Credit rating

Credit rating
• A credit rating estimates the credit worthiness of an individual,
corporation, or even a country. It is an evaluation made by
credit bureaus of a borrower’s overall credit history.
• Credit ratings are based on financial history and current assets
and liabilities.
• Typically, a credit rating tells a lender or investor the
probability of the subject being able to pay back a loan.
• Commercial credit risk is the largest and most elementary risk
faced by many banks and it is a major risk for many other
kinds of financial institutions and corporations as well.
 Registration
• Credit Rating agencies are regulated by SEBI.
• Registration with SEBI is mandatory for
carrying out the rating Business.
 Promoter 
• Financial Institution
• Scheduled Bank
• Foreign Bank operating in India with RBI
approval
• Foreign Credit Rating agency having at least
five years experience in rating securities
• Any company having a continuous net worth
of minimum 100 cr. for the previous five years.
 Eligibility Criteria
• Is set up and registered as a company
• Has specified rating activity as one of its main objects in its
Memorandum of Association.
• Has a minimum Net worth of Rs 5 Crore.
• Has adequate Infrastructure
• Promoters have professional competence, financial
soundness and a general reputation of fairness and integrity
in Business transactions , to the satisfaction of SEBI.
• Has employed persons with adequate professional and other
relevant experience, as per SEBI directions.
Grant of Certificate of Registration
• SEBI will grant to eligible applicants a
Certificate of Registration on the payment of a
fee of Rs 5,00,000 subject to certain
conditions.
 Agreement with the client
• The CRA should enter into a written agreement with each
client containing ,
• Fee charged
• A periodic review of the rating during the tenure
• Clients agreement to cooperate and provide true,
adequate and timely information.
• Disclosure by CRA to client regarding the rating assigned.
• Clients agreement to disclose the rating assigned in the
offer document for the last 3 years
 Monitoring of rating
• • The CRA should continuously monitor the
rating of securities rated by it during their life
time .
• • It should disseminate information regarding
newly assigned rating and its changes in the
earlier ratings through press releases,
websites and inform the same to stock
exchanges.
Disclosure of rating definitions and Rational

. • The rating agency should make public the

definitions of the concerned rating along with
symbol
• They should also state that the ratings do not
constitute recommendation to buy, sell or hold any
securities.
• It should provide the public the rational of its rating
which covers analysis of various factors justifying
the assessment as well as the risk factors.
 CRISIL
• The first rating agency ‘Credit Rating Information Services
of India Ltd. , CRISIL, was promoted jointly in 1987 jointly
by the ICICI and the UTI. Other shareholders included
ADB, LIC, HDFC Ltd, General Insurance Corporation of
India and several other foreign and Indian Banks.
• It pioneered the concept of credit rating in the country
and since then has introduced new concepts in credit
rating services and has diversified into related areas of
information and advisory activities.
• It became public in 1993.
• In 1996, it formed a strategic alliance with S&P rating
group.
 Credit Rating Services(CRS)
• The principle function of CRISIL is to rate mandated debt obligations of
Indian Companies chit fund, real estate developers, LPG Kerosene dealers,
NBFC, Indian states and so on.
• Rating of debt obligations:
– Debt obligation includes rupee denominated credit instruments like
debentures, preference shares, deposits, CD’s commercial papers and a
structured obligations of manufacturing ,finance companies, banks,
financial institutions etc.
– It ensures stable and healthy growth of capital market by offering credit
rating which is widely acceptable. It provides increased disclosures, better
accounting standards and improved financial information to the users.
– It protects the interest of investors by constantly monitoring the results of
rated companies.
• Rating of real estates developers:
– CRISIL has developed framework for rating of
real estate projects. Such rating helps
investors to identify their investment options
• Bond Fund ratings:
– The rating is an opinion of the quality of bond funds
underlying portfolio holdings. They mainly focus on fixed
income securities.
– The rating methodology takes into account the following
factors i.e., credit associated with the securities, the systems
and procedures followed by the funds and management
quality and expertise.
