UNIVERSITY OF MUMBAI

(2022-2023)

A PROJECT REPORT ON

"A STUDY ON CREDIT RATING AGENCIES IN INDIA"

SUBMITTED BY:

SANGEETA GURUPAD MANDAL

ROLL NO: 5730

MASTERS OF COMMERCE

(BANKING AND FINANCE)

VACATION IV

(2022-2023)

PROJECT GUIDE

MS. JIGNA N. CHOLERA

Sadhana Education Society's

L.S RAHEJA COLLEGE OF ARTS AND COMMERCE Juhu Road,

Santacruz (West), Mumbai - 400 054

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 CERTIFICATE
This is to certify that Ms. Sangeeta Gurupad Mandal has worked and duly completed
his Project Work for the degree of Master of Commerce under the Faculty of
Commerce in the subject of banking and finance and her project is entitled under my
supervision I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for any Degree or
Diploma of any University. It is his own work and facts reported by her personal
findings and investigations.

___________________ _________________

Ms. Jigna N Cholera Name of project guide

(Internal Guide) (External Guide)

________________ ___________________

Mr. RAJU D. GOLE. Dr. Debajit N. Sarkar

(Course Coordinator) (Principal)

Date of Submission:

College Seal

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 DECLARATION
I the undersigned Ms. Sangeeta Gurupad Mandal the work embodied in this project
work titled External Debt Management forms my own contribution to the research
work carried out under the guidance of Ms. Jigna Cholera is a result of my own
research work and has not been previously submitted to any other University for any
other Degree/ Diploma Wherever reference has been made to previous works of
others, it has been clearly indicated as such and included in the bibliography 1, hereby
further declare that all information of this document has been obtained and presented
in accordance with academic rules and ethical conduct.

Sangeeta Gurupad Mandal

Roll no: 5730

Certified by:

Ms. Jigna Cholera

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 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Dr. Debajit Sarkar for providing the necessary
facilities required for completion of this Principal

I take this opportunity to thank my Coordinator, Mr. Raju D. Gole for Her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide Ms. Jigna
Cholera whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

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 EXECUTIVE SUMMARY

The project entitled "Credit Rating" gives you an insight to the most important
concept in any industry, be it service oriented or a manufacturing firm i.e. working
capital.

Credit rating is a qualified assessment and formal evaluation of company's credit

history and capability of repaying obligations. It measures the default probability of
the borrower, and its ability to repay fully and timely its financial debt obligations.

The main purpose of credit rating is to provide investors with comparable information
on credit risk based on standard rating scale, regardless of specifics of companies,
separate sector of the economy and country as a whole.

Credit rating has proven itself to be effective instrument of risk assessment in

countries with advanced economy since it demonstrates transparency of an enterprise.
Credit rating reflects financial, sectorial, operational, legal and organizational sides of
companies, which characterize ability and willingness duly and in full amount to
repay obligations.

In world practice, credit rating can be assigned to sovereign governments, regional

and local executive bodies, corporations, financial organizations and etc.

Different Types of Credit Rating are explained in this project. Functions of Credit
Rating are highlighted. Various advantages and limitation to Credit Rating are
highlighted.

This project has also covered the Rating Process, Rating Symbols for short term
debentures n long term bonds, Rating Methodology, of various rating agencies like
CRISIL, ICRA, SMERA, ONICRA, CARE and International Rating Agency.

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 INDEX
CHAPTER.NO TITLE OF THE CHAPTER PAGE NO
1.
1.1 Introduction of Credit Rating 7
1.2 Origin and Evolution of Credit Rating 8
1.3 What does Credit Rating mean? 8
Objectives of Credit Rating 9
1.4
10
1.5 Features of Credit Rating
11
1.6 Functions of Credit Rating
11
1.7 Importance of Credit Rating 12
1.8 Types of Credit Rating 13
1.9 Role of Credit Rating 15
1.10 Credit Rating Process 16
1.11 Advantages of Credit Rating 17
1.12 Disadvantages of Credit Rating 20
1.13 Factor Affecting Credit Score 22
1.14 Process of assigning credit score in India 23
Factor Affecting Assigned Rating 24
1.15
25
1.16 What is a Credit Rating Agency?
25
1.17 How do Credit Rating Agencies Work?
26
1.18 List of Registered Credit Rating Agencies 27
1.19 Role of Credit Rating Agencies 27
1.20 Uses of rating by Agencies 28
1.21 Credit Rating Agencies in India 29
2. Literature Review 43-46

