Professional Documents
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INTRODUCTION OF CRA
India was perhaps the first amongst developing countries to set up a credit rating agency in
1988. The function of credit rating was institutionalized when RBI made it mandatory for the
issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating
compulsory for certain categories of debentures and debt instruments. In June 1994, RBI
made it mandatory for Non-Banking Financial Companies (NBFCs) to be rated. Credit rating
is optional for Public Sector Undertakings (PSUs) bonds and privately placed nonconve11ible debentures upto Rs. 50 million. Fixed deposits of manufacturing companies also
come under the purview of optional credit rating. Securities. Credit Rating is valuable
information, widely used measure for the riskiness of the companies and bonds. It is
expensive information; costly to obtain. Credit Rating prediction is important for investors to
estimate riskiness of unrated companies and for companies to monitor the companies credit
rating, predict the future rating.
With the increasing market orientation of the Indian economy, investors value a systematic
assessment of two types of risks, namely business risk arising out of the open economy
and linkages between money, capital and foreign exchange markets and payments risk.
With a view to protect small investors, who are the main target for unlisted corporate debt in
the form of fixed deposits with companies, credit rating has been made mandatory.
The first mercantile credit agency was set up in New York in 1841 to rate the ability of
merchants to pay their financia Obligatons. Later on, it was taken over by Robert Dun. This
agency published its first rating guide in 1859. The second agency was established by Jon
Bradstreet in 1849 which was later merged with first agency to form Dun & Bradstreet in
1933, which became the owner of Moodys Investors Service in1962. The history of
Moodys can be traced back about a 100years ago. In 1900, John Moody laid stone of
Moodys Investors Service and published his Manual of Railroad Securities.
Early 1920s saw the expansion of credit rating industry when the Poors Publishing
Company published its first rating guide in 1916. Subsequently Fitch Publishing Company
and Standard Statistics Company were set up in 1924 and 1922 respectively. Poor and
Standard merged together in 1941 to form Standard and Poors which was subsequently
taken over by McGraw Hill in 1966. Between 1924 and 1970, no major new rating agencies
were set up. But since 1970s, a number of credit rating agencies have been set up all over the
world including countries like Malaysia, Thailand, Korea, Australia, Pakistan and Philippines
etc. In India, CRISIL (Credit Rating and Information Services of India Ltd.) was setup in
1987 as the first rating agency
Definition
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This in turn increases the total supply of risk capital in the economy, leading to stronger
growth. It also opens the capital markets to categories of borrower who might otherwise
beshut out altogether: small governments, start up companies ,hospitals, and universities
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Credit Rating Agencies are the main authority to assign rate of credit for the companies who
issue debt. Any investor can measure the risk of bad debt after analysis these credit rates.
These credit rates are fixed on the basis of ability to pay back the loan.
Credit Rating Agencies are also helpful to rebuild the investor confidence which is vital to
the global capital markets.
In capital market, its importance is not less than SEBI because credit rating agencies protect
different investors from risk of financial loss by providing them upto date information of
credit rate. Many other key roles can be explain with following way:
To compare the loan on the basis of quality of credit and loan. Suppose X, Y and Z
are three companies offering debentures to investors. Credit rating agencies will
assign their credit rate because these are financial expert and assign rate on the basis
of analysis of past financial records and statements. Credit rating agency will assign
rate AAA to best of X, Y and Z and to invest AAA -credit rating company means low
risk of loss.
Not only show AAA but it show other range of credit rate like A for medium risky
company, BBB medium risky and BB high risky and speculative company.
Credit rating agencies also assist to portfolio monitoring. In portfolio monitoring,
they provide information about which investment is most secure and provide high
return of interest.
Credit quality of transparency.
Credit rating of money market securities.
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Assurance of Safety
High credit rating gives assurance to the investors about the safety of the instrument
and minimum risk of bankruptcy. The companies which get a high rating for their
instruments, will try to maintain healthy financial discipline. This will protect them from
bankruptcy. So the investors will be safe.
Choice of Instruments
Credit rating enables an investor to select a particular instrument from many
alternatives available. This choice depends upon the safety or risk of the instrument.
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The rating process begins with the receipt of formal request from a company desirous of
having its issue obligations rated by credit rating agency. A credit rating agency constantly
monitors all ratings with reference to new political, economic and financial developments
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and industry trends. The process/procedure followed by all the major credit rating agencies in
the country is almost similar and usually comprises of the following steps.
1.
