CREDIT RATING

MEANING:

Credit rating agencies play an important role in assessing risk and its location and
distribution in the financial system. By facilitating investment decisions they can help
investors in achieving a balance in the risk return profile and at the same time assist
firms in accessing capital at low cost.

According to Moody’s definition:- “Ratings are designed exclusively for the purpose of
grading bonds according to their investment qualities.”

Credit rating is an assessment of the capacity of an issuer of debt security, by an

independent agency, to pay interest and repay the principal as per the terms of issue of
debt. A rating agency collects the qualitative as well as quantitative data from the
company which has to be rated and assessed the relative strength and capacity of
company to honour its obligations contained in the debt instrument throughout the
duration of the instrument. The rating given is based on an objective judgment of the
team of experts from the rating agency.

The ratings are expressed in code number which can be easily comprehended even by
the lay investors. The ratings are the quickest way of understanding a company’s
financial standing without going into the complicated financial reports. Credit rating is
only guidance to the investors and not a recommendation to a particular debt
instrument. The important element for investment decision making in debt securities
are:-

i. Yield to maturity
ii. Risk tolerance to investor
iii. Credit risk of the security.

Hence, the focus of credit rating is on any one of these three elements viz., credit risk of
the security and hence it cannot by itself be a basis for investment decision making. It is
only a current opinion on the relative capacity of firms to repay debt in time.

Credit rating, in India, is done for a specific debt security and not for a company as a
whole. No rating agency tells us that the rating symbols indicate the capacity of the
company to honour the terms of contract of a debt instrument.

A debt rating is not a onetime evaluation of credit risk, which can be regarded as valid
for the entire life of the security. It is an ongoing appraisal. Changes in dynamic world of
business may imply a change in the risk characteristics of the security. Hence debt
rating agencies monitor the business and financial conditions of the issuer to determine
whether modification in rating is warranted.

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A credit rating does not create a fiduciary relationship between the rating agency and
the users of rating since there is no legal basis for such relationships.

ORIGIN

The credit rating concept originated in the U.S.A. In 1860, Henry Vannum poor started
publishing financial statics of railroad companies. In 1909, Moody’s Investors Agencies
started Railroad giving more thrust to the concept. Since then the importance has
extensively in the global market. System of ratings got institutionalized following the
Great Depression. In 1993, the US controller of currency enacted a rule that banks
could purchase securities rated only BBB/Baa or above. In 1970, Penn Central, the then
largest Railroad Company in the world went bankrupt with just under $100 million in
outstanding commercial paper. Consequently, today, almost 100% of the commercial
paper volume and 99% of the corporate bond volume are rated in the U.S.A.

CREDIT RATING IN INDIA

The environment that prevailed in America when first ratings were assigned prevails in
many developing countries today. The Indian capital market has witnessed a
tremendous growth in the past few years. Companies are relying on capital markets for
financing existing operations as well as for new projects rather than on institutions. In
this process, the average size of debentures issued by companies, the number of
companies issuing debentures and the number of investors have grown substantially.

As the number of companies borrowings directly from directly from capital market
increases, investors find that the company’s size or name is no longer a sufficient
assurance of the timely payment of interest and principal. Default by large and well
known companies recently in payment of interest on fixed deposits and a debenture has
reinforced this belief among investors. They felt the need for an independent and
credible agency which judges the quality of debt obligations of different companies and
assist individuals and institutional investors in making investment decisions.

In this context, the Credit Rating Information Services of India Limited (CRISIL) was set
up in 1987. CRISIL was promoted by premier financial institutions like ICICI, HDFC,
UTI, SBI, LIC and Asian Development Bank. Now CRISIL is an S&P company with a
majority shareholding. Apart from CRISIL four more rating agencies have been
registered by SEBI in India. These are ICRA, promoted by IFCI in and now controlled by
Moody‘s, CARE promoted by IDBI, Fitch India a 100% subsidiary of Fitch, and a new
born Brickworks. In India, CRAs that rate capital market instruments are governed by
Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.
The regulation provides detailed requirements that a rating agency needs to fulfill to be
registered with SEBI. All the credit rating agencies have been approved by the Reserve
Bank of India.

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CRAs registered with SEBI:-

Name of CRA Year of commencement of

operations

CRISIL 1988

ICRA 1991

CARE 1993

Fitch India 1996

Brickworks 2008

In India, revenues of the three big rating agencies, CRISIL, ICRA and CARE have
shown an upward trend given the increase in the usage of ratings over time.

FUNCTIONS OF CREDIT RATINGS

The credit rating firms are supposed to do the following functions:

1. Superior Information
Rating by an independent and professional firm offers a superior and more reliable
source of information on credit risk for three inter related risks:
(a) It provides unbiased opinion.
(b) Due to professional resources, a rating firm has greater ability to assess risks.
(c) It has access to lot of information which may not be publicly available.

2. Low cost information

A rating firm which gathers, analyses, and summaries complex information in a simple
and readily understood format for wide public consumption represents a cost effective
arrangement.

3. Basis for a proper Risk-Risk trade off

If debt securities are rated professionally and if such ratings enjoy widespread investor
acceptance and confidence, a more rational risk-return trade off would be established in
the capital market.

4. Healthy discipline on corporate borrowers

Public exposure has healthy influence over the management of issuer because of its
desire to have a clear image.

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5. Formulation of public policy guidelines on institutional investment
The public policy on the kinds of securities that are eligible for inclusion in different kinds
of institutional portfolio can be developed with great confidence if securities are rated
professionally by independent agencies.

6. Greater credence to financial and other representation

When credit rating agency rates a security, its own reputation is at stake. So it seeks
financial and other information, the quality of which is acceptable to it. As the issues
complies with the demands of a credits rating agency on a continuing basis, its financial
and other representations acquire greater credibility.