3. Research Methodology
3.1 Objectives 47
3.2 Hypothesis 47
3.3 Research Design 47
4. Data Analysis, Interpretation & Representation 49-69
4.1 Primary Data 49
4.2 Secondary Data 68
4.3 Findings of the Data 69
5. Conclusion & Suggestions 70

❖ Bibliography 71

❖ Annexure 72

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 1. INTRODUCTION OF CREDIT RATING

A credit rating is generally established by a credit bureau and used by merchants,

suppliers, and bankers to determine whether a loan should be granted or credit
extended. "A rating is an opinion on the future ability and legal obligation of the
issuer to make timely payments of principal and interest on a specific fixed income
security. The rating measures the probability that the issuer will default on the
security over its life, which depending on the instrument may be a matter of days to
30 years or more. In addition, long term ratings incorporate an assessment of the
expected monetary loss should a default occur."

"Credit ratings help investors by providing an easily recognizable, simple tool that
couples a possibly unknown issuer with an informative and meaningful symbol of
credit quality." Standard and Poor's Ratings, usually expressed in alphabetical or
alphanumeric symbols, are a simple and easily understood tool enabling the investor
to differentiate between debt instruments based on their underlying credit quality. The
credit rating is thus a symbolic indicator of the current opinion of the relative
capability of the issuer to service its debt obligation in a timely fashion, with specific
reference to the instrument being rated. It is focused on communicating to the
investors, the relative ranking of the default loss probability for a given fixed income
investment, in comparison with other rated instruments.

The ratings assigned are generally regarded in the investment community as an

objective evaluation of the probability that a borrower will default on a given security
issue. Default occurs whenever a security issuer is late in making one or more
payments that it is legally obligated to make. In the case of a bond, when any interest
or principal payment falls due and is not made on time, the bond is legally in default.
While many defaulted bonds ultimately resume the payment of principal and interest,
others never do, and the issuing company winds up in bankruptcy proceedings. In

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most instances, holders of bonds issued by a bankrupt company receive only a part
amount on his investments, invested, once the company's assets are sold at auction.
Thus, the investor who holds title to bankrupt bonds typically loses both principal and
interest. It is no wonder, then, that security ratings are so closely followed by
investors. In fact, many investors accept the ratings assigned by credit agencies as a
substitute for their own investigation of a security's investment quality.

1.1 Credit Rating: Meaning and Definition

The process of assigning a sign with specific reference to the instrument being rated,
that acts as an indicator of the present opinion on relative capability on the rated,
that's acts as an indicator of the current opinion on relative capability on the issuer to
service its debt obligation in a timely manner, is termed as credit rating.

In addition, long-term rating incorporates an assessment of the expected monetary

loss should a default occur. Credit rating helps investors by providing an easily
recognizable, simple tool that pairs a possible unknown issuer with an informative
and meaningful symbol of credit quality. Credit Rating is often termed as an
expression, through use of symbols, of the opinion about credit quality of the issuer of
security/instrument. Credit rating does not amount to any recommendations to
purchase, sell or hold that security. It is concerned with an act of assigning values by
approximating worth or reputation of solvency, and honesty to repose trust during a
person's capability and aim to repay.

1.2 Origin and Evolution of Credit Rating Agencies

With the economic progress took place in the west, it slowly led to the development
of business and personal relation of Merchants and their Customers. The merchants
back then would allow only a certain people to buy goods on credit and always
hesitated to extend their credit to newer client with the risk of their money drowning.
But that could still be not a problem as the dealers could always use and take
advantage of their proximity to the customer and could not make out whether they
will be ready to pay it back or not. As trading distances increased, merchants no
longer personally knew their clients and become leery of extending credit to their
clients who they did not know in fear of them not being able to pay back. Business
owners hesitate to extend their credit to new customers led to the birth of the credit
reporting industry.