Rating Request
The rating process begins, with the receipt of formal request for rating from a
company desirous of having its issue obligations under proposed instrument rated by
credit rating agencies. An agreement is entered into between the rating agency and the
issuer company. The agreement spells out the terms of the rating assignment and covers
the following aspects:
2.
It gives right to the issuer company to accept or not to accept the rating.
It requires the issuer company to provide all material information to the CRA
for rating and subsequent surveillance.
Data gathering/Analysis
To get all the information necessary for analysis, Credit-Rating agency sends
a client the letter with information requirements: a list of all the information and
documents necessary for credit rating analysis. Credit-Rating guarantees that your
confidential information will be kept safe.
3. Management Meetings
Meetings and consultations with client company managers and officials are
very important in the process of credit rating assignment. As a rule, we need two or
three meetings. In the first meeting analysts would ask questions about financial plans
and further development prospects. This information helps us to remain objective in
assessment of clients financial position for the long-term period.
4. Rating committee/Assignment of Rating
Rating team of the agnecy examines all the data, information and documents.
It also considers all the points presented by the client. The team then recommends the
rating.
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6. Appeal
If the Company/ institution feel that the rating can be improved and has
adequate reason for it, it can appeal so to the agency. Such appeal should be
substantiated with proper reasoning and justification. On appeal the agency may or
may not revise the rating.
7. Publication
Decision about rating publication is taken by a client individually. Client may
decide not to publish assigned rating. Even if rating is not published the procedure of
credit rating assignment remains useful as conclusions of agency analysts written in
the rating report may help to determine factors influencing clients credibility. Their
improvement in the future may lead to credit rating upgrade. Agency may not submit
publication of upgrades/downgrades of once published rating to clients approval.
8. Appeal
If a client thinks that in the process of rating assignment some important
factors have not been taken into consideration, clients authorized representatives may
appeal to rating committee within the next ten days after rating assignment. The
appeal will be accepted only if a client can bring new data and documents that are
important for rating procedure. After examination of these documents, credit rating
committee will take a decision which cannot be appealed .Appeal procedure does not
influence on clients rights on rating publication.
9. Surveliance and Annual Review
Rating is a dynamic activity. So rating has to be monitored continuously. Also it is
mandatory.
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CRISIL, India's first credit rating agency, is incorporated, promoted by the erstwhile ICICI
Ltd, along with UTI and other financial institutions. The head office of the company is
located at mumbai and it has established offices outside india. it is a global analytical
company providing ratings ,research and risk and policy advisory services.it is the largest
credit rating agency in India. CRISILs majority shareholder is STANDARD and POORs.
WIth sustainable competitive advantage arising from their strong brand, unmatched
credibility, market leadership across businesses, and large customer base, they deliver
analysis, opinions, and solutions that make markets function better.
they defining trait is our ability to convert data and information into expert judgements and
forecasts across a wide range of domains, with deep expertise and complete objectivity.
At the core of their credibility, built up assiduously over the years, are our values: Integrity,
Independence, Analytical Rigour, Commitment and Innovation.
CRISIL launches Education Grading, beginning with business schools
CRISIL Rating enhances access to funding for SMEs; Announces 20,000th SME
Rating
CRISIL Ratings launches Solar grading
CRISIL Research launches Gold and Gilt Index
CRISIL Global Research & Analytics receives NASSCOM Exemplary Talent
Practices Award
CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field
of assessment service for the banks. Highly skilled members manage the agency. Ms. Roopa
Kudva who acts as the Managing Director and Chief Executive Officer of the company heads
it. The company has set up large number of committees to look after dispersal of various
services offered by the company for example, investor grievance committee, investment
committee, rating committee, allotment committee, compensation committee and so on. The
head office of the company is located at Mumbai and it has established offices outside India
also.
CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral
specialization. CRISIL Ratings plays a leading role in the development of the debt markets
in India. CRISIL has also spearheaded the formation of the Cari CRIS, the world's first
regional credit rating agency.
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LONG TERM
INSTRUMENT
SHORT-TERM
I NSTRUMENTS
CRISIL AAA
(Highest Safety)
CRISIL A1
CRISIL AA
(High Safety)
CRISIL A2
CRISIL A
(Adequate Safety)
CRISIL A3
CRISIL BBB
(Moderate Safety)
CRISIL A4
CRISIL BB
(Moderate Risk)
CRISIL D
CRISIL B
(High Risk)
CRISIL C
(Very High Risk)
CRISIL D
Default
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Mr. N Vaghul and Mr. Pradip Shah are CRISIL's first Chairman and
Managing Director, respectively.
Despite the odds, and the initial lack of market acceptance of credit
ratings, CRISIL's operations are now well established. It begins to
acquire brand identity, with a reputation for analytical rigour and
independence.