TYPES OF RATING

Following are the different kinds of rating:

1. Bond/debenture rating: Rating the debentures/bonds issued by corporate,

government etc. is called debenture or bond rating.
2. Equity rating: Rating of equity shares issued by a company is called equity rating.
3. Preference share rating: Rating of preference share issued by a company is called
preference share rating.
4. Commercial paper rating: commercial papers are instruments used for short term
borrowing. Commercial paper issued by manufacturing companies, finance
companies, banks and financial institutes and rating of these instruments is called
commercial paper rating.
5. Fixed deposits rating: Fixed deposits programmes are medium term unsecured
borrowing. Rating of such programmes is called as fixed deposits rating.
6. Borrowers rating: Rating of borrowers is referred as borrower rating.
7. Individuals rating: Rating of individual is called as individual credit rating.
8. Structured obligation: Structured obligations are also debt obligation different to
debenture or bond or fixed deposit progarmmes and commercial papers. Structured
obligation is generally asset backed security. Credit rating agencies assessed the
risk associated with the transaction with the main trust on cash flows emerging from
the asset would be sufficient to meet committed payment, to the investors in worst
case scenario.
9. Sovereign rating: Is a rating of a country which is being considered whenever a
loan is to be extended or some major investment is envisaged in a country.

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BENEFITS OF SECURITY CREDIT RATING:

For different class of persons different benefits accrue from use of rated instruments.
Such benefits directly accruing to investors through rated instruments are:

A. Benefits to investors:
Investors are benefitted in vey many ways if the corporate security in which they intend
to invest their saving has been rated by credit rating agency. Some of the benefits are
as:

1. Safeguard against bankruptcy:

Credit rating of an instrument done by credit rating agency gives an idea to the investors
about degree of financial strength of the issuer company which enables him to decide
about the investment. Highly rated instruments of a company gives an assurance to the
investors of safety of instrument and minimum risk of bankruptcy.

2. Recognition of risk:

Credit rating provides investors with rating symbols which carry recognizable manner for
the benefit of investors to perceive the risk involved in the investment. It becomes easier
for the investors by looking at the symbol to understand the worth of the issuer company
which in detail cannot be provided at the minimum cost to each and every one and at
the same time they cannot also analyse or understand such information for taking any
investment decisions. Rating symbols gives them the idea the risk involved or the
expected advantages from the investment.

3. Credibility of the issuer:

Rating gives a clue to the credibility of the issuer company. The rating agency is quite
independent of the issuer company and has no business connections or otherwise any
relationship with it or its Board of Directors, etc. Absence of business links between the
rater and the rated firm establishes ground for credibility and attract investors.

4. Easy understandability of investment proposal:

Rating symbol can be understood by an investor which needs no analytical knowledge

on his part. Investor can take quick decisions about the investment to be made in any
particular rated security of a company.

5. Saving of resources:

This relives investors from the botheration of knowing about the fundamentals of a
company, its actual strength, financial standing, management details, etc. The quality of

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credit rating done by professional experts of the credit rating agency reposes
confidence in him to rely upon the rating for taking investment decisions.

6. Independence of investment decisions:

For making investment decisions, investors have to seek advice of financial

intermediaries, the stock brokers, merchant bankers, the portfolio managers etc. about
the good investment proposal, but for rated instruments, investors need not depend
upon the advice of these of financial intermediaries as the rating symbol assigned to a
particular instrument suggests the credit worthiness of the instrument and indicates the
degree of risk involved in it.

7. Choice of investments:

Several alternative credit rating instruments are available at a particular point of time for
making investment in the capital market and the investors can make choice depending
upon their own risk profile and diversification plan.

8. Benefits of rating surveillance:

Investors get the benefit of credit rating agency’s on-going surveillance of the rating and
rated instruments of different companies. The credit rating agency downgrades the
rating of any instruments if subsequently the company’s financial strength declines or
any event takes place which necessitates consequent dissemination of information on
its position to the investors.

In addition to above, investors have other advantages like: quick understandings of the
credit instruments and weigh the ratings with advantages from instruments: quick
decisions making for investment and also selling or buying securities to take
advantages of market conditions: or, perceiving of default risk by the company.

B. Benefits of rating to company:

Company which had its credit instrument or security rated by a credit rating agency is
benefitted in many ways as summarized below:

1. Lower cost of borrowing:

A company with highly rated instrument has the opportunity to reduce the cost of
borrowing from the public by quoting lesser interest on fixed deposits or debentures or
bonds as the investors with low risk preference would come forward to invest in safe
securities through yielding marginally lower rate of return.

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2. Wider audience for borrowing:

A company with a highly rated instrument can approach the investors extensively for the
resource mobilization using the press media. Investors in different strata of the society
could be attracted by higher rated instrument as the investors understands the degree
of certainty about timely payment of interest and principal on a debt instrument with
better rating.

3. Rating as marketing tool:

Companies with rated instrument improve their own image and avail of the rating as a
marketing tool to create better image in dealing with its customers feel confident in the
utility products manufactured by the companies carrying higher rating for their credit
instruments.

4. Reduction of cost in public issues:

A company with higher rated instruments is able to attract the investors and with least
efforts can raise funds. Thus, the rated company can economize and minimize cost of
public issue by controlling expenses on media coverage, conferences and other
publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues.

5. Motivation of growth:

Rating provides motivation to the company for growth as the promoters feel confident in
their own efforts and are encouraged to undertake expansion of their operations or new
projects. With better image created through higher credit rating the company can
mobilize funds from public and instructions or banks from self assessment of its own
status which is subject to self-discipline and self- improvement, it can perceive and
avoid sickness.

6. Unknown issuer:

Credit rating provides recognition to a relatively unknown issuer while entering into the
market through wider investor base who rely on rating grade rather than on ‘name
recognition’.

7. Benefits to brokers and financial intermediaries:

Highly rated instruments put the brokers at an advantage to make less effort in studying
the company’s credit position to convince their clients to select an investment proposal.
This enables brokers and other financial inter-mediaries to save time, energy, costs and
manpower in convincing their clients about investment in any particular instrument.