The origin for the establishment of Credit Rating Agencies in the world could be
traced back to 1840 following the Economic Crisis of 1837.Mr. Lewis Tappan first
established a Mercantile Credit Rating Agency (today known as Credit Rating
Agency) in the year 1841 at the city of New York. Back then Mercantile Credit
Agencies used to rate the people's ability to meet their financial obligation and
consolidate these ratings in the published guide. Robert Dun soon acquired the credit
agency setup up Lewis Tappan and published its first report on Credit rating back in

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1857. Later in the year 1933 these two agencies merged together and formed Dun and
Bradstreet which acquired and owned the Moody's Investor Service in the year 1962.
Moody's drops its history back to 2 publishing companies established by John Moody,
the inventor of recent bond credit ratings.

In 1900, Moody published his first market assessment, called Moody's Manual of
Industrial and Miscellaneous Securities, and established John Moody & Company.
The publication provided detailed statistics concerning to stocks and bonds of
monetary institutions, government agencies, manufacturing, mining, utilities, and
food companies. It experienced early success, selling out its first press run in its first
two month. By 1903, Moody's Manual was a nationally recognized publication.
Moody was forced to sell his business, because of shortage of capital, when the 1907
financial crisis fuelled several changes within the markets. Moody returned to the
financial market in 1990 with an innovative idea. Rather than simply collecting
information on the property, capitalization and management of companies, he now
offered investors an analysis of security values. His company would publish a book
that analyzed the railroads and their outstanding securities. It offered brief
assumptions about their relative investment quality. Moody was first to charge the
subscription fees to investors. In 1913 he extended the manual's focus to take in
industrial firms and utilities; the new Moody's Manual offered ratings of public
securities, indicated by a letter-rating system hired from mercantile credit-reporting
firms. The following year, Moody incorporated the corporate as Moody's Investors
service. Moody's expanded its focus to include ratings for United States of America
state and local government bonds in 1919 and by 1924, Moody's rated nearly the
entire United States bond market.

The history of credit rating in India is merely a decade and half. During this short
span of time, the major rating agencies have instilled confidence in the minds of the
Investors and Regulatory bodies. The major rating agencies in India are attracting the
Global Rating Agencies, which have entered into alliances with them for technical
assistance in fixing rating agencies in many other countries. Moreover, the Indian
Rating Agencies are instrumental for the incorporation of Association of Credit
Rating Agencies of Asia (ACRAA). The Indian Rating Agencies also provide
adequate information to the Investors through their publications. In this chapter, an
effort has been made to review the rating practices and therefore the role paid by the
Indian Rating Agencies Credit Rating Information Services of India Limited
(CRISIL). The Investment Information and Credit Rating Agency (ICRA), Credit
Analysis and Research Limited (CARE), DUFF 6, Phelps (US) in joint venture with
Alliance Capital Ltd. Calcutta were formed in India to provide various services to the
investing community in India.

1.3 What does credit rating mean?

A credit score is a 3-digit number that represents the creditworthiness of the borrower.
Credit rating is the analysis of the possible credit risks associated with granting a

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financial instrument to an individual or a company. Based on the credit score, a lender
determines whether the borrower can repay the loan amount or not.

The rating is provided based on the creditworthiness and the credentials of an

individual or a company. The creditworthiness of an individual or a company is
decided based on the lending and borrowing transactions done in the past. Credit
rating is determined after weighing the rating is provided based on the
creditworthiness and the credentials of an individual or a company. The
creditworthiness of an individual or a company is decided based on the lending and
borrowing transactions done in the past. Credit rating is determined after weighing the
statements of liabilities and assets, and their ability to meet the debt obligations.

It is recommended that you maintain a good credit rating if you would like to apply
for a huge loan in the future. You can maintain a good score given that you pay all
your existing debts on time, check your credit report once in a while to stay informed
of your score and keep your credit utilization ratio below 30%.

1.4 Objectives of Credit Rating

(1) Bridge information asymmetry between investors and issuers: Credit rating
agencies provide investors with objective analyses and independent assessments of
companies and countries that issue such securities.

(2) Helps to maintain investor's confidence: The analyses and assessments provided
by various credit rating agencies provide investors with information and insight that
facilitates their ability to examine and understand the risks and opportunities
associated with various investment environments. With this insight, investors can
make informed decisions as to the countries, industries and classes of securities in
which they choose to invest.

