Chapter 3

CONCEPTUAL FRAMEWORK OF CREDIT RATING

3.1 Introduction

The cred~t ratlng is a recent concept to the lnd~an market The word

credlt rating 1s most of the time misrepresented and m~sunderstood by the

lndlan Investors Thls chapter IS presented w~th the object of maklng the

credlt rat~ng concept clear The credrt ratlng and ~ t s ~mportance are explained

In the first part of thls chapter It also glves a brlef Idea on ~nternatlonal ratlng

agencles A brief note on d~fferent lndlan ratlng agencies IS prov~ded Slnce

the study uses CRlSlL ratlng, the profile of CRlSlL has been extensively

discussed

3.2 Credit Rating

Credit ratlng 1s concerned \Nith an act of asslgnlng values (In terms of

symbols) to fund ralslng Instrument by estimating worth, reputation, solvency

and honesty of the borrowing person so as to repose tnrst In person's ability

and ~ntenbon to repay The credit rabng 1s an assessment, by an independent

agency, of the capacity of an issuer of debt securtty to service the debt and

repay the prlnclpal as per the terms of Issue of debt The rat~ng given IS

based on an objective judgement of a team of experts from the ratlng agency

~nvolved In the credlt ratlng Credlt ratlng 1s a process by whlch r~sk

associated wlth a credlt instrument 1s evaluated The nsk evaluation IS only

one factor among varlous other factors such as prlce of secur~ty, maturity

perlad, yield, and tax considerat~ons, whlch also counts In tak~ng investment

decrslons It evaluates only a specific Instrument and indicates r~sks

assoctated wlth Instruments only

The company wants to get rated for a debt issue being floated by it,

request the service of a cred~t rating agency It enters into a wntten

agreement with a rating agency in a standardlsed format The agreement

spec~fies the t e n s for the regular survelllance of the existlng ratlng, to see

whether it needs to be rev~sed or otherwise The ratlng of any Instrument

remalns under survelllance until the entlre debt 1s repa~d The su~elllance IS

mandatory exerclse for ratlng agencles The cred~t ratlng agencles are

Independent entltles and are prlmanly lnforrnat~on prov~ders They ne~ther

guarantee the ratlngs nor extend Insurance cover for decls~on makers They

only fac~lltate decls~on makers with an analysed data base wlth some

authentlcat~on The credd rating does not amount to a recommendat~on to

buy, hold or sell an lnstrument The cred~t ratlng agencles prov~de the

functions of prov~ding supenor and low cost cred~t informat~on and lmposlng

healthy dlsc~pllne on corporate borrowings

The reputat~on IS the hallmark of rat~ng bus~ness Unless the agency IS

old and establ~shed, ~t cannot get a reputation and unless ~t has a reputation,

cl~ents w~ll not approach ~t The cred~t ratlng IS a temporary phenomenon

whlch cannot be cons~dered for a very long span The creeping of subject~v~ty

In ratlng has prov~ded scope for b~as The absence of widespread branch

network of the ratlng agency may limlt ~ t s skill In ratlng There IS a r~sk that

the ratlng agencles may be motivated to produce Inaccurate rat~ngs because

they are pnvate companies In pursult of profits Since rat~ng agencles are

private lnstrtutlons w~th no speclal author~ty, they lack pr~v~leged access to

investigate corporate activltles The cred~t ratings have become Important

Inputs for Investment declsion both by market partlclpants and investors The

possibll~t~es of changes in cred~t rat~ng are h~gher over longer hme horizons,

w~th increasing global~zat~on and deregulation of market and nat~onal

economies

3.3 Importance of Credit Rating

The role of credrt rat~ng has become most ~mportant In the modern

financ~al market because of globalisation or geograph~cal expansion of

financ~al market, growng number of companies' ralslng funds, growlng

volume of financial instruments traded In the financ~al market, growlng

Table 3.1

Standard &Poor's 1 couples a poss~bly unknown lssuer wlth an I

Credit Rating Defined by Rating Agencies

lnformatlve and meanlngfui symbol of credit quallty

Credlt ratlng IS an oplnlon on the future abllrty and

Agency

I legal obl~gatlon of the lssuer to make t~mely Moody's

payments of prlnclpai and Interest on a specified I

Rating Definition

Credlt ratlng IS an eas~iy recognlsable srrnple tool,

fixed Income secunty

Credlt ratlng IS a slmple system of gradation by

I wh~ch the relatlve capacltles of companies to make AustralIan Ratlngs

tlrnely repayment of lnterest and pnnc~pal on a I I particular type of debt can be noted I

I I Cred~t ratlng IS unbiased, objective and Independent I

1 CRlSlL I oplnlon as to an lssuers capaclty to meet financial

obhgat~ons

Credlt ratlng IS a s~rnple and easy to understand

I I symbol~c lnd~cators of the oplnlon of a cred~t ratlng

I agency about the r~sk involved In a borrow~ng

programme of an lssuer w~ th reference to the

I 1 capab~llty of the lssuer to repay the debt as per

terms of Issue

Credlt ratlng IS, essentially , the oplnlon of the ratlng

I agency on the relat~ve ablilty and wlll~ngness of the

lssuer of a debt Instrument to meet the debt servlce

I I cbllgatrons as and when they Issue I I

Source: We9 sltes of SAP, Moody's, Australian ratlngs, CRlSlL ratings document, 19! ICRA investcr awareness programme - 1998 brochure, and CARE credlt ratlng - answer . . some quesbcns, 1898

number of cases of default In payment of Interest and pr~nctpal, gromng

financlal d~s~ntermed~atlon, growlng lnformatlon technology, Inadequacy of

lnformatlon to the investor about the Issuer, and withdrawal of government

safety nets and the trend towards pr~vatlsatlon The overwhelm~ng number of

fundlng and lnvestlng optlons made difficult for the borrowers to make a nght

cholce of the Instrument Thls demands the Investor an objective crltena for

judgrng the credlt quallty of the Issuer The credlt ratlng serves thls end The

credlt ratlng servlce IS also Important In an lnefficlent capltal market, were the