S&P acquires a 9.68 per cent stake in CRISIL. The alliance with the
world's leading rating agency adds a new dimension to CRISIL's
methodologies. It provides CRISIL with exposure to the international
rating markets and to S&P's rating processes.
1987
1988
1990
1991
1992
1993
1994
1995
1996
1997
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CRISIL sets up India Index Services Ltd (IISL), a joint venture with
NSEIL, to provide a variety of indices and index-related services and
products to India's capital markets.
CRISIL launches Mutual Fund Awards in association with CNBCTV18 - a benchmark award for India's best performing mutual funds.
1998
1999
2000
2001
2002
2003
2004
CRISIL follows it up with its first overseas acquisition EconoMatters Ltd (later the Gas Strategies Group), a London-based
company providing natural gas related consulting, information and
training, and conference-organizing services.
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set up.
2005
CRISIL assigns India's first Bank Loan Rating under the Reserve
Bank of India's Basel-II related regulations.
2006
2007
2008
2009
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2010
2011
CRISIL moves into a new, corporate head office - the new CRISIL
House, at Powai, Mumbai, is a state-of-the-art, green building.
Functions of crisil
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Ratings
CRISIL Ratings:
It is the only ratings agency in India with sectoral specialization It has played a
critical role in the development of the debt markets in India. The agency has developed
new ratings methodologies for debt instruments and innovative structures across sectors.
CRISIL Ratings provides technical know-how to clients all over the world and has helped
set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.
Research
It provides research, analysis and forecasts on the Indian economy, industries and
companies to over 500 Indian and international clients across financial, corporate, consulting
and public sectors.
CRISIL Fund Services: It provides fund evaluation services and risk solutions to the
mutual fund industry.
The Centre for Economic Research: It applies economic principles to live business
applications and provide benchmarks and analyses for India's policy and business
decision makers.
Investment Research Outsourcing: CRISIL added equity research to its wide
bouquet of services, by acquiring Irevna, a leading global equity research and
analytics company. Irevna offers investment research services to the world's leading
investment banks and financial institutions.
Advisory
CRISIL Infrastructure Advisory:
It provides policy, regulatory and transaction level advice to governments and
leading organizations across sectors.
Investment and Risk Management Services:
CRISIL Risk Solutions offers integrated risk management solutions and
advice to Banks and Corporates by leveraging the experience and skills of CRISIL in
the areas of credit and market risk.
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ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited)
was set up in 1991 by leading financial/investment institutions, commercial banks and
financial services companies as an independent and professional Investment Information and
Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group
ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock
Exchange and the National Stock Exchange.
The company changed its name to ICRA Limited, and went public on 13 April 1997,
with a listing on the Bombay Stock Exchange and the National Stock Exchange.
Moody's continues to be the largest single shareholder in ICRA. ICRA has a panIndia presence and has offices in 8 locations. Apart from the four metros, it has
offices in Pune, Ahmedabad, Bangalore and Hyderabad.
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ICRA Limited
TypePublicTraded asBSE: 532835
NSE: ICRA Industry Financial services Founded 1991 Headquarters New Delhi,
India Key people Naresh Takkar, CEO Services Credit ratings
Financial consulting Operating income 1,293 million (US$25.8 million) Net income
449 million (US$8.96 million)[1]Subsidiaries PT. ICRA Indonesia
ICRA Lanka Limited
ICRA Management Consulting Services Limited
ICRA Techno Analytics Limited
ICRA Online Limited[2] Website www.icra.in
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emerged as the leading agency for covering many rating segments like that for banks, subsovereigns and IPO gradings.
CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise
capital for their various requirements and assists the investors to form an informed
investment decision based on the credit risk and their own risk-return expectations. Our
rating and grading service offerings leverage our domain and analytical expertise backed by
the methodologies congruent with the international best practices. With majority
shareholding by leading domestic banks and financial institutions in India, CAREs intrinsic
strengths have also attracted many other investors.
CARE was registered by SEBI as per Securities & Exchange Board of India Regulations
1999.Services offered by CARE The various services offered by CARE include:
Rating Services:
With regard to rating services offered by CARE or Credit Analysis & Research Ltd, the
agency carries out rating of the following debt instruments:
Structured obligations
Commercial paper
Debentures
Fixed deposits
Bonds
Credit Reports
In addition to rating industrial houses, Credit Analysis & Research Ltd (CARE) also does
rating of financial institution, state governments, municipalities, special purpose vehicles.