(3) Enhances the ability of the borrower/issuer: Enhances the ability of the
borrower/issuer to access the money and capital markets for tapping larger volumes of
resources from a wider range of investing public.

(4) Helps develop financial markets: Credit rating agencies (CRAs) specialize in
analyzing and evaluating the creditworthiness of corporate and sovereign issuers of
debt securities. Issuers with lower credit ratings pay higher interest rates embodying
larger risk premiums than higher rated issuers. Moreover, ratings determine the
eligibility of debt and other financial instruments for the portfolios of certain
institutional investors due to national regulations that restrict investment in
speculative-grade bonds.

(5) Assists in maintaining greater transparency: Credit rating agencies assess the
relative credit risk of specific debt securities or structured finance instruments,
borrowing entities, and in some case the creditworthiness of governments and their
securities. By serving as information intermediaries, credit rating agencies

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theoretically reduce information costs, increase the pool of potential borrowers and
promote liquid markets. These functions may increase the supply of available risk
capital in the market and promote economic growth. Rating agencies are constantly
subject to scrutiny, evaluation and questioning by investors, media and regulators.
Since ratings are opinions, it is important that markets are convinced about their
robustness before acting on them.

1.5 Features of Credit Rating

(1) Facilitate investment decisions through credit ratings based on superior and low-
cost Information. Rating agencies play a critical role in assessing the credit worthiness
of an individual, corporation or country.

(2) Increases investor confidence and guide them trade-off between risk and return.
Ratings agencies perform the critical function of assessing the fundamentals and
future prospects of corporate houses that continuously seek to raise money from
private investors or the public.

(3) Healthy discipline imposed on corporate borrowers and encourages financial

discipline.

(4) Benefits the industry as a whole, especially firms can access markets at low cost.

(5) Helps to allocate capital efficiency across sections.

1.6 Functions of Credit Rating

1.Provide superior Information:

It provides superior information on credit risk for three reasons: It is an independent

rating agency, and is likely to provide an unbiased opinion; unlike brokers, financial
intermediaries and underwriters who have a vested interest in the issue, Due to
professional and highly trained staff, their ability to assess risk is better, and finally,
the rating firm has access to a lot of information, which may not be publicly available.

2. Low cost information:

A rating firm gathers, analyses, interprets and summarizes complex information in a

simple and readily understood formal manner. It is highly welcome by most investors
who find it prohibitively expensive and simply impossible to do such credit evaluation
of their own. 3. Basis for a proper risk and return. If an instrument is rated by a credit
rating agency, then such instrument enjoys higher confidence from investors.
Investors have some idea as to what is the risk that he/she is likely to take, if
investment is done in that security.

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4. Healthy discipline on corporate borrowers

Higher credit rating to any credit investment tends to enhance the corporate image and
visibility and hence it induces a healthy discipline on corporate. 5. Greater credence to
financial and other representation. When a credit rating agency rates a security, its
own reputation is at stake. Therefore, it seeks high quality financial and other
information. As the issue complies with the demands of the credit rating agency on a
continuing basis it financial and other representations acquire greater credibility.

6. Formation of public policy

Public policy guidelines on what kinds of securities are eligible for inclusions in
different kinds of institutional portfolios can be developed with greater confidence if
debt securities are rated professionally.

1.7 Importance of Credit Rating

Through Credit Rating, we estimate credit worthiness of an individual, corporation or
a country. It is an opinion formed by credit evaluators of a borrower's potential to
repay debt. Every rating grade comes with its possibility of default, which in turn
assists investor/lender to take informed investment decision. A credit rating estimates
ability to repay debt. A credit rating is a formal assessment of a corporation,
autonomous governments, individuals, conglomerates or even a country. There are
various types of ratings viz. Issuer Rating/Obligor Rating, Bank loan Rating, Issue
based Rating, Project Rating etc. Based on type of borrower/issuer, Ratings can be
classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating,
SME Rating, MFI Rating etc. The importance of credit rating can be described as
under:

(1) Country: For a country to achieve high economic growth and a higher standard of
living it is imperative to have a mechanism capable of attracting savings and
channeling them efficiently to investments that create national wealth.