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RATING AGENCIES IN INDIA
Currently there are five credit rating agencies in India
1. Credit Rating Information Service Ltd. (CRISIL).
2. Investment Information and Credit Rating Agency of India (ICRA).
3. Credit Analysis and Research (CARE).
4. Duff Phelps Credit Rating Pvt. Ltd. (DCR India).
5. Onida Individual Credit Rating Agency Ltd. (ONICRA)

CREDIT RATING INFORMATION SERVICES LIMITED

Credit Rating Information Services Limited (CRISIL) the first credit agency was floated
on January 1, 1988. It was started jointly by ICICI and UTI with an equity capital of Rs.4
crores. Each of them holds 18% of the capital. The other promoters are Asian
Development Bank (15%), the LIC and General Insurance Corporation and its
subsidiaries and the SBI (5% each), the Housing Financial Development Corporation
(6.2%), nine public sector and private sector banks (19.25%) and 10 foreign
banks(7.55%).

The principal objective of CRISIL is to rate the debt obligations of Indian Companies. Its
rating guides investors about the risk of timely payment of interest and principal on a
particular debt instrument.

OBJECTIVES

 To assist both individual and 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 with an effective marketing tool.

CRISIL has five offices one each in Mumbai, Delhi, Kolkata, Chennai and Bangalore.

RATING METHODOLOGY

CRISIL commences a rating exercise at the request of a company. In accordance with

industry practice all over the world, the methodology involves an analysis of the past
performance of the company and assessment of its prospects. The first analysis relates
to the past performance of the company however the past is viewed not as a guide, but
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to understand why the Company performed in the way it did, what problems it faced and
what the management’s response to these problems was. To assess the future
prospects, CRISIL studies the industry or industries which the company operates and
the company’s position within the industry. It also makes an evaluation of the
management and cash flow projection of the company and identifies the key issues
concerning the company. The industry is studied by analysing demand and supply
growth, nature and basis of competition, Government policy for the company and the
effect of change in Government policy on the future of the company. The position of the
company within the industry is studied to understand how the company would fare in the
future. CRISIL, therefore, looks at the operating efficiency in terms of locational
advantage, raw material, power and labour situation; its cost structure as compared to
that of its nearest competitors and the company’s market position in terms of its market
share, product strength, selling and distribution arrangements, competitive advantage,
customer delivery etc. CRISIL, evaluates the management of the company with
reference to its tract record, the recruitment and training system, planning and control
system, depth of managerial talents and succession plans, goals for the company, the
philosophy of doing business, attitudes towards taking business risks and the strategies
for the company. The tenacity, determination and drive of the management to overcome
problems as they arise in the company is yet another factor assessed by the CRISIL.
Then, CRISIL makes its own assessment of cash flows and decides the degree of
comfort available from the cash flows to meet cash needs of the company for capital
expenditure, working capital growth and debt servicing obligations. In addition, it
assesses the company’s ability to raise funds quickly in various ways in times of
necessity to meet the requirements of servicing debt. The rating process seeks to
identify the key issues concerning the company. For instance, if a company is putting up
a new project, the key issue in the rating is the likelihood of timely completion of the
project. The rating is a composite assessment of all these factors with the key issue
getting greater attention from the Rating agency. In evaluating the ratings, CRISIL
employs both qualitative and quantitative criteria. The judgement made by the CRISIL is
necessarily subjective and the quantitative analysis is meant to assist in making best
possible overall qualitative judgement.

CRISIL employees a multi-layered decision making process in assigning rating. When it

receives a request for rating, it assigns two term of the job. The first team meets the
officials and makes an assessment of the industry, company and management. The
second team is also required to make its own study of the industry. Then the first team
interacts with the backup team. The findings of the interactions are Presented
simultaneously in a detailed note to the Branch Internal Committee comprising at least
three senior analysts of CRISIL and an Internal Committee of six senior executives and
thereafter the note is presented with the recommended ratings to the Rating Committee
comprising six directors of the company who are not connected with any shareholders

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of CRISIL. The Rating Committee members are chosen carefully so that they do not
have any links with industries or investment agencies connected with the units being
rated. This multi-layered process ensures that no individual decides on rating and that
prejudices and biases are eliminated. The evaluation of the company is made on a
confidential basis. The rating process ensures complete confidentiality of information
that may be provided by the company.

CREDIT RATING SYMBOLS

CRISIL uses the conventional rating symbols used in the USA and widely accepted in
many other countries.

CRISIL CREDIT RATING SYMBOL FOR DEBENTURES

High Investment Grades

AAA (Triple A) * Highest Safety—Debentures rated ‘AAA’ are judged to offer highest
safety of timely payment of interest and principal. Though the circumstances providing
this degree of safety is likely to change, such changes as can be envisaged are most
unlikely to affect adversely the fundamentally strong position of such issues.

AA (Double A) * High Safety—Debentures rated ‘AA’ are judged to offer high safety of
timely payment of interest and principal. They differ in safety from ‘AAA issues only
marginally.

Investment Grades

A* Adequate Safety—Debentures rated ‘A’ are judged to offer adequate safety of

timely payment interest and principal. However, changes in circumstances can
adversely affect such issues more than those in the higher rated categories.

BBB (Triple B)* Moderate Safety—Debentures rated ‘BBB’ are judged to offer
moderate safety of timely payment of interest and principal for the present; however,
changing circumstances are more likely to a weakened capacity to pay interest and
repay principle than for debentures in higher rated categories.

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Speculative Grades

BB (Double B) * Inadequate Safety—Debentures rated ‘BB’ are judged to carry

inadequate safety of timely payment of interest and principal; while they are less
susceptible to default than other speculative grade debentures in the immediate future,
the uncertainties that the issuer faces could lead to inadequate capacity to make timely
interest and principal payments.

B * High Risk—Debentures rated ‘B’ are judged to have greater susceptibility to

default; while currently interest and principal payments are met, adverse business or
economic conditions would lead to lack of ability or willingness to pay interest or
principal.

C * Substantial Risk—Debentures rated ‘C’ are judged to have factors present that
make them vulnerable to default; timely payment of interest and principal is possible
only if favourable circumstances continue.

D * Default—Debentures rated ‘D’ are in default and in arrears of interest or principal

payments or are expected to default on maturity. Such debentures are extremely
speculative and returns from these debentures may be realized only on reorganisation
or liquidation.

