INTRODUCTION

❖ CREDIT RATING AGENCY IN INDIA:

The evaluation of a people or businesses' ability and past performance in paying debts. A credit
rating is generally established by a credit bureau and used by merchants, suppliers, and bankers
to determine whether a loan should be granted or credit extended. Credit score is a very
important number that you should always be aware of. It's a measure of your financial
responsibility–the higher your score, the more willing lenders and creditors will be to lend you
money. One of the best things you can do before applying for a loan is to check your credit
report and score. “A rating is an opinion on the future ability and legal obligation of the issuer
to make timely payments of principal and interest on a specific fixed income security. The
rating measures the probability that the issuer will default on the security over its life, which
depending on the instrument may be a matter of days to 30 years or more. In addition, long
term ratings incorporate an assessment of the expected monetary loss should a default occur."
"Credit ratings help investors by providing an easily recognizable, simple tool that couples a
possibly unknown issuer with an informative and meaningful symbol of credit quality."
Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily
understood tool enabling the investor to differentiate between debt instruments based on their
underlying credit quality.

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 HISTORY

The credit rating is thus a symbolic indicator of the current opinion of the relative capability
of the issuer to service its debt obligation in a timely fashion, with specific reference to the
instrument being rated. It is focused on communicating to the investors, the relative ranking of
the default loss probability for a given fixed income. The rating measures the probability that
the issuer will default on the security over its life, which depending on the instrument may be
a matter of days to 30 years or more. In addition, long-term rating incorporates an assessment
of the expected monetary loss should a default occur. Credit rating helps investors by providing
an easily recognizable, simple tool that couples a possible unknown issuer with an informative
and meaningful symbol of credit quality. Credit rating can be defined as an expression, through
use of symbols, of the opinion about credit quality of the issuer of security/instrument. Credit
rating does not amount to any recommendation to purchase, sell or hold that security. It is
concerned with an act of assigning values by estimating worth or reputation of solvency, and
honesty to repose trust in a person's ability and intention to repay. The ratings assigned are
generally regarded in the investment community as an objective evaluation of the probability
that a borrower will default on a given security issue. Default occurs whenever a security issuer
is late in making one or more payments that it is legally obligated to make. In the case of a
bond, when any interest or principal payment falls due and is not made on time, the bond is
legally in default. While many defaulted bonds ultimately resume the payment of principal and
interest, others never do, and the issuing company winds up in bankruptcy proceedings. In most
instances, holders of bonds issued by a bankrupt company receive only a part amount on his
investments, invested, once the company's assets are sold at auction.

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 OBJECTIVES

• The main object of the study is to learn on need of credit rating in banking sector.

• To know the need of credit rating on a loan process.

• What is the process of rating agency and how they rate a company.

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 METHODOLOGY

• Investigation methodology is the way to analysis different aspects systematically to

research at a definite solution. For the objective of the study effective methodology
and methods of data collection are quite necessary. In methodology various steps are
adopted for problem identification and to find out appropriate remedial measures.

• Primary Sources: Primary data was collected through the open ended and close
ended questions of the questionnaire, direct interaction with the bank managers,
company authority and contractors are done.

• Secondary Sources: Secondary data collected from published journal, Project

reports, Internet.

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 BENEFITS OF CREDIT RATING AGENCY

❖ BENEFITS TO THE INVESTORS:

1) Safeguards Against Bankruptcy: Credit rating of an instrument done by a credit rating

agency gives an idea to the investors about the degree of financial strength of the issuing
company, which enables him to decide about the investment.

2) Recognition Of Risk: Credit rating provides investors with rating symbols that carry
information in easily 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 issuing company. The rating symbol gives them the idea about
the risk involved or the expected advantages from the investment.

3) Credibility Of Issuer: Rating gives a clue about the credibility of the issuing company.
The rating agency is quite independent of the issuer company and has no business
connections or any relationship with it or its Board of Directors, etc.

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4) Easy Understandability of Investment Proposal: An investor needs no analytical
knowledge on his part and can understand the rating symbol. The investor can take quick
decisions about the investment to be made in any particular rated security of a company.

