Credit Rating

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THEORETICAL FRAMEWORK 

Credit rating is essentially a symbolic indicator of the relative grading of the investment/credit qualities of financial instruments. instruments. 

It reflects the relative ability of the issuers of such instruments to meet the servicing obligations as and when they arise. arise.

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THEORETICAL FRAMEWORK 
It is neither a general purpose evaluation nor an overover-all assessment of the credit risk associated with all the obligations of the issuers/corporates. issuers/corporates.  A rating is specific to an instrument. It does not instrument. amount to any recommendations to buy, hold or sell an instrument. instrument.  The increasing recognition to credit rating in the country marks a major transition from a corporate culture where names mattered. mattered.

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Ratings. ICRA. 4 . Brickwork Ratings.CREDIT RATING AGENCIES There are five credit rating agencies in the country which rate corporate entities: entities: CRISIL. FITCH. CARE.

banks and states. its rating services also extend to preference shares. real estate developers/builders. chit funds. structured obligations. namely. commercial papers.CRISIL CRISIL is the most important rating agency in the country. country. deposits. While it undertakes rating of mandated instruments. debentures. LPG/kerosene dealers. states. 5 .

6 . It has leveraged its information base and expertise in credit rating to provide counselling to government. credit securitisation. clients. evaluation and so on.The extensive compilation and analysis of data for rating business is also used by CRISIL to provide information services to corporate clients. debt securitisation. on. banks and financial institutions on aspects such as privatisation of PSUs.

dealers. banks.ICRA ICRA focuses on rating of instruments for which credit rating is mandatory. In addition. namely. commercial papers. debentures/ bonds. it rates banks. 7 . kerosene/LPG dealers. deposits.

services.ICRA It has also ventured into EPRA for grading the primary market at the instance of the issuing companies and assessing the secondary market for the investors. general assessment services. It also provides credit assessment and investors. 8 .

The instruments operations. enterprises.CARE CARE confines to normal rating business only and has not diversified its operations. other lenders and business enterprises. obligations. commercial papers and structured obligations. It also undertakes general credit analysis of companies for the use of banks. creditcredit-rated by CARE are debentures. 9 . deposits.

10 . instruments. Unsolicited rating at the initiative of the rating agencies has still not emerged. moreover. ratings. emerged. credit rating is done in India at the instance of the issuers of the instruments. The clients have.Rating Process/Methodology Procedurally. the option not to accept the ratings.

All the credit agencies follow broadly the same analytical framework of rating methodology. long-term.Rating is a search for fundamentals and the possibilities of change in these in the long-term. methodology. 11 .

(ii) financial analysis on the basis of consideration of accounting quality. position. adequacy of cash flows and financial flexibility and (iii) management evaluation 12 . operating efficiency and legal position. earnings protection. market position.It comprises of three broad sets of factors (i) business analysis in terms of analysis of industry risk.

asset quality.For finance companies. profitability and financial position and interest and tax sensitivity. the assessment by the rating agencies lays emphasis on regulatory environment and fundamental analysis which includes liquidity management. in addition. 13 . sensitivity.

Rating Symbols The technique of credit rating is through Rating symbols. 14 . They group together similar entities in terms of their relative capacity of timely servicing of obligations as per the terms of the contract.

15 .Rating Symbols The suffixes plus (+) or minus (²) are added to the (² symbols to indicate the relative position of the instrument within the group covered by the symbol.

developers/builders. (7) bank loans (8) collective investment schemes. (3) short-term instruments short(commercial papers). (10) chit funds and (11) real estate 10) 11) developers/builders. (9) Indian states. (2) fixed deposits. (6) bond funds. (5) structured obligations. 16 .CRISIL Rating Symbols The rating symbols of the CRISIL are illustrated with reference (1) debentures. (4) credit assessment.