~nformatlon may not be publlcly ava~lable like an efficient market The

lnveston of develop~ng countr~es are unaware of analys~ng and lnterpret~ng

financlal statements of the companles Thls IS because, the Investors are not

educated, the educated Investors do not have the tlme, money and other

~nfonat lon to analyse the companles before tak~ng Investment decls~ons

Hence the role of speclal~sed ratlng agencles to rate the debt Instruments

become ~mportant

3.4 Origin and Growth of Credit Rating

The ploneer professional thlnker LOUIS Tappan establ~shed a

mercantile rating agency in 1841 In New York, to pred~ct the ablity of

merchants to pay financial obl~gatlon follow~ng the financlal crisis of 1837 In

USA John Bradstreet, a financlal analyst, established another ratlng agency

and publ~shed the analyt~cal work done by ~t The applrcatlon of credlt rating

to corporate Instruments for the first tlme IS traceable wlth the publlcatlon by

Henry Vemum Poor's5 financlal data of rall road companles ent~tled T h e

History of Rall Roads and Canals of the Unlted States", In 18EO's In USA

The other famous agencjes In US rnclude Dun & Bradstreet (Moody's

Subsld~ary), Duff & Phelps (DIP) of Chlcago. McCarthy, Cr~santl & Maffel

(MCM) of New York, Xerox Carp , Unit, and Fltch's lnvestors servlce (Frtch)

at New York The cred~t ratlng has become part actlvlty of the financlal

market and a must for the corporate growth In UK, Japan, Canada, Australla,

-

5~enry Vemum Poor's name IS associated wth Standard 8 Poots, the world famous and famlllar credlt ratlng agency

Austrla, France, South Korea, Phlllpplnes. Indonesia, Tha~land and Malays~a

The Importance of credlt ratlng has Increased more and more wlth the growth

and development of financlal lntermedlarles and lnst~tutlonal Investors

3.5 Benefits of Credit Rating

The credlt ratlng provldes the benefits to Investors ~n terms of (I)

assurance of safety of Investments, (11) qulck Investment decls~ons, and (111)

dlrect Investment decisions uslng cred~t ratlng without depending on the

adv~ce of financ~al lnterrnedlanes The lssulng company 1s benefited out of

cred~t ratlng In means of (I) reduced borrowing cost (quotlng lesser Interest

Table 3.2

Major Events in the Growth of Credit Rating

Year

1906

1916

1941

1966

1969

1982

1900

1909

1914

Events

Standard Statlstrcs Bureau was founded to provlde prev~ousiy

unavaliable financlal lnformat~on on USA's lndustrlal companies

Standard S ta t~s t~w Bureau ass~gned debt rating to corporate

bonds and also started ratlng of the sovereign debts

P O O ~ S Publlshlng merged w~th Standard Statlstlw to form

Standard & Poor's Corporat~on (Sap)

Mc Graw-HIII Inc acqu~red controll~ng Interest of S&P

SBP started ratlng commerc~al paper

S I P extended ratlngs to Eurobond Issues

John Moody founded Moody's Investor Servlces

Moody's Introduced formally the credlt ratlng symbols

Moody's rated bonds of Munlc~pai~tles

rate for hlghly rated ~ n s t ~ m e n t ) , (11) Instrument made attractwe, (111) a