(2) Capital market: A Credit Rating Agency plays an important catalytic role fostering
the growth, stability and efficiency of global and domestic capital markets.

(3) Investors: Credit ratings help savers to determine the risk premium that should be
demand to compensate for the default risk when making fixed income investments.
Savers do not pay any fees for credit ratings but need only to demand to know the
credit rating of the borrower prior to investing.

(4) Borrowers/Issuers: Profitable and well-managed Corporates can lower their cost of
funds by borrowing directly from the public instead of borrowing from banks. Credit
ratings can be used as a 'credit passport to communicate the credit quality to the
investors to get access to wider sources of capital, and the most optimum form of.

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(5) Beneficial for all parties concerned: A comprehensive analysis of a credit
instrument and a subsequent impartial assessment of the credit risk of the instrument,
offer numerous benefits to all parties in concern. Credit rating is evaluated on the
basis of financial transactions carried in the past and assets and liabilities at present.
Various financial, non-financial parameters, past credit history and future outlook are
determined before coming to a rating.

1.8 Types of Credit Rating

Following are the different kinds of rating:

(1) Bond/Debenture Rating

Rating the debentures/ bonds issued by corporates, government etc. is called

debenture or bond rating. The ratings provided to every single debenture and bond is
known as Bond Rating. These ratings range from short to medium terms and can
peculiarly decide its future and general subscription. While AAA being the Highest
and the Best Quality of Bonds / Debentures to be subscribed and C and D being the
ones with highest amount of risk or are in default already.

(2). Personal Ratings

The ratings allotted to an individual on the basis of his or her past financial credit
history and cash flows is known as Personal Rating. Gr ratings are allocated in the
form of Scores ranging from 300 22/99 ny score above 750 points is considered to be
as good can get a l individual easily. However, scores within the range of 300 to 700
are considered to be as risk, lower the score higher the chances of default. In India
often, this Score is used and inter Changed with CIBILI SCORE.

(3) Equity Rating

Rating of equity shares issued by a company is called equity rating. An evaluation of

a stock's expected performance and/or its risk level as judged by a rating agency such
as Standard and Poor's. A stock rating will usually help the investor to find out fair
value for the stock, based on an objective evaluation of the company. The greater the
amount by which the fair value exceeds the market value, the more highly
recommended buy for the stock is. Conversely, if the market value of the stock
exceeds the fair value of the stock, then analysts recommend that the stock to be sold.
Most stock rating systems give stocks 1 to 5 stars, with 5 being the best and highly.

(3) Preference Share Rating

Rating of preference share issued by a company is called preference share rating.

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(4) Commercial Paper Rating

Commercial papers are instruments used for short-term borrowing. Commercial

papers are issued by manufacturing companies, finance companies, banks and
financial institutions and rating of these instruments is called commercial paper rating.

(5) Fixed Deposits Rating

Fixed deposits program are medium term unsecured borrowings, Rating of such
program is called as fixed deposits rating.

6) Borrowers Rating

Rating of borrowers is referred as borrower rating.

(7) Individuals Rating

Rating of individuals is called as individual's credit rating.

(8). Real Estate Ratings

CRISIL has started assigning rating to the builders and developers with the objective
of helping and guiding prospective real estate buyers. CRISIL thoroughly scrutinizes
the sale deed papers, sanctioned plan; lawyers report government clearance
certificates before assigning rating to the builder or developer. Experience of the
builder, number of properties built by the builder, financial strength, and time taken
for completion are some of the factors taken into consideration by the CRISIL before
giving a final rating to the real estate builder developer.

(9) Structured Obligation Rating

Structured obligations are also debt obligations and are different from debenture or
bond or fixed deposit program and commercial papers. Structured obligation is
generally asset-backed security. A structured obligation is a modified way to raise
funds from the market. Organizations which use this method create a Special Purpose
Vehicle or SPV (usually a Trust) and commit their existing assets or future
receivables to it. It then creates special ownership rights called as Pass Through
Certificates or PTCs and sells them to prospective investors. These certificates can
come in various pools or tranches, some being high credit quality while others taking
the lower grade. As a result, they enjoy different return profiles as well. Credit rating
agencies assessed the risk associated with the transaction with the main trust on cash
flows emerging from the asset would be enough to meet committed payments, to the
investors in worst case scenario.