It categorises them into three grades namely. mandatory. CRISIL assigns an alpha based rating scale to rupee denominated debentures. speculatives. 17 . investment and speculatives. high investment. debentures.Debentures: Debentures: The rating of debentures is mandatory.

such changes as can be envisaged are most unlikely to affect adversely the fundamentally strong position of such issues.(Triple A) Highest Security The debentures rated¶ AAA µ are judged to offer the highest safety against timely payment of interest and principal. Though the circumstances providing this degree of safety are likely to change. principal.High Investment Grade High investment includes: includes: AAA . 18 . issues.

High Investment Grade High investment includes: includes: AA . They differ in principal.(Double A) High Safety The debentures rated µAA¶ are judged to offer high safety against timely payment of interest and principal. marginally. 19 . safety from¶ AAA µ issues only marginally.

Investment Grades Investment grades are divided into: into: A. changes in circumstances can adversely affect such issues more than those in the higher rated categories. However.Adequate Safety The debentures rated µA¶ are judged to offer adequate safety against timely payment of interest and principal. categories. 20 . principal.

(Triple B) Moderate Safety The debentures rated µBBB¶ are judged to offer sufficient safety against timely payment of interest and principal.Investment Grades BBBBBB. changing circumstances are present. 21 . however. categories. for the present. more likely to lead to a weakened capacity to pay interest and repay the principal than in the case of debentures in higher rated categories.

the uncertainties that the issuer faces could lead to inadequate capacity to make interest and principal payments on time.(Double B) Inadequate Safety The debentures rated µBB¶ are judged to carry inadequate safety of the timely payment of interest and principal. 22 . they are less susceptible to default than other speculative grade debentures in the immediate future. time. While principal.Speculative Grades BBBB.

adverse business or economic conditions would lead to a lack of ability or willingness to pay interest or principal. 23 . While currently default.High Risk The debentures rated µB¶ are judged to have greater susceptibility to default.Speculative Grades B. principal. interest and principal payments are met.

continue. D. timely payment of interest and default.C. are extremely speculative and returns from these debentures may be realised only on reorganisation or liquidation. 24 . Such debentures maturity. liquidation.Default The debentures rated µD¶ are in default and in arrears of interest or principal payments or are expected to default on maturity.Substantial Risk The debentures rated µC¶ are judged to have factors present that make them vulnerable to default. principal is possible only if favourable circumstances continue.

Note: Note: (1) The CRISI may apply µ+¶ (plus) or µ±¶ (minus) signs for ratings from AA to C to reflect comparative standing within the category. (plus)/± signs may be applied for ratings from grade two to grade six to reflect comparative standing within the grade/category. However. FAAA-(FFAAA-(F-Triple A) Highest Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. The + (plus)/± (minus) groups. relative degree of safety is not as high as for the fixed deposits with µFAAA¶ rating. rating. The contents within category. pf¶ (³pf A´). 25 . The symbols and their grade/category. FAA-(FFAA-(F-Double A) High Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. the strong. Fixed Deposits The fixed deposits are divided into six broad groups. Preference symbols. below. strong. parentheses are a guide to the pronunciation of the rating symbols. shares rating symbols are identical to debenture rating symbols except that the letters µpf¶ are prefixed to the rating symbols for example pf AAA (³pf Triple A´). implications are described below.

below. than fixed deposits rated below this category. principal. ShortShort-Term Instruments Such instruments include commercial papers. categories. Changes in satisfactory. conditions would lead to lack of ability or willingness to pay interest or principal. present that make them vulnerable to default. FCFC-High Risk This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful.FAFA-Adequate Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. The CRISIL grades them into five broad groups. Such deposits are less susceptible to default principal. FBFB-Inadequate Safety This rating indicates inadequate safety of timely payment of interest and principal. but the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments. Their papers. FDFD-Default This rating indicates that the deposits are either in default or expected to be in default upon maturity. payments. Such deposits have factors at doubtful. as mandatory. circumstances can affect such deposits more than those in the higher-rated highercategories. maturity. listed below. 26 . rating is also mandatory. adverse business or economic default.