Credit Analysis & Research Ltd (CARE) also prepares credit reports. These credit reports are
availed of by different corporate houses. The credit reports worked out by CARE are
instrumental in making decisions pertaining to collaborations, joint ventures, mergers,
acquisitions.
Valuations
CARE conducts enterprise evaluations for big investors, business partners (existing partners
as well as prospective partners), managements of big companies. The Indian government's
Disinvestment Commission had availed the services of CARE for carrying out evaluation of
state owned enterprises, which were 20 in number.
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Credit Appraisal:
Credit Analysis & Research Ltd (CARE) also assists non banking companies and different
banks in setting up or bringing about modifications in the credit appraisal.
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Duff & Phelps financial advisory and investment banking business in 2004. The following
year, Duff & Phelps strengthened its valuation capabilities with the acquisition of Standard &
Poor's Corporate Value Consulting business
A leading global financial advisory and investment banking firm, Duff & Phelps (NYSE:
DUF) balances analytical skills, deep market insight and independence to help clients make
sound decisions. The firm provides expertise in the areas of valuation, transactions, financial
restructuring, alternative assets, disputes and taxation. With more than 1,000 employees, Duff
& Phelps serves clients from offices in North America, Europe and Asia.
Profile of Duff & Phelps Credit Rating India Private Ltd (DCR India)
Duff & Phelps Credit Rating India Private Ltd (DCR India) rated the forex debt obligations
of India as ' BBB-' or a Triple B Minus. This rating is of great importance for the economy of
India and the credibility of the national government.
This rating reflects the fact that the Indian national government is trying its best to improve
the state of Indian economy. As per the rating of DCR India, the national government of India
is trying to bring about a better economic environment through the introduction of several
economic policies and plans for the last 17 years.
Over the years India has had powerful accounts of payments. Since the decade of 1990s the
records of debt service have also been impressive. The external debt indicators of India are
also showing better patterns. All these support the rating provided by Duff & Phelps Credit
Rating India Private Ltd (DCR India).
Duff & Phelps Credit Rating India Private Ltd (DCR India) Services
The services provided by Duff & Phelps Credit Rating India Private Ltd
(DCR India) are considered to be at par with other leading providers of
credit rating services in India like Credit Rating Information Services of
India Limited (CRISIL), ONICRA Credit Rating Agency of India Ltd.,
Investment Information and Credit Rating Agency of India (ICRA),
Operation Research Group & Marketing & Research Group and Credit
Analysis & Research Limited (CARE).
2008
2009
2010
2011
2012
Onicra Credit Rating Agency is one of the leading Credit and Performance Rating agencies in
India. It provides ratings, risk assessment and analytical solutions to Individuals, MSMEs
and Corporates.
These services enable the lender or service provider to make smart, value based decisions on
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the Individuals, MSMEs and corporates by providing them essential information that
includes financial, operational, productivity and 360 degree analysis, thus providing a holistic
view about the entity.
Third party credit and performance rating and assessment helps to create trust between
players in markets that underpins transactions.
ONICRA plays a central and critical role in collecting and analyzing a variety of financial,
operational, industry and market information, synthesizing that information, and providing
autonomous, reliable assessments of the entity, thereby providing stakeholders with an
important input into their decision making process.
To realize our goal we have committed ourselves to providing the stakeholders with
objective, timely, independent and forward-looking credit and performance opinions. The
foundation of that dedication is embedded in several core principles objectivity, quality,
independence, integrity and transparency.
Milestones Onicra operates as a financial services organisation. Its products and services
include Individual Credit Rating, SME rating, Employee Background Screening, Customer
Profiling & Rating (CPR), Associate Rating and IT solutions, across the telecom, banking,
health, insurance, education and auto sectors.
The company has been acknowledged as pioneers in this field by the Ministry of Finance in
the Economic Survey (19931994). It is recognised and empanelled by the likes of NSIC
(National Small Industries Corporation Ltd., and the IBA (Indian Banks Association), for
performance and financial ratings. The Employee Background Screening division is certified
by NASSCOM and NDMA.
The company operates with a network of over 147 branches, covering more than 500
locations pan-India with the help of over 2500 Fleet on Street personnel.
Milestone
2012
Why onicra
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2009-11
2006
2005
2002
8. SEBI-REGULATOR
The capital market regulator regulates rating agencies in most regions. In India, the capital
markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating
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agencies in the country. SEBI laid down an extensive set of regulations for rating agencies in
1999.