N.M.* Not Meaningful—Instruments rated “N.M” are in default or are expected to

default on maturity or are vulnerable to default. Such instruments have factors present
in them, which render the rating outstanding meaningless. Such instruments are
extremely speculative and returns from, these instruments may be realised only on
reorganisation or liquidation.

CRISIL RATING SYMBOLS FOR FIXED DEBENTURE

Investment Grades

FAAA (F Triple A) * Highest Safely— This rating indicates that degree of safety
regarding timely payment of interest and principal is very strong.

FAA (F Double A) * High Safety— This rating indicates that the degree of safety
regarding timely payment of interest and principal is strong. However, the relative
degree of safety is not as high as for fixed deposits with ‘FAAA’ rating.

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FA * Adequate Safety— This rating indicates that the degree of safety regarding timely
payment of interest and principal is satisfactory. Changes in circumstances can affect
such issues more than those in the higher rated categories.

Speculative Grades

FB* Inadequate Safety— This rating indicates inadequate safety of timely payment of
interest and principal. Such issues are less susceptible to default than fixed deposit
rated below this category, but the uncertainties that the issuer faces could lead to
inadequate capacity to make timely interest and principal payments.

FC* High Risk— This rating indicates that the degree of safety regarding timely
payment of interest and principal is doubtful. Such 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.

FD* Default— This rating indicates that the issue is either in default or is expected to be
in default upon maturity.

N.M.* Not Meaningful—Instruments rated “NM” are in default or are expected default
on maturity or are vulnerable to default such instruments have factors present in them,
which render the rating outstanding meaningless. Such instruments are extremely
speculative and returns from these instruments may be realised only on reorganisation
or liquidation.

CRISIL RATING SYMBOLS FOR SHORT TERM INSTRUMENTS

P-1— This rating indicates that the degree of safety regarding timely payment on its
instrument is very strong.

P-2— 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 fat
instruments rated ‘P-1’.

P-3— 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
instrument is minimal and it is likely to be adversely affected by short-term adversity or
less favourable conditions.

P-5— This rating indicates that the instrument is expected to be in default on maturity
or is in default.

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N.M.* Not Meaningful— Instruments rated “NM” are in default or are expected to
default on maturity or are vulnerable to default. Such instruments have factors present
in them, which render the rating outstanding meaningless. Such instruments are
extremely speculative and returns from these instruments may be realised only on
reorganisation or liquidation.

CRISIL RATING SYMBOLS FOR STRUCTURED OBLIGATIONS (So)

CRISIL rating of Structured Obligations (so) are its current opinions as to an obligor’s
capacity and willingness to make timely payment, of financial obligations, on the rated
instrument. The assessment takes into consideration any arrangements for payment on
the instrument by an obligor other than the issuer or from sources independent of the
issuer or external support to fulfil the financial obligations on the instrument or any
means of enhancing credit including arrangements as to guarantors, letters of credit and
asset backing. Structured Obligation ratings are based on the same scale (AM through
D) as CRISIL ratings for long-term instruments. CRISIL rating is not a recommendation
to purchase, sell or hold an instrument nor does it comment on the price or suitability for
an investor nor does it involve an audit by CRISIL. CRISIL may revise, suspend or
withdraw a rating as a result of information or changes in circumstances or unavailability
of information.

High Investment Grades

AAA(so) (Triple A s 0)* Highest Safety— This rating indicates the highest degree of
certainty regarding timely payment of financial obligations on the instrument. Any
adverse changes in circumstances are most unlikely to affect the payments on the
instruments.

AA(so) (Double A s o)* High Safety— This rating indicates a high degree of certainty
regarding timely payment of financial obligations on the instrument. This instrument
differs in safety, from ‘AAA’, instruments only marginally.

Investment Grades

A(so) * Adequate Safety— This rating indicates an adequate degree of certainty

regarding timely payment of financial obligations on the instrument. Change in
circumstances can adversely affect such instruments more than those in the higher
rated categories.

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BBB(so) (Triple B s o) * Moderate Safety— This rating indicates moderate degree of
certainty regarding timely payment of financial obligations on the instrument However,
changing circumstances are more likely to lead to a weakened capacity to meet
financial obligations than for instruments in higher rated categories.

Investment Grades

BB (so) (Double B s o)* “Inadequate Safety— This rating indicates an inadequate

degree of certainty regarding timely payment of financial obligations on the instrument.
Such instruments are less susceptible to default than instruments rated below this
category.

B (so)* High Risk— This rating indicates high risk and greater susceptibility to default.
Any adverse business or economic conditions would lead to lack of capability or
Willingness to meet financial obligations on time.

C (so) * Substantial Risk— This rating indicates that the degree of certainty regarding
timely payment of financial obligations is doubtful unless circumstances are favourable
D (so)* Default-This rating indicates that the obligation is in default or expected to
default.

CRISIL RATING SYMBOLS FOR FOREIGN STRUCTURED OBLIGATIONS (FSO)

CRISIL has developed a framework for rating the debt obligation of Indian corporate
supported by credit enhancements extended by entities based outside the country. The
issues considered inter alia include the credit worthiness of the offshore entity, nature
and structure of the credit enhancement mechanism to ensure timely pay on rated debt
obligations and regulatory issues as regards the transfer risk. CRISIL would mark up the
separate credit ratings of these Indian issuers depending on these factors.

CRISIL ratings of Foreign Structured Obligations (fso) factor the credit enhance
extended by an entity based outside the country. The ratings indicate the degree
certainty regarding timely payment of financial obligations on the instrument. These
ratings have been assigned in the current regulatory framework as regards the transfer
risk and any change therein could impact the ratings.
The credit enhancements could be in the form of guarantees letters of credit,
backing or other suitable structures. Due to the current regulatory controls on inward
remittances, CRISIL would require suitable liquidity mechanisms to be in place for
ensuring timely payment on due dates.

