CREDIT

RATING
AGENCIES
Credit Rating – Basic
Terms
Credit Rating: Credit rating is the assessment of a borrower’s credit quality.
• Credit rating is merely an indicator of the relative capacity of a borrowing entity
to service its debt obligations within a specified time period and with particular
reference to the debt instrument being rated.
• Credit rating is not a recommendation to buy, hold or sell.
Credit Rating Agency: An agency that performs the rating of debt instruments is
known as credit rating agency.
Sovereign Credit Rating: A sovereign credit rating is the credit rating of a national
government. The sovereign credit rating indicates the risk level of the investing
environment of a country and is used by investors when looking to invest in
particular jurisdictions, and also takes into account political risk.
Origin of Credit Rating
■ Founder of Moody’s Investor Service, John Moody, rated
US Rail Road Bonds.
■ Lack of symmetric information and high costs of collecting
information increased the popularity of credit rating agencies.
■ The world’s biggest rating agencies are Moody’s Investors Service and
Standard and Poor’s (S&P).
■ Initially, rating agencies in the US rated instruments and published their ratings
free of charge. They financed their operations through sale of publications and
related materials. But with an increase in the popularity of ratings, they began to
charge issuers for ratings.
■ The rating giants have diversified their service portfolio in order to survive
and grow.
Growth of Credit Rating Agencies in
India
India was first among the developing world to set up a credit rating agency—
• Credit Rating Information Services of India Limited (CRISIL) in 1988. Then
came ICRA in 1990, followed by CARE in 1993.
The credit rating function was further institutionalized in the 1990s when the Reserve
Bank and the SEBI made credit rating mandatory for the issue of commercial paper
(CP) and certain categories of debentures and debt instruments.
For any public issue of corporate debts, Credit rating has to be obtained from at least
one credit rating agency with the SEBI’s approval and is
disclosed in the offer document.
In case where ratings are obtained from more than
one agency, all such ratings, including the
unaccepted ones, would have to be
disclosed in the offer
documents.
Importance Of Credit Rating

Provides unbiased opinion to investors

Provides quality and dependable information

Provides information in easy to understand language

Provides information free of cost or at nominal cost

Helps investors in taking investment decisions

Disciplines corporate borrowers

Formation of public policy on investment

Credit Rating Process
CRA assigns a
Signs rating rating team, Interaction with
Issuer
agreement, collates the management,
approaches the
provides information and presents the
rating agency.
information and conducts analysis to the
rating fees. preliminary management.
screening.
Yes
If yes, rating
disseminated on
Rating assigned
Does the issuer CRA’s website If no, does the
and
accepts the and kept under issuer appeals
communicated to
rating? surveillance against rating?
the issuer.
during the tenure
of the bond.

If no, details of
unaccepted
decision are
disclosed on the
website.
 Benefits of Credit rating

Rated Intermedi Business

Investors
Company aries World

Ease in
Assessment of
risk
borrowings
Borrowing at Increase in
cheaper rates investor
Information at
Facilitates population
low cost
growth
Continuous Recognition Job made
monitoring Adds to the easy
goodwill
Choice of Imposes
Investment financial Guidance to
discipline foreign
Greater investors
Credibility information
disclosure
Types of Credit Rating
Rating of bonds and
debentures
Rating of equity shares
Rating of preference
shares
Rating of medium term
loans (Public deposits, CDs
etc.).
Rating of short-term
instruments [Commercial
Papers (CPs).
Rating of borrowers
Rating of real estate
builders and developers
• Rating is popular in certain cases for bonds and debentures.
• Rating of equity shares is not mandatory in India but credit
rating agency ICRA has formulated a system for equity rating.
• In India preference shares are not being rated, however
Moody's Investor Service has been rating preference shares
since 1973 and ICRA has provision for it.
• Fixed deposits taken by companies are rated on regular scale
in India.
• Credit rating of short term instruments like commercial
papers has been started from 1990. Credit rating for CPs is
mandatory which is being done by CRISIL, ICRA and CARE.
• Rating of borrowers, may be an individual or a company is
known as borrower’s rating.
• Rating about private colonisers and flat builders is done to
ensure that they will properly develop a colony or build flats.
CRISIL has started rating of builders and developers.
Rating of chit • Chit funds are rated on the basis of their ability to make
timely payment of prize money to subscribers. CRISIL does
funds credit rating of chit funds.