(10) Sovereign Rating

Is a rating of a country, which is being considered whenever a loan is to be extended,

or some major investment is envisaged in a country is a rating of a country, which is

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being considered whenever a loan is to be extended, or some major investment is
envisaged in a country? It is a grading of a country's ability to meets financial
obligations. Credit rating agencies provide these ratings and investors use this to
assess the level of risk related with investing in a country. The rating may also include
an evaluation of a country's political risk. For example, India has been given BAA 2
rating by Moody's as on November 2017. Sovereign rating is the first thing most
institutional investors will look at when deciding to invest money abroad. This rating
gives the investor an immediate understanding of the level of risk associated with
investing in the country. A country with a sovereign rating will therefore get more
attention than one without. So, to attract foreign money, most countries will strive to
obtain a sovereign rating and they will strive even more so to reach investment grade.
In most circumstances, a country's sovereign credit rating of AAA indicates lowest
risk.

(11). Bank Ratings CRISIL as well as ICRA both are engaged in the Bank Credit
Ratings in India based on the following 6 parameters collectively known as
CAMELS:

a). C stands for Capital Adequacy

b). A Stands for Asset Quality.

c). M stands for Management

d). E stands for Earnings

e). L stands for Liquidity

f). S stands for Sensitivity

1.9 Role of Credit Rating

Credit rating ties the cost to the gain. They also have a metric to quantify the danger
inherent in every tool. In order to improve the risk-return trade-off, an investor uses
scores to determine the risk level and contrasts the rate of return given with the
estimated rate of return (for the specific risk level). In the absence of a credit rating
scheme, the assessment of danger by a typical investor primarily relies on his
experience with the names of the developers or employees. The corporate issuer of a
debt product cannot enable all prospective investors to carry out a comprehensive risk
assessment. Different groups of investors have only seldom come to a common
opinion about the relative efficiency of the product. In addition, the quantitative and
qualitative Considerations such as historical success, economic trends market
competition, management efficiency and potential forecasts and is thus as
comprehensive as possible. The elevated default levels arising from the simple
availability of financing also control to the credit rating's increasing the remaining
ones are:

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The elevated default levels arising from the simple availability of financing also
contributed to the credit rating's increasing value. The remaining ones are:

i. Increased digital management.

ii. Stock business globalization.
iii. Capital and money markets play a growing position.
iv. Failure to enforce protection initiatives.
v. The privatization movement.
vi. Debt securitization.

1.10 Credit Rating Process

(1) Request from issuer and analysis:

A company approaches a rating agency for rating a specific security. A team of

analysts interact with the company's management and gathers necessary information.
Areas covered are: historical performance, competitive position, business risk profile,
business strategies, financial policies and short/long term outlook of performance. The
team of analysts makes an assessment of the issuer's prospects in the light of
information available from management. Also factors such as industry in which the
issuer operates, its competitors and markets are taken into consideration.

(2) Rating Committee:

On the basis of information obtained and assessment made the team of analysts
present a report to the Rating Committee. The issuer is not allowed to participate in
this process as it is an internal evaluation of the rating agency. The nature of credit
evaluation depends on the type of information provided by the issuer.

(3) Communication to management and appeal:

The Rating decision is communicated to the issuer and then supporting the rating is
shared with the issuer. If the issuer disagrees, an opportunity of being heard is given
to him. Issuers appealing against a rating decision are asked to submit relevant
material information. The Rating Committee reviews the decision although such a
review may not alter the rating. The issuer may reject a rating and the rating score
need not be disclosed to the public.

(4) Pronouncement of the rating:

If the rating decision is accepted by the issuer, the rating agency makes a public
announcement of it.

(5) Monitoring of the assigned rating:

The rating agencies monitor the on-going performance of the issuer and the economic
environment in which it operates. All ratings are placed under constant watch. In

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cases where no change in rating is required, the rating agencies carry out an annual
review with the issuer for updating of the information provided.

(6) Rating Watch:

Based on the constant scrutiny carried out by the agency it may place a rated
instrument on Rating Watch. The rating may change for the better or for the worse.
Rating Watch is followed by a full scale review for confirming or changing the
original rating. If a corporate which has issued a 5 year 8% debenture merges with
another corporate or acquires another corporate, it may lead to the listing of the
specified debenture rating under this policy.