safety is lower than that for instruments rated ³P-l´. categories. ³P-l´. default. is very strong. P-4 (Inadequate Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be adversely affected by short-term adversity or less favourable conditions. the instrument is more adequate. P-5 (Default) This rating indicates that the instrument is expected to be in default upon maturity or is in default.P-1 (Highest Safety) This rating indicates that the degree of safety. shortconditions. distinct from credit rating symbols) by numerals ranging from 1 to 14. vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories. P-2 (High Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is strong. below. strong. detailed 14. regarding timely payment of the instrument. however. the relative degree of strong. It indicates credit assessment symbols (as contract. 27 . which roughly correspond to the medium-term instruments rating mediumsymbols. as per the terms of the contract. P-3 (Adequate Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is adequate. The CRISIL may apply ³+´ (plus) sign for ratings from P-l to P-3 to reflect a comparatively higher standing within the category. category. however. symbols. Credit Assessment The assessment indicates the CRISIL¶s broad opinion as to the relative degree of capability of the entity to repay the interest and principal.

At present. default than borrowers with credit assessment below this category. 10 Inadequate Capacity This indicates inadequate capacity for timely payment of interest and principal. capacity of the borrower. more than those in the stronger credit assessment categories. adverse business or default. strong. 6. circumstances that make them vulnerable to default. 8. the capacity is not as strong as for strong. However.1-Very Strong Capacity This indicates that the capacity for timely payment of interest and principal is very strong. Changes in circumstances can affect the satisfactory. 12. 11. 9. 3. 11. Such borrowers are less susceptible to principal. categories. debt. 4 Strong Capacity This indicates that the capacity for timely payment of interest and principal is strong. principal. 7 Adequate Capacity This indicates that the capacity for timely payment of interest and principal is satisfactory. 12. borrowers with a credit assessment of ³1´. 14 Default This indicates that the borrower is either in default or is expected to be in default upon the maturity of the debt. but the uncertainties that the borrower faces could lead to inadequate capacity to make timely interest and principal payment. such borrowers face doubtful. 28 . economic conditions would lead to a lack of capacity to pay interest or principal. 5. payment. 13 Poor Capacity This indicates that the capacity for timely payment of interest and principal is doubtful. 2.

High Investment Grades These grades comprise: comprise: AAA(SO) Highest Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. (2) investment and (3) speculative. 29 . Changes instrument. Investment Grades Investment grades include: include: A(SO) Adequate Safety This rating indicates adequate degree of certainty regarding timely payment of financial obligations on the instrument. differs only marginally in safety from µAAA(SO)¶ instruments. the rating symbols are defined differently. AA(SO) High Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. instruments. investment. Any instrument. Grades are classified into (1) high differently. reflecting the distinction of structured obligations from a debt instrument.Structured Obligations The structured obligations ratings are based on the same scale (AAA through D) as ratings for long-term instruments. This instrument. categories. in circumstances can adversely affect such instruments more than those in the higherhigher-rated categories. adverse changes in circumstances are most unlikely to affect payments on the instruments. speculative. instruments. longinstruments. However.

BBB(SO) Moderate Safety This rating indicates a moderate degree of certainty regarding timely payment of financial obligations on the instrument. default. 30 . instrument. category. Note: Note: The CRISIL may apply µ+¶ (plus) or µ±¶ (minus) signs for ratings from AA(SO) to C(SO) to reflect comparative standing within the category. default. category. Any adverse business or economic conditions would lead to a lack of capability or willingness to meet financial obligations on time. instrument. Such instruments are less susceptible to default than instruments rated below this category. Speculative Grades Speculative grades consist of: of: BB(SO) Inadequate Safety This rating indicates an inadequate degree of certainty regarding timely payment of financial obligations on the instrument. favourable. B(SO) High Risk This rating indicates high risk and greater susceptibility to default. highercategories. D(SO) Default This rating indicates that the obliger is in default or expected to default. changing circumstances are more likely to lead to a weakened capacity to meet financial obligations than for instruments in higher-rated categories. time. However. C(SO) Substantial Risk This rating indicates that the degree of certainty regarding timely payment of financial obligations is doubtful unless circumstances are favourable.