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Foreign Structured Obligations ratings are based on the same scale (MA through D) as
CRISIL ratings for long-term instruments. Foreign Structured Obligation rating symbols
are defined below:

High Investment Grades

AAA (fso) (Triple A f s o) * Highest Safety—This rating indicates highest degree

certainty regarding timely payment of financial obligations on the instrument any
adverse changes in circumstances are most unlikely to affect the payment on the
instrument.

AA (fso) (Double A f s o) * High Safety—This rating indicates high degree certainty

regarding timely payment of financial obligations on the instrument. This instrument
differs in safety, from ‘AAA (fso)’ instruments only marginally.

Investment Grades

A (fso) * Adequate Safety—This rating indicates adequate degree of certainty timely

payment of financial obligations on the instrument. Changes in circumstances can
adversely affect such instruments more than those in the higher rated categories.

BBB (fso) (Triple B f s o) * Moderate Safety—This rating indicates a degree of

certainty regarding timely payment of financial obligations on the instrument. However,
changing Circumstances are more likely to lead to a weakened capacity to meet
financial obligations than for instruments in higher rated categories.

Speculative Grades

BB (fso) (Double B f s o)*Inadequate Safety-This rating indicates inadequate degree

of certainty regarding timely payment of financial obligations on the instrument. Such
instruments are less susceptible to default than instruments rated below this category.

B(fso)*High risk-This rating indicates high risk and greater susceptibility to adverse
business or economic conditions would lead to lack of capability or willingness to meet
financial obligations on time.

C (fso)* Substantial Risk—This rating indicates that the degree of certainty regarding
timely payment of financial obligations is doubtful unless circumstances are favourable.

D (fso) Default—This rating indicates that the obligation is in default or expected to

default.

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CRISIL RATING SYMBOLS FOR INVESTMENT CARRYING NON-CREDIT RISK

The CRISIL long-term debenture rating scale addresses the credit risk, which
represents the possibility of a company not being able to meet its financial obligations.
Recently, CRISIL has been approached to rate several debenture instruments (like fully
convertible debentures) which contain non-credit risks (such as market risk which
indicates the unexpected changes in stock prices or currency rates etc.). In order to
adequately disclose the impact of non-credit risks on the returns to investors in these
debt instruments, CRISIL has introduced a new rating scale. This scale denotes that the
rating does not address the variability of returns which may arise on account of the non-
credit risks.

High investment Grades

AAAr (Triple A r) * Highest Safety-Debentures rated ‘AAAr’ are judged to offer

highest safety of timely payment of interest and/or principal. Though the circumstances
providing this degree of safety is likely to change, such changes as can be envisaged
are most unlikely to affect adversely the fundamentally strong position of such issues.

AAr (Double A r) * High Safety-Debentures rated ‘AAr’ are judged to offer high Safety
of timely payment of interest and/or principal. They differ in safety from AAAr issues
only marginally.

Investment Grades

Ar (Single A r) * Adequate Safety-Debentures rated ‘Ar’ are judged to offer adequate

safety of timely payment of interest and/or principals however, changes in
circumstances can adversely affect such issues more than those in the higher rated
categories.

BBBr (Triple B r) * Moderate Safely-Debentures rated ‘BBBr’ are judged to offer

sufficient safety of timely payment of interest and/or principal for the present; however,
changing circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal than for debentures in higher rated categories.

Speculative Grades

BBr(single B r)* High Risk-Debenture rated ‘BBr’are judged to carry inadequate safety
of timely payment interest and/or principal, while they are less susceptible to default
than other speculative grade debenture in the immediate future, the uncertainty that the

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issuer faces could lead to inadequate capacity to make timely interest and principal
payments.

Br (Single B r )* High Risk- Debentures rated ‘Br’ are judged to have greater
susceptibility to default; while currently interest and/or principal payments are met
adverse business or economic condition would lead to lack of ability or willingness to
pay interest or principal.

Cr (single C r)*Substantial Risk-Debentures rated Cr are judged to have factor

present that make them vulnerable to default; timely payment of interest and/or principal
is possible only if favourable circumstances continue.

Dr (Single D r) Default-Debentures rated ‘Dr’ are in default and in arrears interest and /
or principal payments or are expected to default on maturity. Such debentures are
extremely speculative and returns from these debentures may be realized only
reorganisation or liquidation.

CRISIL RATING SYMBOL FOR DEBT FUND PORTFOLIOS

CRISIL has introduced credit quality ratings for debt funds. This rating is an opinion on
the credit quality of the funds underline portfolio holding. Only pure debt funds whose
portfolio consists entirely of fixed income securities will be rated under this scheme.

CRISIL’S rating methodology will take the following aspects into account while
assigning rating

 The credit risk associated with securities in the fund’s portfolio: The credit risk
associated with particular security held by the fund should be consistent with the
overall fund rating. In generals CRISIL will be guided by the mix of credit risk
represented by the underlying securities in the portfolio in arriving at overall risk
assessment of the portfolio.

 The systems and procedures followed by the fund-While examining systems and
procedures, CRISIL will look into systems for making and executing investment
decisions, back office systems, reconciliation with custodians and registrars,
calculation of NAV, tracking of payments, receivables etc.

 Management quality and expertise-Managements track record in the business,

quality of key personnel and investment strategy for the fund are evaluated.
These ratings are not an opinion on the Asset Management Company’s willingness

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 or ability to make timely payment to the investor. The rating is also not an opinion on
the stability of the NAV of the scheme, which could be altered by market
developments.

RATING SCALE AND DEFINITIONS

Rating Definition

AAAf The fund’s portfolio holdings provide very strong protection against
tosses from credit defaults.

AAf The fund’s portfolio holdings provide strong protection against loss from
credit defaults.

Af The fund’s portfolio holdings provide adequate protection against losses

from credit defaults

BBBf The fund’s portfolio holdings provide moderate protection against loss
from credit defaults.

BBf The fund’s portfolio holdings provide uncertain protection against the
losses from credit defaults.

Bf The fund’s portfolio holdings exhibit vulnerability to losses from credit

defaults.
Cf The fund’s portfolio holdings make it extremely vulnerable losses from
credit defaults.