CRAs while rating structured finance products, are barred from providing
consultancy or advisory services regarding the design of the structured finance
instrument. This prohibition would apply to the subsidiaries of CRAs too. While
publishing the ratings of structured finance products and their movements, CRAs
apart from following all the applicable requirements in case of non-structured ratings
should also disclose the track record of the originator and details of nature of
underlying assets while assigning the credit rating.
In case of unsolicited credit ratings (the credit ratings not arising out of the
agreement between the CRAs and the issuer), credit rating symbol should be
accompanied by the word UNSOLICITED in the same font size.
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The credit rating agencies in India mainly include ICRA and CRISIL. ICRA was formerly
referred to the Investment Information and Credit Rating Agency of India Limited. Their
main function is to grade the different sector and companies in terms of performance and
offer solutions for up gradation.
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all the details required. They have to undergo the strict examination procedure with
regard to the details furnished by them. They are required to prepare internal
procedures , abidance with circulars. They are offered guidelines regarding the credit
rating procedure, by the Act. The credit rating agencies are provided with compliance
officers. They are required to show their accounting records.
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otherwise be shut out altogether: small governments, startup companies, hospitals, and
universities
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Issuers also use credit ratings in certain structured finance transactions. For example, a
company with a very high credit rating wishing to undertake a particularly risky research
project could create a legally separate entity with certain assets that would own and conduct
the research work. This "special purpose entity" would then assume all of the research risk
and issue its own debt securities to finance the research. The SPE's credit rating likely would
be very low, and the issuer would have to pay a high rate of return on the bonds issued.
However, this risk would not lower the parent company's overall credit rating because the
SPE would be a legally separate entity. Conversely, a company with a low credit rating might
be able to borrow on better terms if it were to form an SPE and transfer significant assets to
that subsidiary and issue secured debt securities. That way, if the venture were to fail, the
lenders would have recourse to the assets owned by the SPE. This would lower the interest
rate the SPE would need to pay as part of the debt offering.
The same issuer also may have different credit ratings for different bonds. This difference
results from the bond's structure, how it is secured, and the degree to which the bond is
subordinated to other debt. Many larger CRAs offer "credit rating advisory services" that
essentially advise an issuer on how to structure its bond offerings and SPEs so as to achieve a
given credit rating for a certain debt tranche. This creates a potential conflict of interest, of
course, as the CRA may feel obligated to provide the issuer with that given rating if the issuer
followed its advice on structuring the offering. Some CRAs avoid this conflict by refusing to
rate debt offerings for which its advisory services were sought.
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institution is heavily invested in highly liquid and very "safe" securities (such as U.S.
government bonds or short-term commercial paper from very stable companies).
CRA ratings are also used for other regulatory purposes as well. The US SEC, for example,
permits certain bond issuers to use a shortened prospectus form when issuing bonds if the
issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC
regulations also require that money market funds (mutual funds that mimic the safety and
liquidity of a bank savings deposit, but without Federal Deposit Insurance Corporation
insurance) comprise only securities with a very high NRSRO rating. Likewise, insurance
regulators use credit ratings to ascertain the strength of the reserves held by insurance
companies.
In 2008, the US SEC voted unanimously to propose amendments to its rules that would
remove credit ratings as one of the conditions for companies seeking to use short-form
registration when registering securities for public sale.
This marks the first in a series of upcoming SEC proposals in accordance with Dodd-Frank
to remove references to credit ratings contained within existing Commission rules and
replace them with alternative criteria.
Under both Basel II and SEC regulations, not just any CRA's ratings can be used for
regulatory purposes. (If this were the case, it would present a moral hazard) Rather, there is a
vetting process of varying sorts. The Basel II guidelines (paragraph 91, et al.), for example,
describe certain criteria that bank regulators should look to when permitting the ratings from
a particular CRA to be used. These include "objectivity," "independence," "transparency,"
and others. Banking regulators from a number of jurisdictions have since issued their own
discussion papers on this subject, to further define how these terms will be used in practice.
(See The Committee of European Banking Supervisors Discussion Paper, or the State Bank
of Pakistan ECAI Criteria).
In the United States, since 1975, NRSRO recognition has been granted through a "No Action
Letter" sent by the SEC staff. Following this approach, if a CRA (or investment bank or
broker-dealer) were interested in using the ratings from a particular CRA for regulatory
purposes, the SEC staff would research the market to determine whether ratings from that
particular CRA are widely used and considered "reliable and credible." If the SEC staff
determines that this is the case, it sends a letter to the CRA indicating that if a regulated
entity were to rely on the CRA's ratings, the SEC staff will not recommend enforcement
action against that entity. These "No Action" letters are made public and can be relied upon
by other regulated entities, not just the entity making the original request. The SEC has since
sought to further define the criteria it uses when making this assessment, and in March 2005
published a proposed regulation to this effect.