(7) Confidentiality of information:

As the information provided by the issuers is very sensitive in nature; the rating
agencies are required to keep them strictly confidential and cannot use such
information for any other purpose. (8) Rating Credibility: The rating agencies follow
a thorough and transparent evaluation so as to lend credibility to their findings. The
policies followed are:

(a) Clear and Specific ideas for a rating score.

(b) Rationale and Sensitiveness behind the ratings being made public.

(c) Publication of the limitations of rating, adequacy of information and validity of the
rating score.

(d) Limiting dependence on information from third parties viz. auditors, trustees,
consultants, experts.

(e) Not carrying out a rating exercise on an unsolicited basis.

(f) Withdrawing the ratings after expiration of the tenure and following a strict policy
of not disclosing the rejected ratings except when required.

(9) Rating Coverage:

Ratings are not limited to specific instruments. They also include public utilities;
financial institutions; transport; infrastructure and energy projects; Special Purpose
Vehicles; domestic subsidiaries of foreign entities. Structured ratings are given to
MNCs based on guarantees or Letters of Comfort and Standby Letters of Credit
issued by the banks. The rating agencies have also launched Corporate Governance
Ratings with emphasis on quality of disclosure standards and the extent to which
regulatory obligations have been complied with.

1.11 Benefits of Credit Rating

For different classes of persons different benefits accrue from the use of rated
instruments.

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The benefits directly accruing to investors through rated instruments are:

(A) BENEFITS TO INVESTORS

Investors are benefited in many ways if the corporate security in which they intend to
invest their saving has been rated. Some of the benefits are:

(1) Safeguards against Bankruptcy

Credit rating of an instrument done by a credit rating agency gives an idea to the
investors about the degree of financial strength of the issuing company, which enables
him to decide about the investment. A highly rated instrument of a company gives an
assurance to the investors of the safety of that instrument and a minimum risk of
bankruptcy.

(2) Recognition of Risk

Credit rating provides investors with rating symbols that carry information in easily
recognizable manner for the benefit of investors to perceive the risk involved in the
investment. It becomes easier for the investors by looking at the symbol to understand
the worth of the issuing company. The rating symbol gives them the idea about the
risk involved or the expected advantages from the investment.

3) Credibility of Issuer

Rating gives a clue about the credibility of the issuing company. The rating agency is
quite independent of the issuer company and has no business connections or any
relationship with it or its Board of Directors, etc. Absence of business links between
the rater and the rated firm establishes ground for credibility and attract investors.

(4) Easy Understandability of Investment Proposal

An investor needs no analytical knowledge on his part and can understand the rating
symbol. The investor can take quick decisions about the investment to be made in any
particular rated security of a company.

(5) Saving of Resources

Investors rely upon credit rating. This relieves investors from the hassle of acquiring
knowledge about the fundamentals of a company, its actual strength, financial
standing, management details, etc. The quality of credit rating is done by professional
experts of the credit rating agency repose confidence in him to rely upon the rating for
taking investment decisions.

(6) Independence of Investment Decisions

For making investment decisions, investors have to seek advice of financial

intermediaries, the stockbrokers, merchant bankers, the portfolio managers etc. about
the good investment proposal. For rated instruments, investors need not depend upon

18
the advice of these financial intermediaries as the rating symbol assigned to a
particular instrument suggests the credit worthiness of the instrument and indicates
the degree of risk involved in it.

(7) Choice of Investments

Several alternative credit rating instruments are available at a particular point of time
for investing in the capital market and the investors can make choice depending upon
their own risk profile and diversification plan.

(8) Benefits of Rating Surveillance

Investors get the benefit of the credit rating agency's on-going surveillance of the
rating and rated instruments of different companies. The credit rating agency
downgrades the rating of any instrument if subsequently the company's financial
strength declines or any event takes place, which necessitates consequent
dissemination of information on its position to the investors.

(9) Other Advantages

The investor can quickly understand the credit instrument and weigh the ratings with
advantages from instruments; and make quick decisions to invest or sell or buy
securities to take advantages of market conditions; or, perceiving of default risk by the
company.