5) Saving Of Resources: Investors rely upon credit rating. This relieves investors from the
hassle of acquiring knowledge about the fundamentals of a company, its actual strength,
financial standing, management details, etc.

❖ BENEFITS TO THE COMPANY:

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 minimum risk preference would come forward
to invest in safe securities though yielding marginally lower rate of return.

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
understand 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 instruments 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.

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4) Reduction Of Cost In Public Issues: A company with higher rated instrument is able to
attract the investors and with least efforts can raise funds. Thus, the rated company can
economize and minimize cost of public issues by controlling expenses on media coverage,
conferences and other publicity stunts and gimmicks. Rating facilitates best pricing and
timing of issues.

5) Motivation For 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.

TYPES OF CREDIT RATING

i. Investment grade: These ratings indicate the investment is considered robust by the
rating agencies, and the issuer is likely to complete the terms of repayment. As a
result, these investments are usually less competitively priced when compared to
speculative-grade investments.

ii. Institutional investors: Institutional investors like pension funds or insurance

companies utilize credit ratings to assess the risk associated to a particular investment
issuance, ideally with reference to their entire portfolio. According to the rate of a
particular asset, it may or not include it in its portfolio.

iii. Debt Issuers: Debt issuers like governments, institutions, etc. use credit ratings to
evaluate their creditworthiness and to measure the credit risk associated with their
debt issuance. These ratings can furthermore provide prospective investors in these
organizations with an idea of the quality of the instruments issued by the organization
and the kind of interest rate they could expect from such instruments.

iv. Businesses & Corporations: Business organizations can use credit ratings to
evaluate the risk associated with certain other organizations with which the business

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 plans to have a future transaction/collaboration. Credit ratings, therefore, help entities
that are interested in partnerships or ventures with other businesses to evaluate the
viability of their propositions.

FUNCTIONS OF CREDIT RATING AGENCY

1) Provides Superior Information: It is an independent rating agency, and is likely to

provide an unbiased opinion; unlike brokers, financial intermediaries and underwriters who
have a vested interest in the issue, Due to professional and highly trained staff, their ability
to assess risk is better, and finally, the rating firm has access to a lot of information, which
may not be publicly available.

2) Low cost Information: A rating firm gathers, analyses, interprets and summarizes
complex information in a simple and readily understood formal manner. It is highly
welcome by most investors who find it prohibitively expensive and simply impossible to
do such credit evaluation of their own.

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3) Basis For a Proper Risk and Return: If an instrument is rated by a credit rating agency,
then such instrument enjoys higher confidence from investors. Investors have some idea as
to what is the risk that he/she is likely to take, if investment is done in that security.

4) Healthy Discipline on Corporate Borrowers: Higher credit rating tìo any credit
investment tends to enhance the corporate image and visibility and hence it induces a
healthy discipline on corporates.

5) Greater Credence to Financial and Other Representation: When a credit rating

agency rates a security, its own reputation is at stake. Therefore, it seeks high quality
financial and other information.

IMPORTANCE

1. For Lending Entities: Credit ratings give an honest image of a borrowing entity.
Since no money lender would want to risk giving their money to a risky entity with a
high possibility of default from their part, credit ratings genuinely help money lenders
to assess the worthiness of the following entity and the risk associated with that entity,
therefore helping them to make better investment decisions. Credit ratings act as a
safety guard because higher credit ratings assure the safety of money and timely
repayment of the same with interest.

2. For Borrowing Entities: Since credit ratings provide an honest review of a

borrower’s ability to repay a loan, borrowers with high credit ratings find it easier to
get loans approved by money lenders. A considerable rate of interest is very important
for a borrowing entity because higher interest rates make it more difficult for a
borrower to repay the loan. Therefore, maintaining a high credit rating is essential for
a borrower as it helps them get a considerable amount of relaxation when it comes to
a rate of interest for the loan issued to them. Finally, it is also important for a
borrower to ensure that their credit rating has a long history of high rating. Just
because a credit rating is all about longevity. A credit rating with a long credit history

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 is viewed as more attractive when compared to a credit rating with a short credit
history.