marketing tool to create better Image, (IV) Induces self dlsc~pline through

d~sclosure of account~ng system, financ~al reporting, and management

pattern, (v) easy marketablllty and l~qu~d~ ty of lnstrument, and (vi) taplng

~nternat~onal market

3.6 Credit Rating Methodology

The rat~ng agency asslgns profess~onally qual~fied analyt~cal team for

plannlng and execution of the rating actlvlty This team obta~ns data, analyse

~nformation, and meets key personnel In the company to d~scuss strateg~es,

plans and other relevant issues The analytical team Interacts w~th the back

up team, which also collects Industry lnforrnation The key analys~s

cons~dered for analys~ng the company and ~ t s Issue are l~sted In table 3 3

After evaluating qual~tatlve and quantitative factors, the team presents its

findings to the ratlng committee Th~s comrnlttee f~nally decides the ratlngs

The ratlng arr~ved at, will be communicated to the respective company The

company w~ll be glven an opportunity to furnlsh addlt~onal lnformatlon for

rating apprehens~on The ratlng arnved finally w~ l l be made publ~c by the

ratlng agency

3.7 Major International Rating Agencies

The ~nternational market 1s w~tnessing a large number of credit rating

agencles These rat~ng agencles rate the Instrument lnternat~onally and wrthin

thelr provinces The area of ratings has been wide spread from short term

ratlng to long term ratlng The ratings are glven by these agencles for the

securrtles, entitles, and sovereigns Some of the active and well known

lnternational ratlng agencles have been br~efly explained In this sectlon

3.7.1 Japan Credit Rating Agency Ltd. (JCR)

JCR was establ~shed In Apr~l 1985 by a group of major Japanese

lnst~tut~onal Investors and was author~sed by Japan's min~stry of finance as a

recognlsed rating agency ~n 1987 JCR's ratlng servlces cover broad range of

financial products lncludlng long term bonds, senior debts, medium term

notes and commercial paper for resident and non-resident entlt~es, and

multilateral development banks JCR also rates ability to pay Insurance

clalms for the Japanese l~fe and casualty Insurance companies, as well as

Table 3.3

Key Analysis Considered for Analysing the

Company and its

Analysis

Buslness analysls

Financlai analysls

Management evaluation

Regulatory and competlt~ve

envtronment

Fundamental analysis

Issue in Credit Rating Assignments

Components

Industry rlsk, market posttlon of the

company wtthln the industry, operat~ng

efficiency, and legal position of the

company

Accounting quality, earnlngs protection,

adequacy of cash flows, and financial

flexrbility

Track record of management, plann~r,g

and control systems, depth of managenal

talent, succession plans, goals,

ph~losophy, and strategtes and evaluation

capaclty

Structure and regulatory framework of

financlal system and trends in regulation 1

deregulat~on and thelr tmpact on the

company

L~quldity management, asset qualg,

profitability, financlal positron, ~nterest, and

tax sensltlvlty

structured financing for both res~dent and non-resldent lnclud~ng asset-

backed securltles JCR enjoys a strong support from Japan's prom~nent

inst~tutional investors JCR makes a major contrlbut~on to the development of

an actlve and open bond market In Japan JCR has five dlvls~ons ded~cated

to ratlngs, research, information services, marketing, and plannlng and

general affalrs

3.7.2 Fitch

The headquarters of Fltch IS In New York and London It 1s fully owned

by FIMALAC, Pans Fltch has Included more of earnlngs and stock puce

lnformatlon in rts ratlngs assessments F~tch rating 1s fully cornmltted to serve

capltal market partlclpants by provldlng the hlghest quality ratlngs and

research Fitch ratings have presence In 75 countrres and 40 offices world

w~de Fltch ratlng covers 1,600 financ~al ~nstltutlons, 1000 corporate and

malntalns surveillance on 3,300 structured financlngs and 17,000 mun~clpal

bond ratlngs In the Unlted States' tax exempt market Fltch rating also covers

over 800 Insurance companles and 69 sovereigns F~tch ratlngs cover the

financial ~nstltutlons, banks, corporations, loan products, structured finance,

Insurance, soverergns and publlc finance markets world wlde

3.7.3 Moody's Investors Service

The world's, most prestlglous rating agency and a leading global credlt

ratlng, research and rlsk analysis firm was incorporated on 1" July, 1914 It

has more than 1,700 associates located around the world, malntalning offices

In about 17 countries Mr John Moody found Moody's It offer ratlngs

covenng wider range lncludlng debt related securlt~es, cert~ficate of deposits,

mortgage and asset backed securlt~es, financ~al strength of Insurance

companles, mutual funds, banks, sovereign natlon, publ~c utll~tles, and

munlclpal bonds The ratlngs of Moody's were internat~onallsed In m ~ d 1980's

wlth network of offices In other continents Moody's has expanded Into

developing markets through jolnt ventures or affillat~ons w ~ t h respective local