• Bank loan rating:
– The creditworthiness of bank’s borrower is assessed offering
comments on the likelihood of repayment of loans.
– The methodology considers the borrowers underlying assets
liquidity and risk management initiative and for NBFC quality
 CRISIL Advisory Services (CAS)
• The CAS offers consulting services that aim at identifying and
mitigating risk. The main focus of these services is transaction
and policy level assignments in the area of energy, transport,
banking and finance disinvestment, privatization and
valuation.
– Energy group services: it offers advisory services to companies
engaged in energy sector like power, coal, oil and gas. The
policy level assignments Include aspects like sector reforms
and structuring, regulatory framework privatization, corporate
plan fuel related services.
– Transaction level assignment include project scoping and
structuring, bid process management, financial viability
analysis of projects, risk identification and analysis and
structuring of project contacts, security package, structuring
and analysis.
• Transport and urban infrastructure group services: It provides financial
advisory services to transport and infrastructure service provider.
– Policy level assignments include advice on transport sector privatization
policy of state ports, development of risk identification allocation, long
term sector plans and state role.
– Transaction level assignments include financial viability analysis, project
structuring, bid process management, negotiation of terms with
successful bidders
– Privatization and disinvestment group: this group renders advisory
services to central state governments, public sector enterprises and
private sector entities interested in participating in privatization
program, these services cover 3 aspects policy level, enterprise level
and reforms and restructuring.
• • Banking and finance group: CRISIL offers a wide range of services
covering restructuring and business reengineering, credit
management, investment management and portfolio insurance,
equity valuation, resource mobilization studies and financial
feasibility studies
• • Capital Market Group: This group provides customized research
and advisory assistance to meet specific transactional and strategic
requirements of clients. It offers services like diagnostic evaluation for
valuation of Indian partner of a foreign asset management company,
technical assistance to AMFI, portfolio evaluation and portfolio
analysis for leading mutual funds, composite performance ranking of
domestic mutual funds, assistance to government for the
development of India’s financial sector.
 ICRA Ltd
• Information and Credit Rating Services (ICRA) has
been promoted by IFCI Ltd as the main promoter and
started operations in 1991.
• Other shareholders are UTI, Banks, LIC, GIC, Exim
Bank, HDFC
• It provides Rating, Information and Advisory services
ranging from strategic consulting to risk management
and regulatory practice.
• The main objectives of ICRA are to assist investors
both individual and institutional in making well
informed decisions
 Rating services
• ICRA rates debt instruments issued by
manufacturing companies, commercial banks,
NBFCs, financial institutions, PSUs and
municipalities.
• The instruments rated by it include bonds/
debentures, fixed deposits commercial papers
and certificate of deposit
• equity and hybrid
 Advisory services
• The advisory services include
1.strategic consulting/ strategic practice
2. risk management (credit risk, market risk and
operations risk)
3. information( content services).
• It focuses on sectors like banking and financial
services, infrastructure sector, manufacturing and
service sector, government and regulatory
authorities
 CARE Ltd.
• Credit Analysis and Research Ltd or CARE is promoted by IDBI
• It commenced its credit rating operations in October, 1993 and
offers a wide range of products and Services in the field of
Credit Information and Equity Research.
• It also provides advisory services in the areas of securitisation
of transactions and structuring Financial Instruments.
• It offers services like
1. Credit rating of debt instruments
2. Advisory services like securitization transactions, structuring
financial instruments, financing infrastructure projects
3. Information services like providing information to companies,
industry and businesses.
 Fitch Ratings India Ltd.
• It is the latest entrant in the credit rating
Business in the country as a joint venture
between the international credit Rating
agency Duff and Phelps and JM Financial and
Alliance Group.
• In addition to debt instruments, it also rates
companies and countries on request.
Process and methodology
• All four rating agencies in India adopt a similar
rating process.
