renowned External Rating Committee

Impressive Track Record of more than 15 years Leader in bank ratings Developing
rating methodologies for new segments like Cooperatives, Service sector, trading
Core Competency CARE believes in independence in rating decisions and has an ext
ernal rating committee that decides each rating. It consists of members who are
reputed professionals from various industries like IDBI Ltd, Reserve Bank of Ind
ia, Hindustan Lever Ltd, etc.

CRISIL was incorporated in the year 1987 and was the first rating agency in INDI
A. CRISIL Ratings plays a leading role in the development of the debt markets in
India. CRISIL Ratings provides technical know-how to clients worldwide.
CRISIL Ratings is India's largest rating agency, having rated more than 24,541 d
ebt instruments. CRISIL Ratings has a 70 per cent penetration in the domestic de
bt market.
The two main divisions under Crisil are:CRISIL LTD. CRISIL INFRASTRUCTURES. Ther
e are three sections under Crisil ltd viz, Ratings, Research, Advisory.
Rating Methodology Different for different sectors such as; » Corporate/Manufactur
ing » Finance » Infrastructure » Structured Finance » Funds » Governance & Value Creation »
Real Estate Developers/Project Rating » Maritime Grading » Microfinance Institutions
Grading » SME Criteria for Small and Medium Enterprises

The level of secrecy is high Rating validity All information gathered is only fr
om the company Companies are monitored even after its rated A company is rated o
nly if its clear in all aspects
ICRA was
set up by IFCI on 16th January
ICRA Limited
is in Alliance with µMoody's Investors Service¶ and ICRA¶s largest shareholder.
It is a public limited company with an authorized share capital of Rs.10 crores,
Rs. 5 crores is paid up. ICRA¶s major shareholders IFCI (26%), and the balance by
UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (

Alliance with Moody¶s Investor Services has given them Brand name and it provides
high value Technical services. It benefits ICRA¶s in-house research capabilities a
nd access to Moody¶s global research base.
Core Competency Dedicated teams for Monetary, Fiscal, Industry and Sector Resear
ch. Fees are received in advance. 
Challenges faced:
Authenticity and credibility of data. Fraud cannot be detected as its based on a
nnual reports. Investigation is not possible. Difficulty in getting secondary da
ta in case of small scale industries and family owned businesses. Fees and manpo
wer rates are high. 

Business model
Value Proposition
The services are offered in order to solve customer problems like unbiased indep
endent assessment, comparisons, risk identification. The products offered are th
e grading, advisory and ratings provided. The source credibility and the brand n
ame of the agencies are the values that the customers get.

Customers Relationship
The Investors, Issuers, intermediaries are the customers. The CRA¶s are customer c
entric and cater to their needs. A level of secrecy is maintained. The customers
have an access to the management.
Value chain structure

CRISIL - market leader position with a 70% share. - research credibility. - bran
d name. - innovation. - employees.
ICRA - Global technical support. - Research base. - Brand name.
CARE - large number of well qualified and multi-faceted professionals from diver
se backgrounds such as; financial analysts, economists, sector specialists, char
tered accountants.
Position in value network

CRISIL- market leader, an S & P¶s company , acquisition of IREVNA. ICRA- alliance
with Moody¶s which gives them a global edge. CARE- CARE is a founder member of Ass
ociation of Credit Rating Agencies in Asia.
Competitive strategy

CARE- believes in independence in rating decisions and has an external rating co
mmittee that decides each rating. CRISIL- uses innovation. Crisil's fees are als
o at a premium to that of other rating agencies such as ICRA and CARE. ICRA- a s
trong research (center of excellence) base as a differentiator.
Revenue Generation
CRISIL Amongst all its products the number of revenue-generating activities is q
uite high. Crisil¶s revenue segment are broadly classifieds in 3; Ratings, Advisor
y, Information Services. Among these segments, ratings are most profitable.
ICRA A significant portion of the revenues, around 54.13% is generated from the
rating services offered.