BLRBLR-l A strong likelihood of repayment of interest and principal on the bank loan. loan. Af The fund¶s portfolio holdings provide adequate protection against losses from credit defaults. below. defaults. defaults. 31 . defaults. BLRBLR-2 A good likelihood of repayment of interest and principal on the bank loan. Bank Loan Ratings (BLRs) The BLRs and their interpretation are given below. BBBf The fund¶s portfolio holdings provide moderate protection against losses from credit defaults. defaults. Cf The fund¶s portfolio holdings have factors present that make them vulnerable to credit defaults. loan. BLRBLR-3 A satisfactory likelihood of repayment of interest and principal on the bank loan. AAf The fund¶s portfolio holdings provide strong protection against losses from credit defaults. defaults. BBf The fund¶s portfolio holdings provide inadequate protection against losses from credit defaults. loan. defaults.Bond Funds The rating symbols and their interpretation are as follows: follows: AAAf The fund¶s portfolio holdings provide very strong protection against losses from credit defaults.

companies. would have impact on the degree of certainty of the scheme providing an assured return to the investor. BLR-5 Sub-standard. The grades.Sub-standard. cash. Collective Investment Schemes The CRISIL has developed a framework for the rating of collective investment schemes of plantations and other companies. The methodology broadly assesses the scheme-related risk factors as well as schemepromoterpromoter-related risk factors. vulnerability to loss. These factors are investor. in terms of the quantity of produce and/or cash. BLR. high likelihood of loss. factors that it believes.Loss. 32 . symbols divide them into five grades. The rating is not a comment on the quality of the document. the CRISIL has identified factors. produce or the monetary value that all the investors will get from the produce. produce. BLR-6 Loss. loan. as detailed below: below: Grade I (High Certainty) This rating indicates high certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Under each of these. Grade II (Adequate Certainty) This rating indicates adequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. cash.BLRBLR-4 A moderate likelihood of repayment of interest and principal on the bank loan. loss. The rating is an opinion on the degree of certainty of the scheme to deliver the assured returns. loss. as mentioned in the offer document. BLR. crystallised into a composite rating expressed in the form of grades.

Risk factors for the scheme are extremely high cash. 33 . Risk factors for the scheme are high and the scheme is cash. Grade IV (Inadequate Certainty) This rating indicates inadequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. default. cash. prone to default. Grade V (High Uncertainty) This rating indicates high uncertainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. obligations. expectation of default on obligations.Grade III (Moderate Certainty) This indicates moderate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash.

The rating process and methodology is the same weaknesses. The rating symbols and their broad instruments. It also reflects the relative degree of risk associated with subscription to the chit series floated by chit funds. satisfactory. strong. widens the access to subscribers. however. interpretations are listed below. Moreover. subscribers. CHIT AA+/CHIT AA/CHIT AA-High Safety This rating indicates that the degree AAof safety regarding timely payment to the subscribers is strong. below. 34 . The purpose of the rating of chit funds is to mandatory. rating is. as in the case of mandated instruments. Investment Grade: CHIT AAA-Very High Safety This rating indicates that the Grade: AAAdegree of safety regarding timely payment to the subscribers is very strong. provides a distinct identity to the chit fund and an objective evaluation of its strengths and weaknesses. a rating funds. with a reported minimum net worth of Rs 5 1akh. enhances the marketability of chits. Such akh.Rating of Chit Funds The CRISIL undertakes rating of chit funds incorporated as public/private limited companies. assess their ability to make timely payment of the prize money to the subscribers. typically having an operating track record of at least 10 years. strong. CHIT A+/CHIT A/CHIT A-Adequate Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is satisfactory. not mandatory.