On September 29, 2006, US President George W. Bush signed into law the Credit Rating
Reform Act of 2006. This law requires the US Securities and Exchange Commission to
clarify how NRSRO recognition is granted, eliminates the "No Action Letter" approach and
makes NRSRO recognition a Commission (rather than SEC staff) decision, and requires
NRSROs to register with, and be regulated by, the SEC. S & P protested the Act on the
grounds that it is an unconstitutional violation of freedom of speech In the Summer of 2007
the SEC issued regulations implementing the act, requiring rating agencies to have policies to
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money by issuing debt securities. However, the amount is so large that the return investors
may demand on a single issuance would be prohibitive. Instead, it decides to issue three
separate bonds, with three separate credit ratingsA (medium low risk), BBB (medium
risk), and BB (speculative) (using Standard & Poor's rating system).
The firm expects that the effective interest rate it pays on the A-rated bonds will be much less
than the rate it must pay on the BB-rated bonds, but that, overall, the amount it must pay for
the total capital it raises will be less than it would pay if the entire amount were raised from a
single bond offering. As this transaction is devised, the firm may consult with a credit rating
agency to see how it must structure each tranchein other words, what types of assets must
be used to secure the debt in each tranchein order for that tranche to receive the desired
rating when it is issued.
There has been criticism in the wake of large losses in the collateralized debt obligation
(CDO) market that occurred despite being assigned top ratings by the CRAs. For instance,
losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about
$125 million, despite being rated AAA or Aaa by Standard & Poor's, Moody's Investors
Service and Fitch Group.
The rating agencies respond that their advice constitutes only a "point in time" analysis, that
they make clear that they never promise or guarantee a certain rating to a tranche, and that
they also make clear that any change in circumstance regarding the risk factors of a particular
tranche will invalidate their analysis and result in a different credit rating. In addition, some
CRAs do not rate bond issuances upon which they have offered such advice.
Complicating matters, particularly where structured finance transactions are concerned, the
rating agencies state that their ratings are opinions (and as such, are protected free speech,
granted to them by the "personhood" of corporations) regarding the likelihood that a given
debt security will fail to be serviced over a given period of time, and not an opinion on the
volatility of that security and certainly not the wisdom of investing in that security. In the
past, most highly rated (AAA or Aaa) debt securities were characterized by low volatility and
high liquidityin other words, the price of a highly rated bond did not fluctuate greatly dayto-day, and sellers of such securities could easily find buyers.
However, structured transactions that involve the bundling of hundreds or thousands of
similar (and similarly rated) securities tend to concentrate similar risk in such a way that even
a slight change on a chance of default can have an enormous effect on the price of the
bundled security. This means that even though a rating agency could be correct in its opinion
that the chance of default of a structured product is very low, even a slight change in the
market's perception of the risk of that product can have a disproportionate effect on the
product's market price, with the result that an ostensibly AAA or Aaa-rated security can
collapse in price even without there being any default (or significant chance of default). This
possibility raises significant regulatory issues because the use of ratings in securities and
banking regulation (as noted above) assumes that high ratings correspond with low volatility
and high liquidity
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coming year. The rating of municipal bonds, state government borrowing, commericialbank
and public sector undertaking etc. will be covered in the near future. So, the outlook for the
credit rating industry is positive.
The experience of India rating agencies so far is that about 30% of the rating are no
accepted or used. Instances are their when companies with poor rating assigned by one
company have gone to another for better rating. this raise doubt about efficiency of credit
rating agencies in serving the investors. Various constraint are faced by credit ratting
agencies. The major constraint is the low level disclosure by Indian companies. Rating
agencies have complained of inadequate access to information, poor quality of audit and long
time lags in the availability of data. The companies often do not co-operate whenever the feel
that disclosure of a particular piece of information might not be in their interest. All these act
as systematic constraint on the rating service.
The India credit rating agencies have made strategic alliance with reputed
international agencies. They adopt, to a large extent, the rating methodologies adopted by
their western counterparts the suitability of rating methods and models formulated well
developed markets in the west is highly doubtful in India condition. The rating agencies in
India have to evolve their on methodologies with in the context of macro economic
environment
The environment that prevailed in America when first rating were assigned, prevails
in many developing countries today. The India capital market has witnessed a tremendous
growth in the past few years. Companies are relying on capital market for financing existing
operations as well as for new projects rather than on institution. In this process, the average
size of debenture issued by company, the number of companies issuing debenture end the
number of invertors have grown substantially.