INVESTMENT INFORMATION AND CREDIT RATING AGENCY

ICRA Ltd (formerly Investment Information and Credit Rating Agency of India ltd.) ICRA
has been promoted by Industrial Finance Corporation of India as its main promoter with
its headquarters at New Delhi. It is an independent company limited by share with an
authorised share capital of Rs. 10 crore against which Rs. 5 crore is paid up. IFCI has
contributed by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, and UCO
bank etc.

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ICRA was established to provide: Information and guidance to institutional and
individual investors and creditors; enhance the ability of borrower/ issuers to access the
money market and the capital market for tapping a larger volume of resource from a
wider range of investing public; assist the regulators in promoting transparency in
financial markets; or finally the intermediaries with a tool to improve efficiency in funds
raising process.

The range of services offered include Rating service: As an early in the credit rating
business, ICRA is one of the most experienced credit rating agencies in India today.
ICRA rates rupee denominated debt instruments issued by manufacturing companies,
commercial banks, non bank finance companies, financial institutions, public sector
undertakings and municipalities among others. The obligation include long term
instruments such as bonds and debenture, medium terms instruments such as fixed
deposit programmes and short term instruments much as commercial papers and
certificate of deposit. ICRA also rates structured obligation and sector specific debt
obligations such as instruments issued by power, Telecom and infrastructure
companies. Other services include credit assessment of large and small scale units for
obtaining specific lines of assistance from commercial banks, financial institutions and
financial services companies.

Information service: The information services group focuses on providing authentic

date and value added products used by intermediaries, financial institutions, banks,
asset managers, institutional and individual investors and others. Value added services
include ICRS’s pioneering concept of Equity Grading providing a critical input on
company’s earnings prospects of equity investors. Other products include corporate
reports, equity assessment, mandate based studies and sector/industry specific
publications.

Advisory Services: Advisory Services Division offers wide ranging management

advisory services which include strategic counselling, restricting solutions, client specific
need based studies in the banking and financial services, corporate and other core
sectors.

RATING METHODOLOGY

ICRA considers all relevant factors that have a bearing on the future cash generation of
the issuers. These factors includes: industry characteristics competitive position 0f
issuer, operational efficiency, management quality, commitment to new project and
other associate companies and finding policies of the issuer. A detailed analysis of the
past financial statements is made to assess the performance under the real world
business dynamics. Estimates of future earnings under various scenarios are drawn

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and evaluated against the claims and obligations that require Servicing over the tenure
of the instrument being rated primarily, it is the relative comfort level of the issuer to
service obligation that determine the rating.

Key areas considered in a rating analysis include the following:

1. Business risk: Industry characteristics, performance and outlook, Operating

position (capacity, market share, distribution system, marketing networks, etc.)
technological aspects, business cycles, size and capital intensity.

2. Financial Risk: Financial management (capital structure, liquidity position, financial

flexibility and cash flow adequacy, profitability, leverage, interest coverage),
projection, with particular emphasis on the components of cash flow and claims
there on, accounting policies and practices, with particular reference to practices of
providing for depreciation, income recognition, inventory valuation, off balance
sheet liabilities and claims, amortisation of intangible assets, foreign currency
transactions etc. are seen and evaluated.

3. Management assessment: Background and history of issuer, corporate strategy

and philosophy, organisational structure, quality of management and management
capability under stress, personnel policies including succession planning.

4. Environment analysis: Regulatory environment, operating environment, national

economic outlook, areas of special significance to the company, pending litigation,
tax status, possibility of default risk under a variety of future scenarios.

ICRA’S RATING PROCESS

The rating process follows:

(a) Rating request: Rating is initiated by a formal request (or mandate) from the
prospective issuer. This mandate spells out the terms of the rating assignment,
Important issues that are covered include : binding the credit rating agency to
maintain confidentiality, the right to the issuer to accept or not to accept the rating
and issuer to provide information required by the credit rating agency for rating and
subsequent surveillance;

(b) Rating team: The team usually comprises two members. The composition of the
terms if based on the expertise and skills required for evaluating the business of the
issuer;

(c) Information requirements: Issuers are provided a list of information requirements

and the broad framework for discussions. This requirement is derived from the
experience of the issuers business and broadly conforms to all the aspects which

20 | P a g e
 have a bearing on the rating. These factors have been discussed in details under
rating framework;

(d) Secondary information: ICRA also draws on the secondary source of information
including its own research division. The credit rating agency also has a panel of
industry experts who provide guidance on specific issues to the rating team. The
secondary sources generally provide data and trends including policies about the
industry;

(e) Management meetings and plant visits: Rating involves assessment of number of
qualitative factors with a view to estimate the future earnings of the issuer. This
requires intensive interactions with issuers’ management specifically relating plans,
future outlook, competitive position and fuding policies; Plants visits facilitate
understanding of the production process, assess the state of equipment and main
facilities, evaluate the quality of technical personnel and form an opinion on the key
variables that influence level, quality and cost of production. These visits also help
in assessing the progress of project under implementation;

(f) Preview meeting: After completing the analysis, the findings are discussed at
length in the internal committee, comprising senior analysts of the credit rating
agency. All the issue having a bearing on the rating are identified. At the stage, an
opinion on the rating is also formed;

(g) Rating committee meeting: This is the final authority for assigning ratings. A brief
presentation about the issuers business and the management is made by the rating
team. All the issues identified during discussions in the internal committee are
discussed. The rating committee also considers the recommendation he internal
committee for the rating. Finally, a rating is assigned and all the
issue which influence the rating are clearly spelt out;

(h) Rating communication: The assigned rating along with the key issue is
communicated to the issuer’s top management for acceptance. The ratings which
are not accepted are either rejected or reviewed. The rejected ratings are not
disclosed and complete confidentiality is maintained;

(i) Rating reviews: If the rating is not acceptable to the issuer, he has a right to appeal
for a review of the rating. These reviews are usually taken up only if the issuer
provides fresh inputs on the issues that were considered for assigning the rating.
Issuers’ response is presented of the Rating Committee. If the inputs are
convincing, the Committee can revise the initial rating decision;

(j) Surveillance: It is obligatory on the part of the credit rating agency to monitor the
accepted ratings over the tenure of the rated instruments. As has been mentioned
early, the issuer is bound by the mandate letter to provide information to the credit
rating agency. The ratings generally reviewed every year, unless the circumstances

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 of the case warrant an early review. In a surveillance review the initial rating could
be retained or revised (upgrade or downgrade).