3. For Investors: Credit ratings play a very crucial role when it comes to a potential
investor’s decision to invest or not in a particular bond. Now, investors have different
risk natures associated with them. In general, investors, who are generally risk-averse
in nature, are more likely to invest in bonds with higher credit ratings when compared
to lower credit ratings. At the same time, credit ratings help investors, who are risk
lovers to differentiate between bonds that are riskier due to the lower credit ratings
and invest in them for higher returns at the risk of higher defaults associated with
them.

LIST OF CREDIT RATING AGENCY IN INDIA

1) RATING CREDIT INFORMATION SERVICES OF INDIA LIMITED

(CRISIL):

CRISIL is a global analytical company providing ratings, research, and risk and policy
advisory services. The majority shareholder of CRISIL is Standard & Poor’s. CRISIL also
works with various governments and policy-makers in India and other developing nations.
Also, one of the major key areas of this agency is to enhance and improve the infrastructure
and meet the demands of a particular region. Additionally, the agency has provided ratings to
approximately 5180 SMEs in India alone. Another important function of CRISIL is to
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establish the creditworthiness of companies based on the business strengths, the board, the
market share, and reputation of the company etc.

So, here is a snapshot of this credit rating agency-

Year of Establishment 1987

Headquarters Gurgaon, India
Rating scale — CRISIL offers 8 different grades credit scoring. They are,
— CRISILAAA, CRISIL AA, CRISIL A – The three grades
offer maximum safety for timely servicing of the loans.
— CRISILBBB, CRISIL BB – Offer moderate safety.
— CRISIL B, CRISIL C, CRISIL D – High
risk individuals

❖ PROCESS OF CRISIL:

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2) INVESTMENT INFORMATION AND CREDIT RATING AGENCY
(ICRA):

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Formerly named as the Investment Information and Credit Rating Agency, the ICRA was a
joint venture of Moody’s and Indian financial and banking service organizations. It was then
renamed to ICRA Limited in April 2007 and listed in the Bombay Stock Exchange and National
Stock Exchange in the same year. ICRA assigns corporate governance rating, performance
ratings, grading and provides rankings to mutual funds, hospitals and construction and real
estate projects. The focus area for ICRA is the MSME sector. ICRA ratings may be understood
as relative rankings of credit risk within India. ICRA ratings are not designed to enable any
rating comparison among instruments across countries; rather these address the relative credit
risks within India. Unless stated otherwise, ICRA’s ratings (other than Structured Finance
Ratings) in the investment grade convey the relative likelihood of default, that is, the possibility
of the debt obligation not being met as promised.

So, here is a summary of this credit rating agency-

Year of Establishment 1991

Headquarters Mumbai, India
Rating Scale The ICRA rating system includes symbols that represent the
ability of a corporate entity to service its debt obligations in a
timely manner. The rating symbols vary with the financial
instruments considered

❖ ICRA RANGE OF SERVICES:

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 i. Rating Services: As an early entrant in the Credit Rating business ,ICRA Limited
(ICRA) is one of the most experienced Credit Rating Agencies in the country today.
ICRA rates rupee-denominated debt instruments issued by manufacturing
companies, commercial banks, non-banking finance companies, financial
institutions, public sector undertakings and municipalities, among others. The other
services offered include Corporate Governance Rating, Stakeholder Value and
Governance Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims
Paying Ability of Insurance Companies, Project Finance Rating, Line of Credit
Rating and Valuation of Principal Protected-Market Linked Debentures (PP-MLD).

ii. Grading Services: The Grading Services offered by ICRA employ pioneering
concepts and methodologies, and include Grading of: Microfinance Institutions
(MFIs); Construction Entities; Real Estate Developers and Projects; and Maritime
Training Institutes. In MFI Grading, the focus of ICRA’s grading exercise is on
evaluating the candidate institution’s business and financial risks. Similarly, the
Grading of Real Estate Developers and Projects seeks to make property buyers
aware of the risks associated with real estate projects, and with the developers’
ability to deliver in accordance with the terms agreed

iii. Industry Research: ICRA’s industry research service covers over 30 segments in
the corporate and financial services sectors. Given ICRA’s strong analytical
capabilities across industries, the research reports provide in-depth analysis of
industry-specific issues, trends in demand-supply factors, the competitive
landscape, and medium-to-long-term outlook. The research reports are tailored to
meet the research requirements of a wide range of participants, including banks,
mutual funds, insurance companies, venture funds and corporates.