from the appropriate local authorities are considered for a rating. as well as the ability to transfer clear title to customers. subscribers. considered factors are: (i) project risk analysis and (ii) developer risk analysis. Methodology The CRISIL assigns ratings after assessing the factors that could affect the ability of the developer to meet agreed specifications in terms of quality and time. CHIT D Default This indicates that the chit fund is either in default or is expected to be in default. subscribers. Rating of Real Estate Developers/Builders The CRISIL undertakes rating of real estate projects. Such chit funds doubtful. business conditions would lead to lack of ability or willingness to pay subscribers.Speculative Grade: CHIT B+/CHIT B/CHIT B. The CRISIL. have factors at present which make them vulnerable to default.Inadequate Safety This rating Grade: indicates inadequate safety of timely payment to subscribers. 35 . The customers. ratings are based on current information provided to the CRISIL. company as a whole. adverse default. Only projects with an approved plan and planning permit whole. the uncertainties that such chit funds face could lead to inadequate capacity to make timely payments to subscribers. are: analysis. default. CHIT C+/CHIT C/CHIT C-High Risk This rating indicates that the degree of safety regarding timely payment to the subscriber is doubtful. rating. The rating pertains to a particular project and not to the projects. While such chit subscribers. funds are less susceptible to delay/default than chit funds rated below this category.

from a 1976. The analysis of quality takes into assessed. · Copies/formats of all agreements between the developer and the buyer(s). duties and taxes in respect of the property paid to date. 36 . as applicable. account the specifications agreed upon by the developer and the buyers. buyers. · Copy of the sanctioned plan. financial flexibility and management evaluation are some of the factors considered in order to assess the standing of the developer. The key developer. established. · Receipts of all municipal and government rates. buyer(s). · A report on the title. Developer Risk Analysis The track record of the developer.Project Risk Analysis The quality of legal title. Act. 1976. together with commencement and completion certificates. in respect of the property to be constructed. from a reputed legal firm/lawyer or from the appropriate authority. · Exemption order under the Urban Land Ceiling Act. competent authority. applicable. authority. if applicable and · Clearance certificate under the Income Tax Act. date. quality of construction and timeliness of delivery of the proposed/completed unit are assessed. documents for scrutiny at the time of rating are: are: · Registered sale deeds for all transfers over the past 30 years or from the time a clear proof of title is established. existing financial position.

Project risks are high. The developer. projects. PA1 PA1 Highest Ability Projects rated PA1 indicate the highest ability of the PA1 developer to specify and build to the agreed quality levels. rating symbols it uses and their interpretation are indicated below. PA5 PA5 Inability Projects rated PA5 indicate the inability of the developer to PA5 complete projects or transfer clear titles. Note: Note: The CRISIL may apply µ+¶ (plus) sign for ratings PA1 to PA3 to reflect PA1 PA3 comparative standing within the category. It uses the prefix (PA) to the strategy. PA4 PA4 Inadequate Ability The developer¶s ability to build to specified quality levels and adhere to time schedules is inadequate. mandatory. schedules. project could result in inability and/or unwillingness to complete projects. PA2 PA2 High Ability The developer¶s ability to build the project to specified quality levels and time schedules and transfer clear title is high. marginally higher in this category as compared to projects in the PA1 category. Uncertainties facing the inadequate. However. rating symbols to indicate the project development ability of the developer. below. present. category. rates them as a part of its diversification strategy. however. The CRISIL. changing circumstances are likely to adversely affect these projects more than those in the higher rated categories. PA1 category. titles. categories. and transfer clear titles within stipulated time schedules. 37 .Rating Symbols The rating of builders is not mandatory. PA3 PA3 Adequate Ability Adequate ability of the developer to build to reasonable quality levels and time schedules and transfer clear title for the present.

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