As the number of companies borrowing directly from capital market increases,
investors find that the companys size or name is no longer a sufficient assurance of the
timely payment of interest and principal. Default by large and well known company recently
in payment of interest on fixed deposit or debenture has reinforced this belief among
investors. They felt the need for an independent and credible agencies which judges the
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quality of debt obligation of different companies and assist individual and institution
investors in making investment.
In this context, the credit rating information services of India limited was in 1987.
following this, investment information and credit rating agencies of India was promoted in
1991 and credit analysis and research limited was floated in1993. all the credit rating
agencies have been approved by the RESERVE BANK OF INDIA.
12. CRITICISM
Credit rating agencies have been subject to the following criticism:
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instead require banks, broker-dealers and insurance firms (among others) to use
credit spreads when calculating the risk in their portfolio.
Large corporate rating agencies have been criticized for having too familiar a
relationship with company management, possibly opening themselves to undue
influence or the vulnerability of being misled.[13] These agencies meet frequently
in person with the management of many companies, and advise on actions the
company should take to maintain a certain rating. Furthermore, because
information about ratings changes from the larger CRAs can spread so quickly
(by word of mouth, email, etc.), the larger CRAs charge debt issuers, rather than
investors, for their ratings. This has led to accusations that these CRAs are
plagued by conflicts of interest that might inhibit them from providing accurate
and honest ratings. At the same time, more generally, the largest agencies
(Moody's and Standard & Poor's) are often seen as promoting a narrow-minded
focus on credit ratings, possibly at the expense of employees, the environment, or
long-term research and development. These accusations are not entirely
consistent: on one hand, the larger CRAs are accused of being too cozy with the
companies they rate, and on the other hand they are accused of being too focused
on a company's "bottom line" and unwilling to listen to a company's explanations
for its actions.
While often accused of being too close to company management of their existing
clients, CRAs have also been accused of engaging in heavy-handed "blackmail"
tactics in order to solicit business from new clients, and lowering ratings for those
firms . For instance, Moody's published an "unsolicited" rating of Hannover Re,
with a subsequent letter to the insurance firm indicating that "it looked forward to
the day Hannover would be willing to pay". When Hannover management
refused, Moody's continued to give Hannover Re ratings, which were downgraded
over successive years, all while making payment requests that the insurer
rebuffed. In 2004, Moody's cut Hannover's debt to junk status, and even though
the insurer's other rating agencies gave it strong marks, shareholders were
shocked by the downgrade and Hannover lost $175 million USD in market
capitalization.
The lowering of a credit score by a CRA can create a vicious cycle and selffulfilling prophecy, as not only interest rates for that company would go up, but
other contracts with financial institutions may be affected adversely, causing an
increase in expenses and ensuing decrease in credit worthiness. In some cases,
large loans to companies contain a clause that makes the loan due in full if the
companies' credit rating is lowered beyond a certain point (usually a "speculative"
or "junk bond" rating). The purpose of these "ratings triggers" is to ensure that the
bank is able to lay claim to a weak company's assets before the company declares
bankruptcy and a receiver is appointed to divide up the claims against the
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company. The effect of such ratings triggers, however, can be devastating: under a
worst-case scenario, once the company's debt is downgraded by a CRA, the
company's loans become due in full; since the troubled company likely is
incapable of paying all of these loans in full at once, it is forced into bankruptcy
(a so-called "death spiral"). These rating triggers were instrumental in the collapse
of Enron. Since that time, major agencies have put extra effort into detecting these
triggers and discouraging their use, and the U.S. Securities and Exchange
Commission requires that public companies in the United States disclose their
existence.
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rated securitization requires capital allocation of only 0.6%, a BBB requires 4.8%,
a BB requires 34%, whilst a BB(-) securitization requires a 52% allocation. For a
number of reasons (frequently having to do with inadequate staff expertise and the
costs that risk management programs entail), many institutional investors relied
solely on the ratings agencies rather than conducting their own analysis of the
risks these instruments posed. (As an example of the complexity involved in
analyzing some CDOs, the Aquarius CDO structure has 51 issues behind the cash
CDO component of the structure and another 129 issues that serve as reference
entities for $1.4 billion in CDS contracts for a total of 180. In a sample of just 40
of these, they had on average 6500 loans at origination. Projecting that number to
all 180 issues implies that the Aquarius CDO has exposure to about 1.2 million
loans.) Pimco founder William Gross urged investors to ignore rating agency
judgments, describing the agencies as "an idiot savant with a full command of the
mathematics, but no idea of how to apply them.