ratlng agencies. Moody's uses accounting experts to assrst ~ t s analysts In

plcklng apart the complex financlal structures used by many corporatrons

Moody's publishes cred~t oplnlon research and ratlngs on a broad range of

cred~t obl~gatlons such as corporate and governmental obl~gat~ons Issued In

domestlc and lnternat~onal cap~tal markets The ratlngs and research are

d~ssemlnated to the publ~c through electronic and prlnt med~a and real-tlme

systems The ratlngs are wldely used by securities traders and Investors

Moody's ratlng are based on publ~c lnformat~on and ass~gned w~thout the

request of Issuers

3.7.5 Standard & Poor's (SLP)

The premier credtt rating agency of the world, S&P began ~ t s operation

w~th publ~cat~on of financlal information on Unlted States' lndustr~al

companfes It offers rat~ng on a w~de range of debt secur~t~es both In Un~ted

States and overseas markets S&P has outstanding ratlngs on bonds,

preferred stocks, short term Issues and sovereign natlons It has also

part~c~pated In ratlng w~ th other local rat~ng agencles of different natlons

through jo~nt ventures S&P has provided over 140 years of Independent

lns~ght for the global financ~al community It IS the pre-emlnent global prcv~der

of htghly valued Investment data, valuat~on analysts and oplnlons It 1s one of

the world's leading cred~t ratlng servlces, operating through a global network

of 18 offices and 7 affiliates

Standard & Poor's IS the global leader In provld~ng 0bjectlve

~nformatlon, lns~ght and analysis to customers In the equltles, fixed Income,

and forelgn exchange and mutual fund markets The cntlcal thlnk~ng, oplnlon,

news and data prov~ded by Standard & Poor's have become an Integral part

of the global financ~al Infrastructure S&P IS powered through experienced

analyt~cal team, thoughtfully set crlterla, ensured consistent and pred~ctable

methodology for all commentary and analysts S&P IS committed to

transparent effic~ent market and that gave the financ~al comrnunlty the

Independent bench marks they need to make Informed financlal declslons It

renders a serles of web-based servlces that supports analytical plannlng and

investment professlonals globally SLP IS a world class leader for ratlngs and

rlsk anatysls on a w ~ d e range of credlt obl~gations It also offers a

comprehenslve portfolio of data analysls and advlsory sewlces uniquely

valuable to Investment managers and Investment advlsors

3.7.6 A.M. Best Company

A M Best Company IS an lnsurance lnforrnat~on source, offer~ng

comprehenslve data to Insurance professlonals Thls company was found ~n

1899 by Alfred M Best Its ratlngs reflect an In-depth knowledge of the

Insurance rndustry developed dunng ~ t s 100 years relatlonsh~p with the

buslness It IS the world's oldest and most authorltatlve company

3.7.7 Duff and Phelps Credit Rating Company (DCR)

DCR IS a major lnternatlonal source of credlt lnforrnation Its rating

covers fixed Income secur~tres, long term and short term debt of corporatrons,

sovereign natlons, and financ~al lnstltutlons DCR has also rated structured

financing, mortgage backed secunt~es and Insurance companles It has

establrshed many lnternatlonal jolnt ventures

3.8 Credit Ratings in India

The regulatory agencles l~ke Stock Exchange Board of lnd~a and

Reserve Bank of lndla have made credlt ratlng compulsory for a var~ety of

Instruments and schemes In some cases a mlnlrnum cred~t rating IS used as

an entry barr~er lnst~tut~onal Investors lnvar~ably use cred~t rating as an

addltlonal lnput for the~r dec~s~on rnakrng Some lnstrtutlonal Investors have

st~pulated a mlnlmum credrt ratlng as a requirement for the~r investments

The banks and tinanclal ~nstltut~ons make w~de - spread use of cred~t ratlng,

even ~n the~r cred~t declslons There 1s also lncreaslng use of domestic credlt

ratlng by fore~gn companles contemplating buslness relat~onship w~th lnd~an

companles lnd~vldual Investors ~n debt securlt~es lncreasrngly use credrt

ratrng to arrlve at appropriate Investment declslons Cred~t ratlng as a

measure of rlsk In 'rlsk reward relatlonshlp' IS gett~ng clearly established ln

the market The ratlng agencles are also often called upon to asslst vartous

agencles to handle asslgnments, whlch are not In the nature of credtt ratlng

3.9 Present Status of Credit Rating in lndia

In lndla so far market shows very clearly that there IS no danger of

competltlve generOSlty, whtch can eventually destroy the credibtltty of the

rating servlce Itself The experience of the lndlan rabng agencles so far IS

that about 25-30 percent of thelr ratings are not accepted or used Thls

percentage would clearly lndlcate that the agencles are not drlven by an urge

to please borrowers, compressing thelr own professional judgement The

less than 5 percent of Issuers seek second ratlng In Indla, of those who seek

a second ratlng, about half get the same ratrng and some others get a lower

ratlng from the second agency In most cases where a second agency gave

a h~gher ratlng, there was considerable lapse of Ume between the two

ratings The cred~t rating IS known by only marglnal lndtan Investors The

ethlcs of ratlng asslgnments are well respected by the cred~t ratlng agencles

3.10 Performance of Credit Rating Industry i n lndia

The approxtmate market share held by different ratlng agencies are

CRISIL 42 percent, ICRA 36 percent, CARE 18 percent and Duff and

Phelps 4 percent The lndtan cred~t ratlng agenctes rate the debt Instruments

associated w~th rlsk of default and resultant loss trrespectlve of the Issuer of

such Instruments The rattng agencles have been ratlng the following types of

debt and other obllgatlons (I) debentures1 bonds, (11) flxed deposits, (111)

commercial papers, (IV) structured obl~gatlons, (v) uSlltles. (VI) state govt

Issues, (VII) asset backed securltles, (VIII) mutual funds, (IX) equity, (x) bank

llnes of credlt, (XI) collective Investment scheme, and (XII) real estate projects

Table 3 6 presents the performance statistics of Indian debt market deallngs

and the proportton of rated debt The total debt Issued cont~nuously

lncreaslng stnce 1995-96 The publ~c Issue market has drled down and the

pnvate placement IS the route, adopted by most borrowers The percentage

of debt rated has drastically Increased due to the tnvestor awareness on

credit rating and on the government regulaton wh~ch made some Instrument

for compulsory ratlngs The rat~ng has also become more attractwe In the

Indian market, since most of the fund managers are forced to look Into the

best rat~ng for the securlty to be ~ncluded In the portfol~o

I Table 3.6 1

"Rs In bllllons 'till Septerr Source CRISIL's news lettel

of Credit Rating

Private

Placement"

