Credit rating
Foreign Credit Rating agency having at least
1. 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 borrowers overall credit
history.
2. Credit ratings are based on financial history
and current assets and liabilities.
3. Typically, a credit rating tells a lender or
investor the probability of the subject being
able to pay back a loan.
4. 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.
5. Many uncertain elements are involved in
determining both how likely it is that an
event of default will happen and how costly
default will turn out to be if it does occur.
There are four Credit Rating agencies in India
1. CRISIL(Credit Rating Information Services
of India Ltd)
2. ICRA(Information and Credit Rating
Services ltd)
3. CARE (Credit Analysis and Research Ltd)
4. FITCH India
Registration
1. Credit Rating agencies are regulated by
SEBI.
2. Registration with SEBI is mandatory for
carrying out the rating Business.
3. A registration fee of Rs. 25000 should be
paid to SEBI
Promoter
1. A Credit rating agency can be promoted by:
2. Public Financial Institution
3. Scheduled Bank
4. Foreign Bank operating in India with RBI
approval
5.
five years experience in rating securities
6. Any company having a continuous net worth
of minimum 100 cores for the previous five
years.
Eligibility Criteria
1. Is set up and registered as a company
2. Has specified rating activity as one of its
main objects in its Memorandum of
Association.
3. Has a minimum Net worth of Rs 5 Crore.
4. Has adequate Infrastructure
5. Promoters have professional competence,
financial soundness and a general reputation
of fairness and integrity in Business
transactions , to the satisfaction of SEBI.
6. Has employed persons with adequate
professional and other relevant experience,
as per SEBI directions.
Grant of Certificate of Registration
1. 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
2. The CRA should enter into a written
agreement with each client containing ,
3. Rights and liabilities of each party w.r.t
rating of securities.
4. Fee charged
5. A periodic review of the rating during the
tenure
6. Clients agreement to cooperate and provide
true, adequate and timely information.
7. Disclosure by CRA to client regarding the
rating assigned.
8. Clients agreement to disclose the rating
assigned in the offer document for the last 3
years
Monitoring of rating
1. The CRA should continuously monitor the
rating of securities rated by it during their
life time .
 2. 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.
1. The rating agency should make public the
definitions of the concerned rating along
with symbol
2. They should also state that the ratings do not
constitute recommendation to buy, sell or
hold any securities.
3. 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
1. 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.
2. 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.
3. It became public in 1993.
4. In 1996, it formed a strategic alliance with
S&P rating group.
Services offered by CRISIL
1. Credit Rating Services
2. Advisory Services
3. Credibility first rating and evaluation
Services
4. Training Services
Credit Rating Services(CRS)
1. 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:
2. Debt obligation includes rupee denominated
credit instruments like debentures,
preference shares, deposits, CDs
commercial papers and a structured
obligations of manufacturing ,finance
companies, banks, financial institutions etc.
3. 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.
4. It reduces cost of issue by direct
mobilization of resources.
5. It protects the interest of investors by
constantly monitoring the results of rated
companies.
Rating of structured obligations:
It reflects CRISIL opinion regarding the
capacity and willingness of the company to
make timely payments of financial
obligations on rated instruments.
Rating of real estates developers:
1. CRISIL has developed framework for rating
of real estate projects. Such rating helps
investors to identify their investment options
2. The rating is expected to help developers
mobilize funds for their projects.
3. The methodology assesses a project in terms
of project risk factors and developers risk
factors.
 CRICIL Advisory Services (CAS)
Bond Fund ratings:
1. The rating is an opinion of the quality of
bond funds underlying portfolio holdings.
They mainly focus on fixed income
securities.
2. 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:
1. The creditworthiness of banks borrower is
assessed offering comments on the
likelihood of repayment of loans.
2. The methodology considers the borrowers
underlying assets liquidity and risk
management initiative and for NBFC quality
of assets , loans and investment.
Collective investment schemes:
1. This covers rating of collective investment
schemes offering opinion on the degree of
certainty of the scheme to deliver the
assured returns in terms of cash as
mentioned in the offer document
2. Grating of health care institutions:
3. The grading for healthcare institutions is an
opinion on the relative quality of health care
delivered by the institutions to the patients.
Grading is done taking into account
facilities, quality , consistency in delivering
the service etc. Flowing are the grades given
Grade A( Very good quality), Grade B
(Good Quality) , Grade C (Average Quality)
and Grade D( Poor Quality)
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.
1. 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.
2. 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.
1. 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.
2. Transaction level assignments include
financial viability analysis, project
structuring, bid process management,
negotiation of terms with successful bidders
3. 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:
Rating services
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 Indias financial sector.
Information services
ICRA Ltd
1. Information and Credit Rating Services
(ICRA) has been promoted by IFCI Ltd as
the main promoter and started operations in
1991.
2. Other shareholders are UTI, Banks, LIC,
GIC, Exim Bank, HDFC and ILFS.
3. It provides Rating, Information and
Advisory services ranging from strategic
consulting to risk management and
regulatory practice.
4. The main objectives of ICRA are to assist
investors both individual and institutional in
making well informed decisions
5. To assist issuers in raising funds from a
wider investor base.
6. To enable banks, investment bankers,
Brokers in placing debt with investors.
7. To provide regulators with market driven
systems to encourage the healthy growth of
capital markets.
8. It provides rating services, information
services and advisory services.
1. ICRA rates debt instruments issued by
manufacturing companies, commercial
banks, NBFCs, financial institutions, PSUs
and municipalities.
2. The instruments rated by it include bonds/
debentures, fixed deposits commercial
papers and certificate of deposit. It also rates
structured obligations in accordance with
the terms of the structure based on risk
assessment of the instrument . It rates
sector specific debt obligations issued by
power, telecom and infrastructure
companies.
3. It also provides corporate governance
rating , rating of claims paying ability of
insurance companies, credit assessment of
large medium and small scale companies to
obtain assistance from banks, FIs. It also
provides services of general assessment of
companies.
1. The information services division of ICRA
focuses on providing authentic data and
value added products used by
intermediaries, financial institutions, banks,
asset managers, institutions and investors.
2. Value added services include equity grading
providing a critical input on a company's
earning prospects and inherent risks in
decision making process of equity investors
and equity assessment.
3. Other services include corporate reports,
equity assessment, mandate based studies
(customized research) and sector/industry
specific publication.
Advisory services
1. The advisory services division of ICRA
offers wide ranging management advisory
services. Under advisory services ICRA
provides its understanding on the business
processes and relevant organizational issues
to different players of financial markets such
as investors, issuers, regulators,
intermediaries and media.
2. The advisory services include 1.strategic
consulting/ strategic practice 2. risk
management (credit risk, market risk and
operations risk) 3. regulatory practice 4
transaction practice 5. information( content
services).
3. It focuses on sectors like banking and
financial services, infrastructure sector,
manufacturing and service sector,
government and regulatory authorities.
CARE Ltd.
1. Credit Analysis and Research Ltd or CARE
is promoted by IDBI jointly with Financial
Institutions, Public/Private Sector Banks and
Private Finance Companies.
2. 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.
3. It also provides advisory services in the
areas of securitisation of transactions and
structuring Financial Instruments.
4. It offers services like 1. Credit rating of
debt instruments 2. Advisory services
like securitization transactions, structuring
financial instruments, financing
infrastructure projects and municipal
finances 3. Information services like
providing information to companies,
industry and businesses. 4. Equity research
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.
Rating Process
1. The process begins with issue of rating
request letter by the issuer of the instrument
and signing of the rating agreement.
2. CRA assigns an analytical team consisting
of two or more analysts one of whom would
be the lead analyst and serve as the primary
contact.
3. Meeting with Management- The analytical
team obtains and analyses information
relating to its financial statements, cash flow
projections and other relevant information.
4. Discussion with management on
management philosophy, competitive
position, financial policies and future plans.
Rating Process cont-
1. Discussions on financial projections based
on objectives and growth plan , risks and
opportunities.
2. Rating committee- after meeting with the
management the analysts present their report
to a rating committee which then decides on
the rating.
3. After the committee has assigned the rating,
the rating decision is communicated to the
issuer, with reasons or rationale supporting
the rating.
4. Dissemination to the Public: Once the issuer
accepts the rating, the CRAs disseminate it,
along with the rationale, to the print media.