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3) CREDIT ANALYSIS AND RESEARCH (CARE) :

CARE stands for Credit Analysis and Research. After its genesis in 1993, it has now become
the second largest credit rating agency in India. Its headquarters are in Mumbai. Additionally,
it has its regional offices in New Delhi, Bangalore, Chennai, Hyderabad, Ahmedabad, and
Kolkata. The primary function of CARE is to perform rating of debt instruments, credit analysis
rating, loan rating, corporate governance rating, the claims-paying ability of insurance
companies, etc. It also grades construction entities and courses undertaken by maritime training
institutions. Ratings provided by CARE include financial institutions, state governments, and
municipal bodies, public utilities, and special purpose vehicles.

So, here is what you need to know about this credit rating agency-

Year of Establishment 1993

Headquarters Mumbai, India
Rating Scale CARE offers two different categories of bank loan ratings for
short-term and long-term debt ranges-
— The short-term debt ratings are as follows and mentioned in
the descending order of safety level for servicing loans
appropriately. CARE AAA, CARE AA, CARE A, CARE
BBB, CARE BB, CARE B, CARE C, CARE D.
— The long-term debt ratings are as follows and mentioned in
the descending order of safety level for servicing loans
appropriately. CARE A1, CARE A2, CARE A3, CARE A4,
and CARE D

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❖ CARE’S PROFILE PRODUCT :

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 LIMITATIONS

• Some of the serious limitations of credit rating are its backward looking nature (depends
on past data) which in a dynamic market framework can have serious consequences
including accentuating a systemic crisis like the current global crisis, and its failure and
unwillingness to capture/cover market risks.

• Not a statutory or non-statutory audit of the rated entity.

• Not a general-purpose credit or performance evaluation of the rated entity, unless

otherwise specified. The rating is usually specific to the instrument and is not the rating
of the issuer.

• Not an indication of compliance or otherwise with legal or statutory requirements.

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 FINDINGS

• Ratings are not a guarantee against loss.

• Credit ratings are assigned to companies through Credit rating agency.

• Credit rating improves corporate images.

• Credit Rating Agency analyses the company by its past and present value which may
change in future.

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 CONCLUSION

Thus we can say that Credit rating is a qualified assessment and formal
evaluation of company’s credit history and capability of repaying obligations. It
measures the default probability of the borrower, and its ability to repay fully and
timely its financial debt obligations. It stands a major scale for a bank loan. By which
a bank never face a bankrupt Situation. The main purpose of credit rating is to provide
investors with comparable information on credit risk based on standard rating scale,
regardless of specifics of companies, separate sector of the economy and country as a
whole. Credit rating has proven itself to be effective instrument of risk assessment in
countries with advanced economy since it demonstrates transparency of an enterprise.
Credit rating reflects financial, sectorial, operational, legal and organizational sides of
companies, which characterize ability and willingness duly and in full amount to repay
obligations in world practice, credit rating can be assigned to sovereign governments,
regional and local executive bodies, corporations, financial organizations and etc.

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 BIBLIOGRAFY

• https://indialends.com/blogs/all-about-credit-rating-agencies-in-india

• https://zfunds.in/m/what-is-crisil-rating

• https://www.yourarticlelibrary.com/economics/7-benefits-of-credit-rating-
agencies-to-investors/1445

• https://www.icraresearch.in/Home/About_us#:~:text=The%20other%20services
%20offered%20include,Debentures%20(PP%2DMLD).

• https://www.simtrade.fr/blog_simtrade/credit-rating/

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