9 964

18 104

30 945

38 933

54 701

62 952

22 847

idustry in

Public

Debtw

2 712

5 753

1 8 0 1

4 681

3 22

2 05 I 1 1 101

India

27 343

29 262

34 996

52 746

20 823

Tom1 Cub: and Rated Cum

10

- - - T o h l Cubt

S 30 R a M b b t

." 20

9C96 96-97 97.98 9&99 9 M O (Q01

Y.ar

3.11 Indian Credit Rating Agencies

In 1987, the concept of cred~t ratlng to the Indian market was

Introduced by CRlSlL Thls cred~t ratlng services has grown to the maximum

extent In past decade The CRlSlL was the first ratlng agency to emerge In

the market followed by ICRA, CARE, and others A br~ef note about the

lnd~an credlt ratlng agencles are expla~ned In th~s sect~on

3.11.1 CRlSlL

It IS the first credlt ratlng agency In lndia It is promoted by the

lndustr~al Credlt and Investment Corporat~on of lnd~a Ltd (ICICI) and Un~t

Trust of India (UTI) as a publlc l~m~ted company with ~ t s headquarters at

Mumbal It IS incorporated In 1987 and developed the ratlng methodology for

corporate debt in the context of Ind~a's financ~al, monetary and regulatory

system It IS a publ~cly held company, one of the rare ratlng agencles to be

l~sted on a stock exchange CRlSlL was the first ratlng agency ~n lnd~a to rate

commerc~al paper programmes (1989), debt instruments of financial

institutions and banks (1992), and asset backed securltles (1992) It has

provlded techn~cal assistance to Malays~a and Israel CRlSlL also stands

among the top five rat~ng agencies In the world In terms of coverage and

analytical strength The strategic alllance of CRlSlL wlth Standard Poor's

(Sap) rating services of USA has benefited CRlSlL wlth lnternatlonal

experience, revamping operating systems, value added rnethodolog~es, and

assisting the cl~ent companies In ralslng funds across the country

CRlSlL commenced ~ t s operations on Is' Jan. 1998, w~th a capital

base of Rs 4 crores The capital share was held ~n the follow~ng proportions

IClCl 15% UTI 15%, AsIan Development Bank 15% Life Insurance

Corporat~on of lnd~a 05%, GIC & Subs~d~arles 05%. State Bank of lndla

05%, Housing Development F~nance Corporation 05%, Select Nat~onal~sed

Banks 18% and Select Forelgn Banks, 17% CRlSlL went publlc In 1992 and

is the only llsted credlt ratlng agency in lndla CRlSlL has p~oneered a viable

market dnven credit rating system In the country by provid~ng real tlme news,

'+' or '-'s~gn tnd~cates the relatlve degree of safety w ~ t h In the grades

60

Table 3.7

CRISIL's Rating Symbol

Long Term

AAA

AA+. AA, AA-

A+, A, A-

BBB+, BBB, BBB-

BB+, BB, BB-

B+, B, B-

C

D

H~ghest safety

H~gh safety

Adequate safety

Moderate safety

Inadequate safety

H~gh r~sk

Substant~al r~sk

Default

Fixed Deposit

FAPA

FAA+, FAA, FAA-

FA+, FA, FA-

FB+, FB, FB-

FC+, FC, FC-

F D

H~ghest safety

Hlgh safety

Adequate safety

Inadequate safety

Hlgh r~sk

Default

Short Tenn

PI+, P I , P1-

P2+, P2, P2-

P3+, P3, P3-

P4

P5

Very strong

Strong

Adequate

M~n~rnal

Default

analysed data, lncislve lnslghts and oplnlon, and expert advlce CIRSIL has

played a stellar role In the development of the debt markets In lnd~a The

analytlcal vtgour, Integrity, Independence, tnnovatlon and cornmltment are

strength of CRlSlL

3.11.1.1 Services Provided by CRlSlL

CRlSlL preforms ~ t s functions to prov~de broad range of servlces

through its three d~vtstons (I) Credit Rattng Serv~ces (CRS), (I!) Credlt

Advlsory Serv~ces (CAS), and (111) CRlSlL Research and lnformat~on Servlces

(CRIS) CRlSlL has p~oneered the cred~t rat~ng system In lnd~a It IS the

market leader whlch has rated more than 1800 companles The CRlSlL

ratlng covers the Issuance made by manufactur~ng companles, finance

companles, banks, financtal ~nstltutlons, bu~lders, bond funds, financial

strength rating, collective Investment schemes, and tnfrastructure companies

CRlSlL updates the ratlngs and publ~sh them perlod~cally In rat~ng scan

CAS offers consultancy servtces to ~ t s cllents wlth a range of financlal

advlsory servlces It alms at r~sk ~dent~ficat~on, nsk mltlgatlon and formulatton,

and execlrtlon strategies CAS combines analytlcal excellence w~th strong

knowledge It focus on transact~on and pollcy level assignments In the areas

of energy, transport and urban infrastructure, bank~ng and finance,

dlslnvestment, privatlsatlon and valuation The key servlces prov~ded by CAS

are (I) offerlng advisory servlces to ent~tles engaged In the energy sector, (11)

experts asslstance In plann~ng lnduct~on of prlvate sector capital and

management Into publ~c sector organlsatlons under prlvatlsat~on . (111) helping

the state authorit~es in formulating the government's financlal and commercral

pol~cy, (IV) experts gu~dance In developing corporate plans, (v) experts

assistance on project scoplng and structuring, (VI) analysing financial v~abtlity