Rating Review for a possible change
1. The rated company is on the surveillance
system of the CRA, and from time to time,
the earlier rating is reviewed. The CRA
constantly monitors all rating with respect to
new political ,economic, financial
development and industry trends.
2. Analysts review new information or data
available on the company. On preliminary
analysis of the new information if the
analyst feel that there is a possibility for
change in the rating then they meet with the
management and proceed with
comprehensive rating analysis.
Credit Rating Watch
1. 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.
2. In such a possibility, the issuers rating is put
on credit watch indicating the direction of
a possible change and supporting reasons for
review.
3. Once a decision to either change or present
the rating had been made, the issue will be
removed from credit watch.
Rating Methodology
1. The rating methodology involves an analysis
of industry risk, issuers business and
financial risk. A rating is assigned after
assessing all factors that could affect the
credit worthiness of the entity. The industry
analysis is done first followed by the
company analysis.
Credit rating for manufacturing companies
2. The main elements of rating methodology
are as below
3. Business risk Analysis : It begins with an
assessment of the companys environment
focusing on the strength of the industry
prospects, business cycle as well as
competitive factors affecting the industry.
The vulnerability of the industry to political
factors is also assessed. If a company is
involved in more than one business, each
segment is analyzed separately. The main
factors include Industry Risk, Market
position, operating efficiency and legal
position.
4. Financial risk analysis: Financial risk is
analyzed mainly through financial ratios.
Emphasis is placed on the ability of the
company to maintain /improve its future
financial performance.
5. The profitability of a company is an
important determinant of its ability to
withstand business adversity. The main
measures of profitability include operating
and net margins and returns on capital. The
absolute levels of these ratios, trends and
comparison of these ratios with other
competitors is analyzed. Emphasis is also
laid on cash flow patterns.
6. The area analyzed are accounting quality,
earnings prospects, adequacy of cash flows
financial flexibility and interest and tax
sensitivity.
Management Risk: A proper assessment od
debt protection levels requires an evaluation
of management philosophies and its strategies.
The analyst compares the companys business
strategies and financial plans to provide
insights into a managements ability to
forecast and implement plans. The areas
analyzed include track record of the
management, planning and control systems,
evaluation of capacity to overcome adverse
situations, goals, philosophy and strategies.
Credit rating for financial service sector
1. When rating debt instruments of financial
institutions, banks, NBFCs in addition to the
 financial analysis and management
evaluation the following factors are
considered
Speculative grades