ICRA’S LONG - TERM DEBT FUND CREDIT RISK RATING SCALE:

This scale is used to rate the underlying credit risk of debt fund’s portfolio on the long
term rating scale.

mfAAA : The highest - credit - quality rating assigned by ICRA to debt funds. The rated
debt fund carries lowest credit risk, similar to that associated with long - term debt
obligations rated in the adequate - credit - quality category.

mfAA : The high - credit quality rating assigned by ICRA to debt funds. The rated debt
fund carries low credit risk, similar to that associated with long - term debt obligations
rated in the high - credit - quality category.

mfA : The adequate credit - quality rating assigned by ICRA to debt funds. The rated
debt fund carries average credit risk, similar to that associated with long - term debt
obligations rated in the adequate - credit - quality category.

mfBBB : The moderate credit - quality rating assigned by ICRA to debt funds. The
rated debt fund carries higher than - average credit risk, similar to that associated with
long- term debt obligations rated in the moderate credit quality category.

mfBB : The inadequate credit - quality rating assigned by ICRA to debt funds. The
rated debt fund carries high credit risk, similar to that associated with long - term debt
obligations rated in the inadequate - credit - quality category.

mfB : The risk - prone - credit - quality rating assigned by ICRA to debt funds The rated
debt fund carries very high credit risk, similar to that associated with long - term debt
obligation stated in the risk - prone - credit - quality category.

mfC : The poor- credit - quality rating assigned by ICRA to debt funds The rated debt
fund carries similar credit risk as long - term debt obligations rated in the poor- credit –
quality category.

mfD : The lowest - credit - quality rating assigned by ICRA to debt funds. The rated debt
fund carries similar credit risk as long - term debt obligations rated in the lowest-credit -
quality category.

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ICRA’S SHORT - TERM DEBT FUND CREDIT RISK RATING SCALE

This scale applies to debt funds with weighted average maturity up to one year. Such
funds would generally include liquid funds and cash funds. Benchmark maturity for this
scale is 12 months.

The highest. credit - quality short - term rating assigned by ICRA to debt funds.
The rated fund carries the lowest credit risk, similar to that associated with short
mfAI - term debt obligations rated in the highest - credit - quality category. Within this
category, certain funds are assigned the rating of mfAl+ to reflect their relatively
stronger credit quality.

The above - average - credit - quality short - term rating assigned by ICRA to
mfA debt funds. The rated fund carries higher credit risk than funds rated mfAl, with
2 such risk being similar as that associated with short - term debt obligations rated
in the above – average-credit - quality category.

The moderate - credit - quality short - term rating assigned by ICRA to debt
funds. The rated fund carries higher credit risk than funds rated mfA2 and mfAl,
mfA with such risk being similar as that associated with short - term debt obligations
3 rated in the moderate - credit - quality category.

The risk - prone - credit - quality short - term rating assigned by ICRA to debt
mfA
funds. The rated fund carries high credit risk, similar to that associated with short
4
- term debt obligations rated in the risk - prone - credit - quality category.

The lowest.- credit - quality short - term rating assigned by ICRA to debt funds
mfA5 The rated fund carries credit risk similar to that associated with short - term debt
obligations rated in the lowest - credit - quality category.

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CARE

CARE is a credit rating and information services Company promoted by IDBI jointly with
investment institutions, banks and finance companies. The company commenced its
operations in October 1993 and announced’ its first rating in 1993. Services offered by
CARE are:

1) Credit rating: CARE undertakes credit rating of all types of debt instruments, both
short-term and long-term. Credit rating is an opinion on the relative ability and
willingness of an issuer to make timely payments on specific debt or relative
obligations over the life of the instrument. Credit rating thus provided a relative
ranking of the credit quality of debt instruments. In a developing market which is
shedding its strict regulatory framework, as in Indian, credit rating agencies have a
significant role to play. In such a market, the rating agency forms an integral part of a
broader programme of disinter medication, broadening and deepening of the market
and removal of barriers.

2) Information services: The broad objective of the Information Service will make
available information on any company, local body, industry or sector required by a
business enterprise. Value addition, through incisive analysis, will enable the users
of the service, like individual, mutual funds, investment companies, residents or non-
residents, to make informed decisions regarding investments. CARE, also prepares
‘credit reports’ on companies, for the benefit of banks and business counterparts.
CARE hopes that this service will, in course of time, meet a dearly emerging need in
the context of the liberalization of the industrial and service sectors and deregulation
of the capital market and the financial service industry.

3) Equity research: Another major activity of CARE will be Equity Research. The will
involve extensive study of the shares listed in the major stock exchange and
identification of the potential winners and losers among them on the basis of the
fundamentals affecting the industry, economy, market share, management
capabilities, international competitiveness and other relevant factors.

24 | P a g e
4) Rating of parallel marketers of LPG and kerosene: CARE undertakes
‘performance rating’ of parallel marketers of Liquefied Petroleum Gas (LPG) and
Superior Kerosene Oil (SKO) as notified by Government of India.

CARE’S RATING PROCESS

(i) Client gives request for rating and submits information and details schedules;

(ii) CARE assigns rating team and team analyses the information;

(iii) The team interacts with the Clients, undertakes site visits;

(iv) The Client interact with the Team respond to queries raised and provides any
additional data necessary for the analyses;

(v) The team analyses the data submitted by the Client and put up to Internal
Committee of CARE for previews analyses;

(vi) Rating Committee of CARE awards rating to the Client;

(vii) Client may ask for review of the rating assigned and furnish additional
information for the purpose. Client has the option not to accept the final rating in
which CARE will not publish the rating or monitor it; and, finally,

(viii) If the rating is accepted to the Client, CARE gives it for notification and a periodic
surveillance is undertaken by CARE.