Ratings of • Insurance companies are rated on the basis of their claim

paying ability (whether it has high, adequate, moderate or
insurance weak claim-paying capacity). ICRA is doing the work of rating
companies
Rating of insurance companies.

collective • Credit rating about them means (assessing) whether the

scheme will be successful or not. ICRA is doing credit rating of
investment such schemes.

schemes • Private and cooperative banks have been failing quite

regularly in India. People like to deposit money in banks which
Rating of banks are financially sound and capable of repaying back the
deposits. CRISIL and ICRA are now doing rating of banks.

• States in India are now being also rated whether they are fit
Rating of states for investment or not. States with good credit ratings are able
to attract investors from within the country and from abroad.

• Foreign investors and lenders are interested in knowing the

repaying capacity and willingness of the country to repay
Rating of countries loans taken by it. Moody’s, and Morgan Stanley are doing
rating of countries.
A Typical Credit Rating Scale
Rating Scale for Non-
Convertible Debentures
Rating Definition CRISIL ICRA CARE
Highest safety CRISIL AAA ICRA AAA CARE AAA
High safety CRISIL AA ICRA AA CARE AA
Adequate safety CRISIL A ICRA A CARE A
Moderate credit risk CRISIL BBB ICRA BBB CARE BBB
Moderate default CRISIL BB ICRA BB CARE BB
risk
High default risk CRISIL B ICRA B CARE B
Very high default risk CRISIL C ICRA C CARE C
Default CRISIL D ICRA D CARE D
Limitations of Credit Rating

1
• Possibility of bias exist
2
• Improper disclosure may happen
3
• Impact of changing environment
4
• Problems for new companies
5
• Downgrading by Rating Agency
6
• Difference in Rating
RATING SERVICES

 Credit Rating
 Information Services
 Equity Research
 RATING
METHODOLOGY
The Analytical Framework of Credit Rating.
 ■ ECONOMY ANALYSIS :- Strategic nature of the industry in the prevailing policy environment,
regulatory oversight governing industries.

BUSINESS ANALYSIS
■ BUSINESS ANALYSIS:-
 Industry Risk:- Investment plans of the major players of the industry, demand supply factors,
price trends, changes in technology, entry barriers, business cycles etc.
 Market position in the industry:- Market share of the firms, marketing arrangements, products
and services.
 Operating Efficiency:- Production processes of the firm, cost structure, locational advantages,
labour relationships, input availability and prices.
 Legal Position :- prospectus, accuracy of information, filing of forms, returns etc
BUSINESS RISK
 Strategic Risk:- Technological changes, a new competitor entering into the market,
shifts in customer demand, increase in the costs of raw materials, or any other
large scale changes.
 Compliance Risk
 Operational Risk
 Reputational Risk
FINANCIAL ANALYSIS

 ACCOUNTING QUALITY:-
• Impact of the auditor’s qualifications and comments are quantified and analytical
adjustments are made to the accounts.
• Off- balance sheet items are factored into the financial statements.
• Change of accounting policy
 EARNINGS PROTECTION :- Profitability Ratios, Earnings Growth, Projected earnings
 ADEQUACY OF CASH FLOWS
 FINANCIAL FLEXIBILITY:- Ability to access capital markets and other sources of funds
whenever a company faces a financial crunch is reviewed.
 VALIDATION OF PROJECTIONS AND SENSITIVITY ANALYSIS
FINANCIAL RISK
 Counter Party Risk
 Political Risk
 Interest Rate Risk
 Currency Risk

MANAGEMENT EVALUATION
BUSINESS
ENVIRONMENT
ANALYSIS
SEBI REGULATIONS FOR CREDIT
RATING AGENCIES
■ Only commercial banks, public financial institutions, foreign banks operating in
India, foreign credit rating agencies and companies with a minimum net worth
of Rs. 100 crore
■ Minimum net worth of Rs. 5 crore.
■ Cannot assess financial instruments of their promoters who have more than 10
per cent stake in them.
■ Cannot rate a security issued by an entity which is a borrower of its promoter or
a subsidiary of its promoter or an associate of its promoter.
■ Suspension of the Certificate of Registration in case of failure to comply with
the conditions or provisions of the act.
 CREDIT RATING AND
INFORMATION
SERVICE OF INDIA LIMITED
 Incorporation & Commencement
(1987)
■ CRISIL is a global analytical company providing services to different types of
institutions.
■ CRISIL was promoted by the ICICI Ltd along with UTI and other financial institutions.
■ It Provides high-end research to the world’s largest banks and leading corporations
■ Mr. N Vaghul (Chairman) and Mr. Pradip Shah(Managing Director)
■ Global analytical company provides
ratings,
research & risk and
policy advisory services
■ CRISIL commenced its operations within a year of its incorporation on January 1.
 Clientele