of projects, (VII) advtslng on rlsk identlficat~on 8 analysls and structurtng of

project contracts, (VIII) des~gn~ng an overall publ~c enterpr~se d~vest~ture

program, and (IX) advis~ng on restructuring, cred~t management, Investment

management, equrty valuation, resource mob~lisat~on, and financ~al feasib~lity

assessment CRlSlL Infrastructure Sector Advtsory plays a stgnificant role ~n

reforms, lnstltutlon bulldlng, prlvate-publlc partnerships and leadlng

asstgnments CRlSlL Banklng & Flnance Sector Advtsory advtces to de-rlsk

priclng, leadlng declslons, operational effic~enc~es, credtt management, and

measurement of portfol~o credit rlsk

CRIS dlssem~nates value added research and undertakes customtsed

studies In four areas vlz lndlan economy, lnd~an cap~tal markets, lndlan

industries, and lndlan corporate sector CRlS cllent base comprlse of

lnstltutlonal lnvestors, Investment bankers, commerctal banks, financial

~nst~tut~ons, corporate planners, mutual funds, and asset management

companies CRlSlL Sector Vtew IS an In depth analysis of the Important and

potentlal growth tndustr~es ~n India It provides detalls on structure and

characten, product analys~s, and demand supply analysls of the Industry

CRlSlL View provides CRISIL's analysls and oplnlon on the busmess and

financial outlook of company, based on whlch Investors can take declstons It

also prordes a useful basts for fund managers In the~r portfolio allocation

decls~ons CRlSlL Index servlces provides the Indices CRlSlL - 500 Equlty

Index, CRlSlL MIDCAP 200 Equlty Index, CRlSlL Industry Ind~ces, and

Customlsed lndlces

3.11.1.2 Subsidiaries of CRlSlL

The CRISIL's subs~dlartes are (I) CRIS-R~sk & Information Solutions

Co Ltd (CRIS-RISC) (Formerly Known as Cr~sll Com Ltd), (11) CRlSlL

Research & Information Serv~ces (CRIS Ltd ), and (111) Global Data Services

of lnd~a Ltd CRIS-RISC is a cap~tal markets research, lnformat~on & news

company whlch constructs and d~strlbutes its varlous offer~ngs using the

Interest as well as other technology platforms to a vanety of capltal market

and med,a I lnformation players CRlSlL Market Wtre (CMW) a dtvislon of

CRIS-RISC IS forged from the expenenced profess~onal team of the Erstwhile

Bridge News It spearheads CRlSlL offerings In the market wlth real-tlme

news provided on multi-dellvery platforms

CRIS Ltd is a wholly owned subs~diary of CRISIL, was formed when

CRlSlL acqu~red the INFAC brand In January 2000 INFAC was promoted by

IPRS, a company that p~oneered the concept of Industry analys~s In India

CRIS-INFAC conducts In depth research at the macro and mlcro level

covertng the economy, Industry, corporate as well as areas such as

commodity market trends and prlces CRIS-INFAC sat~sfies the informat~on

needs of a large and d~verse set of lnd~as lead~ng economlc dec~s~on

markets The CRIS- INFAC network of over 1200 prlmary sources over 80

~ndustnes, 300 commod~ties and 3000 companles ensures a balanced and

authenticated analytical base The penetration of CRIS-INFAC's servlces In

the financ~al sector IS over 90 percent

Global Data Servlces of lndla Ltd (GDSIL) prov~des the h~gh qual~ty,

rel~able and tlmely financ~al analysls of lndlan corporate It covers over 1500

of the largest companles l~sted on the Indian stock exchanges The data IS

prov~ded both onllne and offllne Global data servlces also provides data

entry servlce and offers to malntaln financial updates on the cred~t and

Investment portfol~os of ~ t s cl~ents lnst~tut~onal lnveston and cap~tal market

lnterrnedlanes use thls servlce GDSIL offers consistent, h~gh-quality financial

data analys~s to users w~thln and outsde the CRlSlL group, enhancing the

efficacy of the convent~onal financial analysis frameworks adopted in the

marketplaces

3.11.1.3 Performance of CRlSlL

CRlSlL has over time, built up a reputat:on for superlor analys~s, wh~ch

IS today w~dely accepted and respected by the ~nvestors' commun~ty

CRISlL's sustained campalgn to enhance awareness amongst Issuers,

Investors and other market entltles has undouttedly contr~buted to th~s It has

benefited the investors by t~mely rat~ng act~ons taken in recent years For

many Indian ~nvestors, the name CRlSlL IS virtually synonymous with ratlngs

It IS the wcrld's first agency to develop crlterla for ratlng instruments CRlSlL

has rntroduced ratlngs for structured finance Instruments, real estate

developers, cap~tal market brokers, and parallel marketers of petroleum

products CRlSlL has also Introduced ratlngs of health care lnstltutlons on

quality The major lnnovat~ons Include the creatlon of a software model for

assessment and measurement of borrowers rlsks, whlch has been

productised and sold to major Indian banks and lnst~tut~ons

The very s~gnlflcant achievement has been the lntroduct~on of

corporate governance and value creation rat~ngs It 1s a globally unlque

product, whlch rates companies based on both, strength and controls and

processes, and on the extent of balanced wealth creat~on and the qual~ty of

wealth management The financ~al performance has moderately Increased

over a per~od of tlme lnltlally the income from rat~ng bus~ness y~elded good

Income The emergence of other cred~t rat~ng agencles has forced the

CRISIL's to expand ~ t s servlces to the analyt~cal lnformat~on providing areas

F I ~ 3 2 exh~b~ts the CRISIL's operat~ng Income The operat~ng Income have

been rlslng stead~ly over the last decade The profits have Increased

slpnlf~cantly In the last financ~al year

Fog 3 2

CRISIL's Operating Income

600-

600-

;