2. Regulatory and competitive environment

3.
4.
Fundamental analysis
Capital adequacy
1. BB(Double B)- Inadequate safety-
5. Asset quality These instruments carry inadequate safety of
6. Liquidity management timely payment of interest and principal.
7. Profitability and financial position
8. Interest and tax sensitivity
2. B (High risk)- Instruments rated B
have greater risk of default.

Rating symbols/Grades
1. Rating symbols are a symbolic expression of 3. C (Substantial risk)- Risk of default.
the opinion/assessment of the credit rating Repayment can only be expected in
agency regarding the investment, credit favorable conditions.
quality, grade of the debt, obligation
instrument.
2. CRISIL rating symbols: The rating symbols 4. D (Default) Such instruments are
of CRISIL with respect debentures, fixed extremely speculative and default risk is
deposits, short term instruments(CPs), credit highest.
assessment, structured obligations, bond
funds, bank loans, collective investment
schemes, Indian states, real estate
developers are as follows.
5. Rating symbols for Fixed deposits.

6. FAAA( F triple A)- Highest safety

Rating symbols for Debentures

High Investment Grade:

7. FAA( F- double A)- High safety

1. AAA-(Triple A ) Highest security- Offer the

highest safety against payment of interest 8. FA- Adequate safety
and principal
2. AA(Double A) High Safety - Offer high
safety against payment of interest and 9. FB- Inadequate safety
principal.
A- Adequate safety- Offer adequate
safety against payment of interest
and principal. In adverse conditions
10. FC- High Risk

might affect such issues.