Rating Symbol of CARE

A. Long Term & Medium Term Instrument

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 Instruments carrying this rating are considered to be of the best quality,
CARE AAA carrying negligible investment risk. Debt service payments are protected
by stable cash flow with good margin. While the underlying assumptions
CARE AAA
(FD)/(CD)/(So)/ any change as can be visualised are most unlikely to impair the strong
position of such instruments.
(CPS)/(RPS)

CARE AA Instrument carrying this rating are judged to be high quality by all
standards. They are also classified as high investment grade. They are
CARE AA related lower than CARE AAA securities because of somewhat lower
margins of protection. Changes are assumption may have a greater
(FD)/(CD)/(SO)/ impact or the long-term risks may be somewhat larger. Overall, the
difference with CARE AAA rated securities is marginal.
(CPS)/(RPS)

CARE A Instruments with this rating are considering upper medium grade
instruments and have many favourable investment attributes. Safety for
CARE A principal and interest are considered adequate. Assumption that do not
materialise may have a greater impact as compared to the instruments
(FD)/(CD)/(SO)/ rated higher.

(CPS)/(RPS)

CARE BBB Such instruments are considered to be of investment grade. They

indicate sufficient safety for payment of interest and principal, at the time
CARE BBB of rating. However, adverse changes in assumptions are more likely to
weaken the debt servicing capability compared to the higher rated
(FD)/(CD)/(SO)/ instruments.

(CPS)/(RPS)

CARE BB Such instruments are considered to be speculative, with inadequate

protection for interest and principal payments.
CARE BB

(FD)/(CD)/(SO)/

CARE B Instrument with such rating are generally classified susceptible to default.
While interest and principal payments are being met, adverse changes in
CARE B business conditions are likely to lead to default.

(FD)/(CD)/(SO)/

(CPS)/(RPS)

CARE C Such instruments carry high investment risk with likelihood of default in

26 | P a g e
 the payment of interest and principal.
CARE C

(FD)/(CD)/(SO)/

(CPS)/(RPS)

CARE D Such instruments are of the lowest category. They are either in default or
are likely to be in default soon.
CARE D

(FD)/(CD)/(SO)/

(CPS)/(RPS)

FD Fixed Deposits

CD Certificate of Deposits

SO Structured Obligations

CPS Convertible Preference Shares

RPS Redeemable Preference Shares

B. Short Term Instrument

Symbols Definition

PR1 Instruments would have superior capacity for repayment of short - term
promissory obligations. Issuers of such instruments will normally be
characterized:- by leading market positions in established industries, high rates
of return on funds employed etc.

PR2 Instruments would have strong capacity for repayment of short-term

promissory obligations. Issuers would have most of the characteristics as for
those with PR-1 instruments but to a lesser degree.

PR3 Instruments have an adequate capacity for repayment of short - term

promissory obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection

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 PR4 Instrument have minimal degree of safety regarding timely payment of short –
term promissory obligations and the safety is likely to be adversely affected by
short – term adversity or less favourable condition.

PR5 The instrument is in default or is likely to be in default on maturity.

C. Credit Analysis Rating

Symbols Definition

CARE 1 Excellent debt management capability. Such companies will normally be

characterised as leaders in the respective industries.

CARE 2 Very good debt management capability. Such companies would be regarded
as close to those rated CARE – 1, but with a lower capability to withstand
changes in assumptions.

CARE 3 Good capability for debt management. Such companies are considered
medium grade, assumptions that do not materialise may impair debt
management capacity in future.

CARE 4 Barely satisfactory capability for debt management. The capacity to meet
obligation is likely to be adversely affected by short – term adversity or less
favourable condition.

CARE 5 Poor capability for debt management. Such companies are in default or are
likely to default in meeting their debt obligations.

D. Long Term Loans

Symbol Definition

CARE AAA (L) Loans carrying this rating are considered to be of the best quality, Carrying
negligible investment risk. Debt service payments are protected by stable
cash flows with go margin. While the underlying assumptions may change,

28 | P a g e
 such changes as can visualised are most unlikely to impair the strong
position of such loans

CARE AA (L) Loans carrying this rating are judged to be of high quality by all standards.
They are also classified as high investment grade. They are rated lower
than CARE AAA loans because of somewhat lower margins of protection.
Changes in assumptions may have a greater impact or the long-term risks
may be somewhat larger. Overall, the difference with CARE AAA rated
loans is marginal.

CARE A (L) Loans with this rating are considered upper medium grade and have many
favourable investment attributes. Safety for principal and interest are
considered adequate. Assumptions that do not materialise may have a
greater impact as compared to the loans rated higher.

CARE BBB (L) Such loans are considered to be of investment grade. They indicate
sufficient safety for payment of interest and principal, at the time of rating.
However, adverse changes in assumptions are more likely to weaken the
debt servicing capability compared to the higher rated loans.

CARE BB (L) Such loans are considered to be speculative, with inadequate protection
for interest and principal payments.

CARE B (L) Loans with such rating are generally classified susceptible to default.
While interest and principal payment are being met, adverse changes in
business conditions are likely to lead to default.

CARE C (L) Such loans carry high investment risk with likelihood of default in the
payment of interest and principal.

CARE D (L) Such loans are of the lowest category. They are either in default or are
likely to be in default soon.

E. Short Term Loans

Symbol Definition

PL 1 Superior capacity for repayment of interest and principal on the loan.

PL 2 Strong capacity for repayment of interest and principal on the loan. They are rated
lower than PL-1 because of somewhat lower margins of protection. Changes in
assumptions may have a greater impact.

PL 3 Adequate capacity for repayment of interest and principal on the loan. Variability in

29 | P a g e
 earnings and profitability may result in significant changes in the level of debt
servicing capability. The effect of industry characteristics may be more pronounced.

PL 4 Minimal degree of safety regarding timely payment of interest and principal and the
safety is likely to be adversely affected by short – term adversity or less favourable
condition.

PL 5 The loan is in default or is likely to be in default on maturity.

BIBLIOGRAPHY

Bhalla,v.k. (2009), INVESTMENT MANAGEMENT, Sultan Chand & Company

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