Many of the structured financial products that they were responsible for rating,
consisted of lower quality 'BBB' rated loans, but were, when pooled together into
CDOs, assigned an AAA rating. The strength of the CDO was not wholly
dependent on the strength of the underlying loans, but in fact the structure
assigned to the CDO in question. CDOs are usually paid out in a 'waterfall' style
fashion, where income received gets paid out first to the highest tranches, with the
remaining income flowing down to the lower quality tranches i.e. <AAA. CDOs
were typically structured such that AAA tranches which were to receive first lien
(claim) on the BBB rated loans cash flows, and losses would trickle up from the
lowest quality tranches first. Cash flow was well insulated even against heavy
levels of home owner defaults. Credit rating agencies only accounted for a ~5%
decline in national housing prices at worst, allowing for a confidence in rating the
many of these CDOs that had poor underlying loan qualities as AAA. It did not
help that an incestuous relationship between financial institutions and the credit
agencies developed such that, banks began to leverage the credit ratings off one
another and 'shop' around amongst the three big credit agencies until they found
the best ratings for their CDOs. Often they would add and remove loans of
various quality until they met the minimum standards for a desired rating, usually,
AAA rating. Often the fees on such ratings were $300,000 - $500,000, but ran up
to $1 million.
It has also been suggested that the credit agencies are conflicted in assigning
sovereign credit ratings since they have a political incentive to show they do not
need stricter regulation by being overly critical in their assessment of
governments they regulate.
Attempts to regulate more strictly credit rating agencies in the wake of the
European sovereign debt crisis have been rather unsuccessful. Some European
financial regulation experts have argued that the hastily drafted, unevenly
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2. Market Risk
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The market risk, one of the inherent risks in the PD business, is expressed by the
decline in the market value of its assets. ICRA analyses the portfolio of the PD and
subjects the same to stress analysis under varying interest rate scenarios. As the
potential loss is determined by the duration of the portfolio, ICRA studies the above
stress test for different duration and the gearing levels of the PD. ICRA views the net
worth to potential loss as an important ratio while evaluating the PD. In case of
erosion of the above cover, ICRA expects the PDs to scale down its operations or
infuse more capital in form of equity. ICRA also studies the market risk models used
by the PD, if any, for their operations and evaluates the PDs contingency plans.
3. Credit Risk
Since the PDs primarily deal in government securities, the credit risk is negligible.
However, with the PDs gradually increasing their exposure to corporate debt paper to
its improve yields and margins, the credit risk would assume a greater importance.
ICRA evaluates the internal norms and the control systems used to measure the credit
risk by the PD.
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appreciates that due to external market environment, there could be periods when the
internal norms were breached. ICRA studies and analyses such nstances and the
actions taken by the PD to rectify the same. In addition, ICRA evaluates PDs
performance as regards conformity regulatory norms in respect of
the primary market and secondary market operations in terms of bidding
commitments and turnover ratios. Though confirming to these norms are not a
problem for the PDs currently with a fewer number of PD operating and steadily
growing government borrowings programmes, ICRA feels that this could become
important with entry of more players in the PD business and the any changes in the
regulatory norms.
6. Profitability
The financial performance of a PD is largely dependent on external environment
such as the economic cycle, government borrowing programme and the interest rates
movements. The profitability is seen over a meaningful period of time to understand
the income stability of a PD with respect to its peers. While considering the
performance of the PD in terms of revenues, gearing and Return on Networth, ICRA
notes the profitability is dependent on the aggressiveness of the PD. The ability of the
management to quickly adapt to the changing environment provides comfort in form
of a relatively lower volatility in income. There are low liquidity risks for a PDs as
most of their assets are in government securities, which are highly liquid. As their
main business revolves around trading, their investments in non government
securities are usually in instruments that carry high credit rating (rating of LAA and
equivalent and above). The growing repo market for government securities and
likely introduction of repo on corporate bonds further alleviates any liquidity
concerns of a PD operation
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14.CONCLUSION
Credit rating as an industry has passed through several cycles and phases, and will
continue to evolve going forward. Running through all of these, however, is one common
thread, which serves as the key determinant of success in the industry:
credibility.
In the sense of recognition by the market, credibility is theulitimate touchstone of a
rating agencys success, and is built up through a period of sustained performance in the core
rating area. Some key factor feeding into credibility are:
Integrity- freedom from influence, the capacity to stick to the correct decision even
in the face of business consideration.
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15.BIBLOGRAPHY
Website
www.google.com
www.crisil.com
www.care.com
www.investopedia.com
Books
M. Y .Khan (financial service)
Gorden & Natrages (financial Markets & Services)
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