r 300-

f Z W -

4

Source Annual reports of CRlSlL

3.11.2 ICRA Limited

ICRA L ~ m ~ t e d was (formerly called as Investment lnformat~on and

Cred~t Ratlng Agency of lndla Ltd) lncorporated on Jan 16, 1991 and

launched ~ t s servlces on August 31, 1991 It's headquarter IS at New Delh~

ICRA IS an Independent and professional company provid~ng rating,

lnformatlon, and adv~sory servlces Its asslgnments Include cred~t rating,

equ~ty grad~ng, and mandated stud~es spannlng d~verse lndustr~al sectors

The ICRA rates debt Instrument Issues by rnanufacturlng companles,

comrnerclal banks, non-bank~ng finance companles, financ~al Institutions,

publ~c sector undertakings, and mun~c~pal~tles The obllgations rated by ICRA

Include long term, medlum and short term lnstruments It also rates

structured obl~gat~ons and sector spec~fic debt obl~gatlons The new servlces

offered by ICRA are cred~t assessment, general assessment, bank lhnes of

cred~t, assessments for SSls and medlum scale lndustr~es and Insurance

compan~es' cla~ms paying rat~ng In 1996, ICRA entered Into a strategic

alllance w~th Flnanc~al Pro Forma Inc , a Moody's subsid~ary to offer servlces

on rlsk management tra~nlng and software

3.1 1.3 CARE

Cred~t Analys~s 8 Research Ltd was lncorporated In Apr~l 1993 It IS a

cred~t rat~ng, lnformat~on and advlsory servlce company promoted by

lndustrlal Development Bank of lnd~a (IDBI), Canara Bank, UTI and other

leading banks and financ~al servlces companles CARE ass~gned ~ts first

rat~ng In Nov 1993, and up to May 31, 2002 had completed 2008 ratrng

asslgnments for an aggregate value of about Rs 3128 b~ l l~on CARE ratlngs

are recogn~sed by Government of Indla, Reserve Bank of lnd~a and Stock

Exchange Board of lnd~a The rating coverage extends to lndustr~al

companles, public ut~l~tles, financial ~nst~tut~ons, ~nfrastructure projects,

spec~al purpose vehicles, state government, and mun~c~pal bod~es CARE

rates all types of lnstruments l~ke comrnerclal papers, fixed deposits, bonds,

debentures, and structured obllgatlons CARE'S ~nformatlon and advlsory

servlce group prepares cred~t reports on spec~f~c requests from banks or

Table 3.8

ICRA's Cred~t Rating Symbols

MB+. MB, MB- I Inadequate safety

Long Term

MC+, MC, MC- I R I S ~ prone

LAAA

W, LA4+, LAA-

LA+, LA. LA-

LBBB+, LBBB, LBBB-

LBB+, LBB, LBB-

LB+, LB, LB-

LC+, LC, LC-

LD

MD Default

Short Term (including commercial paper)

H~ghest safety

Hlgh safety

Adequate safety

Moderate safety

Inadequate safety

Rlsk prone

Substant~al nsk

Default

Al+, A1 ( Hlg hest safety

~ 2 + , ~2 I ~ i g h safety

Medium Term

MAAA

W+, MAA, MAA-

MA+, MA, MA-

H~ghest safety

Hlgh safety

Adequate safety

A3+, A3

A4+, A4

A5

Adequate safety

Rlsk prone

Default

'+' or ' - ' s l y lndlcates the relat!ve degree of safety wlth In the gndes

Table 3.9

CARE'S Rating Symbols

Long Term I Medium Term

CARE AAA (FD)I(CD)I(SO)

CARE AA (FD)I(CD)I(SO)

CARE A (FD)I(CD)I(SO)

CARE EBB (FD)I(CD)I(SO)

CARE BB (FD)I(CD)I(SO)

CARE B (FD)I(CD)I(SO)

CARE C (FD)I(CD)I(SO)

CARE D (FD)I(CD)I(SO)

Best qual~ty

Hlgh qual~ty

Adequate safety

Moderate safety

Inadequate safety

Rlsk prone

Hlgh nsk

Default

Fixed Deposit

CARE AAA (FD)

CARE AA (FD)

CARE A (FD)

CARE EBB (FD)

CARE BB (FD)

CARE B (FD)

CARE C (FD)

CARE D (FD)

Best quallty

H ~ g h quallty

Adequate safety

Moderate safety

Inadequate safety

Rlsk prone

Hlgh nsk

Default

Short Term

PR1

PR2

PR3

PR4

PR5

Supenor

Strong

Adequate

Rtsk prone

Default

buslness partners, conduct sector stud~es, and provldes advisory servces in

the areas of financial restructur~ng, valuation, and credlt appraisal systems

3.11.4 Fitch lndia

Fitch ratlng IS an lnternat~onal rating agency that provides investors

wlth h~ghest quality ratings and research Fltch lndla head quartered In

Mumbal IS a 100 percent subsldlary of the Fltch group it IS an lnternatlonal

rating agency wrth a presence on the ground ~n lnd~a Fitch lndia IS fully

geared to extend the expertise and commitment of its forelgn parent to Indian

cornpanles Fltch lndia analysts have access to Fltch International's large

global information network The credit rat~ngs of Fitch apply to a varlety of

entitles and Issues, includ~ng but not llmlted to sove:elgns, governments,

structured financing, and corporations, debt, preferred stock, bank loans, and

counter partles, as well as the flnanclal strength of insurance cornpanles and

financlal guarantors

3.11.5 Duff & Phelps Credit Rating lndia Private Ltd.

Duff & Phelps cred~t rating agency IS a Indo-US joint venture involving

equity stake of Chicago based well known international credlt ratter, the Duff

and Phelps Cred~t Ratlng Company wlth lndlan firm based at Calcutta, known

as Alllance Credlt Capltal group

3.11.6 ONlDA Credit Rating Agency of lndia Ltd. (ONICRA)

ONlDA Credit Ratrng Agency of lndia Ltd has pioneered lnd~v~dual

cred~t ratlng servlces ~n India ONICRA was Incorporated in October 1993 for

providing the servlces of individual credit rating and lnforrnation services for

the first tlrne ~n lndia It has developed over the yean the methodology to

assess the financlal rlsks in respect of various types of transactions related to

indiv~duals and small and medium enterprises ONICRA IS presently

operating at commerc~al scale It provldes pre and post disbursement and

actlvatlon solutions so as to bridge the gap between the prlnclpals and thelr

Term Deposit (Bank Deposit I Fixed Deposit)

Table 3.10

Fitch India's Rating Symbols

Long term (12 months and above)

AAA (:nd)