■ It has rich and globally diversified client base

■ Customers within India includes small enterprises to the largest corporations
and financial institutions, governments and policymakers
■ Customers outside India includes world’s largest banks and leading
corporations.
■ CRISIL forges a strategic business alliance with Standard & Poor's
(February, 1996)
■ CRISIL's revenue crosses Rs.5 billion in 2008.
 Pragati

■ CRISIL transforms the lives of 1000 rural citizens through 'Pragati', a series
of financial awareness workshops.(March, 2012)
■ Pragati was first conducted in Assam with the help of RGVN, it also works
with an NGO called ‘Educate Girls’ to provide education to under privileged
girls in Rajasthan.
 Global Research & Analytics

■ It is the world's largest and top-ranked provider of high-end research, risk and
analytics services.
■ It is the world's largest provider of equity and fixed income research support
to banks and firms, it also provide extensive support to banks in the areas of
Financial Crime and Compliance analytics.
■ It is the leading provider of research & analytics support and running risk to
more than 75 global banks.
■ Their research support enables coverage of over 3,300 stocks and 3,400
credits globally. They support more than 15 Bank Holding Companies
(BHCs).
■ It has 7 research centers including in Argentina, China, India, and Poland.
 Credit Worthiness of a Bond

■ A credit rating evaluates the credit worthiness of an issuer of specific types

of debt(if it is issued by a corporation or a government).
■ It is an evaluation made by a credit rating agency of the debt issuers
likelihood of default.
■ Credit ratings are based on their judgment and experience.
■ The credit rating is used by individuals and entities that purchase the
bonds.
■ A poor credit rating indicates a credit rating agency’s opinion that the
company or government has a high risk of defaulting.
ICRA LIMITED
Introduction

■ ICRA was incorporated on January 16, 1991.

■ It was originally named Investment Information and Credit
Rating Agency of India Limited.
■ The company changed its name to ICRA Limited, and went public on
April 13, 2007.
■  ICRA assigns corporate governance rating, performance ratings,
grading and provides rankings to mutual funds, hospitals and
construction and real estate projects.
Alliance with Moody’s Investors
Service
■ The international Credit Rating Agency - Moody’s Investors Service
is ICRA’s largest shareholder.
■ The participation of Moody’s is supported by a Technical Services
Agreement.
■ Moody’s provide certain high-value technical services to ICRA.
■ Moody’s conducts regular training and business seminars for ICRA
analysts.
■ The agreement provides for Moody’s advising ICRA on Rating-products
strategy, and the Ratings business in general.
Subsidiaries of ICRA Limited
Board of Directors
Services of ICRA Limited

■ ICRA has a broad-based its services to the corporate and financial

sectors, both in India and overseas.
■ It presently offer five types of services:
1) Rating Services
2) Information Grading and Research Services
3) Advisory Services
4) Economic Research
5) Outsourcing
RATING SERVICES
■ ICRA rates rupee-denominated debt instruments, such as bonds and
debentures (long-term), fixed deposit programmes (medium-term),
commercial paper and certificates of deposit (short-term), and
structured obligations and sector-specific debt obligations (issued by
Power, Telecom, and Infrastructure companies).
■ The other rating services offered include:
1) Corporate Governance Rating
2) Corporate Governance Assessment
3) Credit Risk Rating of Debt Mutual Funds
4) Rating of Claims Paying Ability of Insurance Companies
5) Project Finance Rating
6) Line of Credit Rating
■ ICRA, along with National Small Industries Corporation Limited (NSIC), has
launched a Performance and Credit Rating Scheme for small-scale
enterprises in India.
ICRA RATING
SCALES
■ Long-Term Rating Scale
■ Medium-Term Rating Scale
■ Short-Term Rating Scale
■ Issuer Rating Scale
■ Structured Finance Rating
■ Mutual Fund Credit Risk Rating Scale
■ Rating Scale for Claims paying ability of Insurance Companies
■ Fund Management Quality Rating
ICRA’s Rating Scale

Safety Level Long Term Medium Term Short Term

Highest AAA MAAA A1
High AA MAA
A2 Investment Grade
Adequate A
MA
Moderate BBB
A3
Moderate Risk BB
MB
High Risk B Non Investment
A4
Very High Risk C MC Grade
Default D MD D
 Companies with ICRA Ratings