3. BBB(Triple B)- Moderate safety- Offer
sufficient safety against payment of interest
11. FD- Default

and principal. Circumstances may lead to

weakened capacity to pay interest and
principal. Rating symbols for Short term instruments
1. P-1 (highest safety)
 2. P-2 (High Safety)
3. P-3( Adequate safety)
4. P-4(Inadequate safety) Rating of collective investment schemes.
5. P_5 (default) 1. GRADE I (high certainty of assured returns)
6. Rating for credit assessment 2. GRADE II (adequate certainty of assured
7. It indicates the capability of entity to repay returns)
the interest and principal as per the terms of 3. GRADE III (moderate certainty of assured
the contract. The rating symbols are as returns)
below- 4. GRADE IV ( Inadequate certainty of
8. 1-Very strong capability assured returns)
9. 2,3,4- Strong capability 5. GRADE V (high uncertainty of assured
10. 5,6,7- Adequate capability returns)
11. 8,9,10- Inadequate capability
12. 11,12,13 Poor capability
13. 14- Default
14. Ratings for structured obligations Credit Rating of Indian States
15. High investment grades:
1. Rating of the states by the CRISIL
16. AAA(SO)- Highest safety
represents a landmark in the diversification
17. AA(SO)- high safety
of the rating Business in the country.
18. Investment grades:
2. It has already rated several states.
19. A(SO) Adequate safety
3. While assessing a state, CRISIL considers
20. BBB(SO)- Moderate safety
two basic factors:
21. Speculative grades:
4. The Economic Risk and
22. BB(SO)- Inadequate safety
5. The Political Risk
23. B(SO) High Risk
24. C (SO)- Substantial risk)
25. D (SO)- Default Economic Risk
1. Economic structure of the state and its finances
2. Macroeconomic performance
Ratings for bond funds 3. Infrastructure
1. AAAf Very Strong Protection against 4. Sector studies
losses 5. Whether revenue and expenditure patterns are
2. AAf - Strong Protection against losses sustainable.
3. Af- Adequate Protection against losses 6. Deficit Management
4. BBBf- Moderate Protection against losses 7. Degree of dependence on Central support
5. BBf - Inadequate Protection against losses 8. Tax policy of the state
6. Cf vulnerable to credit defaults. 9. Performance of Public sector undertakings and
their effect on the states finances.
Bank Loan Ratings
1. BLR-1: strong likelihood of repayment of
interest and principal on bank loan Political Risk
2. BLR-2: good likelihood of repayment of
1. Relations between the state and the Centre
interest and principal on bank loan
and its impact on transfer of resources as
3. BLR-3: satisfactory likelihood of repayment
well as centres influence on political
of interest and principal on bank loan
stability in the state.
4. BLR-4: moderate likelihood of repayment of
2. Various political parties in the state, their
interest and principal on bank loan
economic policies and their effect on the
5. BLR-5: sub standard , vulnerable to loss
states policies.
6. BLR-6: High likelihood of loss
 3. Quality of the current leadership and financial flexibility and management
administration evaluation are considered with rating the
4. Ability of the Government to take decisions position of developer.
that are politically difficult.

Rating of real estate developers

1. Rating pertains to particular project and not
to the company as a whole. It assigns ratings
after assessing the factors that could affect
the ability of the developer to meet agreed Rating symbols for developers
specifications in terms of quality and time as
well as the ability to transfer clear titles to 1. PA1- Highest Ability to build the project
customers. Ratings are based on project risk 2. PA2- High Ability to build the project
analysis and developer risk analysis 3. PA3- Adequate Ability to build the project
2. Project risk analysis : The quality of legal 4. PA1- Inadequate Ability to build the project
title in respect of the property constructed, 5. PA1- Inability to build the project
quality of construction and timeliness of
delivery of the completed unit is assessed.
3. Developer risk analysis: The track record of
the developer, existing financial statements,