AA (ind) +, AA (ind), AA (ind) -

A(ind)+, A(~nd), A(~nd)-

BBB(ind)+, BBB(lnd), BBB(1nd)-

BB (ind) +, BB (ind), BB (~nd) -

B (rnd) +, BB (rnd), BB (~nd) - C (~nd)

D (ind)

High cred~t quality

Adequate credit quality

H~ghest credrt qualrty

High credit qual~ty

Adequate credit quality

Moderate credrt qualtty

Speculatrve

Highly speculat~ve

High default risk

Default

tAAA (ind)

I tC (ind) I High default r~sk

Highest cred~t qualrty

F2 (~nd) Good credit quality

Fair credit qualrty

F4 (rrd) Speculatwe

Default

tD (ind)

L The symmls CP, C D ICD, or PS 1s used after rhe rat~ng indlcallng commeic~al paper, cert~fica:. of depos~t, Inter corporate depos~t or preference share

Default

Short Term (less than 1 year)

prospecting and exlstlng customers Presently ~t serves cllents ~n auto

finance, consumer finance, cred~t card Issuers, cellular phones servlce

providers, etc

3.12 Opportunities for Credit Rating Business in l n d ~ a

lncreasrng rlsk averslon by lenders and Investors and restr~cted

avenue for ralslng capltal will lead to a greater demand for structured finance

rabngs The newer forms of securlt~zatlon such as trade recelvables and

credd card recelvables are also expected to contr~bute for the growth of ratlng

business ~n comlng years The Insurance sector prlvatizat~on and openlng up

of penston funds would go further long way to ensure that whatever they

Invest ~n IS rated The health Insurance ~ndustry IS openlng up new vlstas of

growth for ratlng agencles There w~l l be a strong demand for rating servlces

on the back of debt market upswlng due to reduclng Interest rates and almost

staonat~on ~n equlty lnltlal publ~c offerlng and rlghts Issues market The

Interest rate belng remalnlng soft would be agaln a good demand for re-

financing and hence ratings The clearance of the awaltlng secur~t~zat~on bill

would enable many b ~ g ~nst~tut~ons In banking and government sectors to opt

for asset securltlzat~on to meet the capital defic~ts These deals w~l l requlre a

mandatory cred~t ratlng leading to a greater demand for cred~t rating The

forh comlng infrastructure projects and regulatory changes and expected

changes ~n cornputatlon method of capttal adequacy ratio for the banks w~ll

be a major career for ratlng

3.13 Chapter Summary

The credlt ratlng IS an assessment, by an Independent agency, of the

capaclty of an Issuer of debt securlty to servlce the debt and repay the

pnnclpal as per the terms of Issue of debt The role of cred~t rating has

become most important ~n the modem financ~al market The lnternat~onal

market IS witnessing a larger number of credit rat~ng agencles These rating

agencles rate the Instrument internationally and w~thin thelr provinces The

area of ra3ngs has been wide spread from short term rattng to long term

rating The ratlngs are glven by these agencies for the securities, ent~t~es and

sovereigns Some of the actlve and well known international ratlng agencles

are (I) Japan Cred~t ratlng Agency Ltd (JCR), (11) Fltch, (111) Moody's Investors

Service, (N) Standard & Poor's, (v) A M Best Company, and (VI) Duff and

Phelps Cred~t Rating Company (DCR)

In 1987, the concept of credlt ratlng to the lnd~an market was

Introduced by CRlSlL This credlt ratlng servlces has grown to the maximum

extent in past decade The CRlSlL was the first rat~ng agency to emerge In

the market followed by ICRA, CARE and others The CRISIL, the first credtt

rating agency ln lndla was promoted by the lndustrlal Cred~t and Investment

Corporat~on of India Ltd (ICICI) and Unlt Trust of lndla (UTI) as a publlc

llmlted company with ~ t s headquarters at Mumbai It was incorporated in 1987

and developed the ratlng methodology for corporate debt In the context of

Indla's financial, monetary and regulatory system It IS a publ~cly held

company, one of the rare rating agencles to be listed on a stock exchange

CRlSlL was the first ratlng agency In lnd~a to rate commerc~al paper

programmes (1989), debt instruments of financial Institutions and banks

(1992) asd asset backed securities (1992) It has provided technical

assistance to Malays~a and Israel CRlSlL also stands among the top five

ratlng agem,cles In the world In terms of coverage and analytical strength

In lnd~a so far market shows very clearly that there is no danger of

cornpetltlve generos~ty, which can eventually destroy the cred~b~lity of the

ratlng servlce ltself The expertence of the lnd~an rating agencles so far IS

that about 25-30 percent of thelr ratings are not accepted or used Increasing

risk avers on by lenders and Investors and restricted avenue for ralsing

cap~tal w~l l lead to a greater demand for structured finance ratlngs The newer

forms of securitizat~on such as trade recelvables and cred~t card recelvables

are also expected to contr~bute to growth in ratlng business In cornlng years

The Insurance sector prlvatlzation and openlng up of pension funds would go

further long way to ensure that whatever they ~nvest in IS rated The health

Insurance Industry IS opening up new vistas of growth for rating agencies

There w~l l be a strong demand for ratlng servlces on the back of debt market

upswing due to reduc~ng interest rates and almost stagnation In equity inltlal

public offer~ng and rlghts Issues market The Interest rate belng remaining

soft would be again a good demand for re-financing and hence ratlngs

References

http I l w arnbest com

http I l w careratings corn

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http Ihvww fjtchratings corn

http //w lcra org

http l l w jcr co jp

http I l w rnoodys corn

http //w onlcra corn

http l l w rbi org In

http //w sebi gov In

http I l w standardandpoors corn