• CRISL
• ICRA
• CARE
• Fitch india
 Rating Methodology
• All relevant factors that have a bearing on the
future cash generation of the issuers are
considered in the rating methodology.
• The following are the key areas considered in
its rating analysis.
• 1. Business risk
• The rating analysis considers business risks
which include Industry characteristics,
performance and outlook, operating position.
(capacity, market share, distribution system,
marketing networks etc.), technological
aspects, business cycles, size .
• 2. Financial risk
• The financial risks considered in the rating analysis
include Financial management (capital structure,
liquidity position, financial flexibility and cash flow
adequacy, profitability, leverage, interest coverage)
• projection of cash flow, accounting policies and
practices with regard to depreciation, income
recognition, inventory valuation, off balance sheet
liabilities and claims, amortization of intangible
assets, foreign currency transactions etc.
• 3. Management
• The management of the issuer company is
assessed in terms of background and history
of issuer
• corporate strategy and philosophy,
organizational structure, quality of
management, personnel policies.
• 4. Environment analysis
Factors:
• Regulatory environment,
• operating environment,
• prospects of the economy,
• tax status, etc
 Rating process
• 1. Request for rating
• CRA initiates the rating process on the basis of
request made by the prospective issuer/firm.
• The terms of rating assignment relate to some
important issues such as commitment of
the credit rating agency to maintain
confidentiality of the crucial information
submitted by the issuer company
• 2. Rating experts
• Rating is conducted by a team which is comprised of
experts. The members will have expert knowledge in
evaluating the business of the issuer.
• 3. Information needs
• The issuers are required to provide a list of information
and a broad framework for discussion. As rating process
involves a detailed analysis of the financial competence
and operating efficiency of the issuer company, various
factors are required to be furnished by the issuer.
• 4. Secondary information
• Apart from the information furnished by the
issuer, the rating firm gets some secondary
information from its own research division.
• Like: general background and trend in the
industry.
• 5. Meetings and discussions with the management
• Rating involves assessment of not only quantitative
factors but qualitative factors as well.
• discussion with the management of the issuer
company regarding plans, future outlook,
competitive position and funding policies.
• understanding of the production processes, assets,
equipment and related facilities, quality of technical
personnel, and cost of production, etc.
• 6. Preview meeting
• After the analysis is over, the findings are
thoroughly discussed by an internal
committee comprising senior analysts of the
credit rating agency.
• All the issues having a bearing on rating are
carefully identified. Then an opinion on the
rating is formed.
• 7. Communication of rating
• The rating assigned is communicated to the
top management of the issuer. The top
management in turn, may or may not accept
ratings
• 8. Review of ratings
• When the ratings are not acceptable to the
issuer, he can appeal for a review of ratings.
• Such review is made on the basis of further
information furnished by the issuer relating to
the factors that were considered for assigning
the rating.
• If the results of the review are satisfactory, the
committee can revise its initial rating decision.
• 9. Revision of Ratings
• The credit rating agency monitors the
accepted ratings over a period of time.
• As per the terms of the rating assignment, the
issuer is bound to provide information to the
credit rating agency for the periodical review
of the ratings. On the basis of the review, the
initial rating can be retained or revised.
 Credit Rating Watch
• During the review monitoring or surveillance exercise,
rating analysts might become aware of imminent
events like mergers and so on, which effect the rating
and warrants a rating change.
• In such a possibility, the issuer’s rating is put on ‘credit
watch’ indicating the direction of a possible change
and supporting reasons for review.
• Once a decision to either change or present the rating
had been made, the issue will be removed from credit
watch.
Credit rating for financial service sector
• When rating debt instruments of financial institutions, banks,
NBFCs in addition to the financial analysis and management
evaluation the following factors are considered
• Regulatory and competitive environment • Fundamental
analysis
• Capital adequacy
• Asset quality
• Liquidity management
• Profitability and financial position
• Interest and tax sensitivity
 Rating symbols/Grades
• https://www.crisil.com/en/home/our-business
es/ratings/credit-ratings-scale.html