Name Sector Rating

Reliance Industries Limited Oil & Gas AAA
Bharti Airtel Limited Telecom AA
IDBI Bank Limited Bank A
B Fouress (P) Limited Engineering BBB
G Khanna & Co. Trading BB
Harshita Polypack Packaging B
Raj Ratan Smelter Limited Ferrous Metals C
Reliance Communications Limited Telecom D
 ICRA RATING
METHODOLOGIES
:
 Indian Cement Companies
Introduction
• The Indian cement industry is the second largest in the world after China.
• It has a total cement production capacity of about 455 million tonnes
(MT) as of November 2018.
• The production during the year 2018 was 305 million tonnes against
the capacity of over 455 million tonnes resulting in an average capacity
utilization of around 67%.
■ Cement demand is closely linked to the overall economic growth, particularly
the housing and infrastructure sector.
Limitations of ICRA Ratings

■ ICRA ratings are only an opinion on the relative ranking of credit risk.
■ ICRA ratings convey only the relative credit risk; that is, they do
not reflect the other investment risks .
■ ICRA ratings are not always constant and are subject to change.
■ For assigning ratings, ICRA relies on all relevant information made
available to it by the issuer company.
While ICRA takes reasonable care to ensure that all such information is
reliable, it makes no representation or warranty, express or implied,
as to the accuracy, authenticity, timeliness or completeness of any
such information. 
CRA’s are
always
the last to
knowFailure of the Credit Rating
Agencies
IL&FS Crisis
• Credit rating agencies ignored the rising debt levels at IL&FS group, while assessing
its creditworthiness.
• Rating agencies, ICRA, India Ratings and CARE had rated it AAA, indicating the
highest level of creditworthiness and these ratings were in place till June 2018. 

This, despite the fact that as early as September 2016, one of the listed IL&FS
group companies, IL&FS Engineering and Construction Company, having defaulted
on the redemption of redeemable preference shares.
• But it continued to accord good risk grades to ITNL’s short-term paper and also
affirmed its excellent long-term credit rating for IL&FS, the parent company.
• Even in August 2018, ICRA downgraded IL&FS just by one notch, from AAA to AA+.
• Only after the IL&FS defaulted on a series of loan payments in September 2018, did
the rating agencies downgrade IL&FS multiple notches. 

This was a major failure on the part of the rating agencies. 

Lehman Brothers Fall: The 2008
Crisis
■ The "failures" of the Big Three rating agencies were
"essential cogs in the wheel of financial destruction" and
"key enablers of the financial meltdown.
■ The mortgage-related securities at the heart of the crisis
could not have been marketed and sold without their seal of
approval. Investors relied on them, often blindly.
■ Dozens of suits involving claims of inaccurate ratings were
filed against the rating agencies by investors. Plaintiffs have
included by collateralized debt obligation investors ,
California state employees, the bankrupt investment bank
Bear Stearns, bond insurers and the U.S. Government.
Enron Scandal
■ Although the failing energy company had been faking a
large portion of its profits for years by the time it declared
bankruptcy in December 2001, the rating agencies didn't
downgrade its debt to junk status until only four days
before its collapse.
■ Investors in Enron's stock and bonds accordingly lost
millions.
Way Forward
Concern Recommendations
Removing • SEBI should introduce rotation of employees, analysts and CRAs in a
conflict of phased manner.
interest • SEBI should enable CRAs to adopt different payment models by
amending the CRA Regulations.
• SEBI should conduct feasibility studies for adoption of other models,
such as the exchange-pays model.

Reducing • SEBI should consider establishing a platform to disclose all ratings

rating given.
shopping • SEBI should revisit grounds for withdrawal of ratings to permit
withdrawal in a larger number of situations.
• SEBI should establish a framework to regulate preliminary rating
estimates, instead of completely prohibiting them.
Increasing • Credible litigation risk would help in such promotion.
accountability • SEBI should encourage investors to provide them information.
towards investors • SEBI should incorporate a provision to make CRAs liable for
compensating investors for any loss caused to them by
negligent or fraudulent rating.
Regulating Rating • SEBI should regulate all rating activities of CRAs relating to
Activities other than the financial system.
Rating of Securities • The CRA regulations and directions issued by SEBI should
& Reducing address the special concerns that arise for different instruments
Mechanistic Reliance and entities.
on Ratings • Regulators should only extend reliance on ratings where they are
adequately regulated, and in no event, should they extend
mechanistic reliance on credit ratings.