Primarily linked to the issuance of debt securities in the Indian capital market
"Credit rating business" and its Industry Size in India

Difficult to gauge industry size in India as all companies with borrowings over
Rs. 10 crores are to be rated.
Different process for different sector«
Yes there are different methodologies for different industries depending upon in
dustry characteristics (cement and cotton yarn companies).
Acceptable standards to achieve positive ratings

Ratings are not model based and consider lot of qualitative factors. Hence, ther
e cannot be a predetermined formula to improve ratings.
Challenges faced by the CR agencies in India

Now-a-days Credit Rating Agencies (CRAs) are required to rate companies from gro
wth sectors like Life Insurance, Bio technology, IT/ITES etc apart from earlier
rated mature sectors. Higher management risk.
Besides rating well-known listed entities, CRAs are now rating trading and partn
ership/proprietorship firms where there is less transparency in their accounts.
With market for complex products evolving, CRA¶s in India are exposed to different
kinds of structures with varied complexities. Apart from basic risks, legal imp
lications are also significant.
Future of credit rating agencies in India

With developing secondary market securities, rating agencies will always have gr
owing business. However, with banks to follow standardized approach in the mediu
m term, ratings under Basel II may reduce as banks will use their internal ratin
gs and not require rating from external agencies for bank facilities.
Effects of wrong credit ratings

Wrong credit rating will cause credit crunch. Many banks are closed due to credi
t crunch. Many lenders have been hit hard, because the crunch has resulted in in
creased difficulties in: Getting finance on the wholesale money market Increased
cost costs relating to inter bank lending
1. 2.
Micro Finance Institutes

Providing credit, thrift and other financial services and products to the econom
ically challenged to enable them to raise their income levels and living standar
ds. Customers of microfinance institutions (MFIs) do not have access to banking
services, and depend on informal sources (such as friends, relatives and money l
enders) for their credit requirements.
MFIs fulfill the critical objective of providing financial services to the econo
mically challenged; such services enable clients to meet their credit requiremen
ts, fulfill their entrepreneurial ambitions and enhance their economic status. T
o make this happen, CRISIL offers risk assessment (including MFI Grading) and di
agnostic services to help MFIs and other constituents in the microfinance indust
ry to measure, mitigate and manage their business and financial risks.
CRISIL Grading

CRISIL launched MFI grading in 2002. World¶s first credit rating agency to develop
a separate methodology and scale to assess MFIs. Since then, CRISIL has assesse
d around 150 MFIs and established itself as the leading rating agency in the Ind
ian microfinance space.
In addition to MFI grading and risk assessment services, it rates MFIs¶ bank facil
ities and securitization transactions. It is India¶s first rating agency to have r
ated bank loans of MFIs and securitization transactions involving microfinance l
oan receivables.

For MFIs- A MFI Grading is based on through analysis of your microfinance progra
mme and the grading report from CRISIL therefore carries weight with donors, inv
estors and lenders, and can help you access cost effective funds in a timely man
- The MFI would also receive a report from CRISIL, which would include rationale
for the grading, summary of the performance across various parameters - Managem
ent, Institutional arrangement, Capital adequacy and asset quality, Resources, O
perational Effectiveness and Scalability and Sustainability, summary of key fina
ncial and operational indicators. - The report will not only be helpful in fund
raising but also in identifying the weaknesses that the MFI needs to address.
For Banks- CRISIL's MFI Grading would help bankers to evaluate the functioning o
f the MFIs and NGOMFIs and increase their priority sector disbursements.
Process of MFI Grading
CRISIL has developed the microfinance grading to meet the requirements of the co
nstituents of the sector - apex MFIs, banks, MFIs and social investors. Hence th
e MFI Grading is not a credit rating and does not indicate the credit worthiness
of an MFI (obligor). The MFI Grading cannot also be compared with the credit ra
ting assigned to a debt instrument (fixed deposits, debentures, etc) of the same
Pros People with good credit are at an advantage because their credit files will
only enhance their ability to borrow.

Lenders have the advantage of being able to reward or punish people with their r
It helps to evaluate on the risk involved with various investment alternative. I
t helps the issuers of the debt instrument to price their issue correctly and to
reach out to new investors. Makes it easier to raise funds for the rated firm.

Sometimes incorrect credit information is reported, or a consumer's identity is
stolen. Wrong credit rating will affect the business and foreign people invested
in our country.
such as lawsuits, bankruptcies on a credit file are among the most serious.
Non disclosure of significant information. Rating is not certificate of soundnes