(B) BENEFITS OF RATING TO THE COMPANY

Company which had its credit instrument or security rated by a credit rating agency is
benefited in many ways as summarized below:

(1) Lower Cost of Borrowing

A company with highly rated instrument has the opportunity to reduce the cost of
borrowing from the public by quoting lesser interest on fixed deposits or debentures
or bonds as the investors with low risk preference would come forward to invest in
safe securities though yielding marginally lower rate of return.

(2) Wider Audience for Borrowing

A company with a highly rated instrument can approach the investors extensively for
the resource mobilization using the press media. Investors in different strata of the
society could be attracted by higher rated instrument, as the investors understand the
degree of certainty about timely payment of interest and principal on a debt
instrument with better rating.

(3) Rating as Marketing Tool

Companies with rated instruments improve their own image and avail of the rating as
a marketing tool to create better image in dealing with its customers feel confident in

19
the utility products manufactured by the companies carrying higher rating for their
credit instruments.

(4) Reduction of Cost in Public Issues

A company with higher rated instrument is able to attract the investors and with least
efforts can raise funds. Thus, the rated company can economize and minimize cost of
public issues by controlling expenses on media coverage, conferences and other
publicity stunts and gimmicks. Rating facilitates best pricing and timing of issues.

(5) Motivation for Growth

Rating provides motivation to the company for growth as the promoters feel confident
in their own efforts and are encouraged to undertake expansion of their operations or
new projects. With better image created though higher credit rating the company can
mobilize funds from public and instructions or banks from self-assessment of its own
status, which is subject to self-discipline and self-improvement, it can perceive and
avoid sickness.

(6) Unknown Issuer

Credit rating provides recognition to a relatively unknown issuer while entering into
the market through wider investor base who rely on rating grade rather than on 'name
recognition'.

(C) BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES

Rating is a useful tool for merchant bankers and other capital market intermediaries in
the process of planning, pricing, underwriting and placement of issues. The
intermediaries, like brokers and dealers in securities, could use rating as an input for
their monitoring of risk exposures. The merchant bankers are also using credit ratings
for pre-packing of issues by way of securitization / structured obligations. Highly
rated instruments put the brokers at an advantage to make less effort in studying the
company's credit position to convince their clients to select an investment proposal.
This enables brokers and other financial intermediaries to save time, energy, costs and
manpower in convincing their clients about investment in any particular instrument.

1.12 Disadvantages of Credit Rating

(1) Biased Rating and Misrepresentations

In the absence of quality rating, credit rating is a curse for the capital market industry,
carrying out detailed analysis of the company, should have no links with the company
or the persons interested in the company so that their reports impartial and judicious
recommendations for rating committee. The companies having lower grade rating do
not advertise or use the rating while raising funds from the public. In such cases, the
investor cannot get information about the riskiness of instrument and hence is at loss.

20
(2) Static Study

Rating is done on the present and the past historic data of the company and this is
only a static study. Prediction of the company's health through rating is momentary
and anything can happen after assignment of rating symbols to the company.
Dependence for future results on the rating, therefore defeats the very purpose of risk
indicative ness of rating. Many changes take place in economic environment, political
situation, government policy framework, which directly affect the working of a
company.

(3) Concealment of Material Information

Rating company might conceal material information from the investigating team of
the credit rating company. In such cases, quality of rating suffers and renders the
rating unreliable.

(4) Rating is no Guarantee for Soundness of Company

Rating is done for a particular instrument to assess the credit risk but it should not be
construed as a certificate for the matching quality of the company or its management.
Independent views should be formed by the public using the rating symbol.

(5) Human Bias

Findings of the investigation team, at times, may suffer with human bias for
unavoidable personal weakness of the staff and might affect the rating.

(1) Reflection of Temporary Adverse Conditions

Time factor affects rating. Sometimes, misleading conclusions are derived. For
example, company in a particular industry might be temporarily in adverse condition
but it is given a low rating. This adversely affects the company's interest

(2) Down Grade

Once a company has been rated and if it is not able to maintain its working results and
performance, credit rating agencies would review the grade and down grade the rating
resulting into impairing the image of the company.

(3) Difference in Rating of Two Agencies

Rating done by the two different credit rating agencies for the same instrument of the
same issuer company in many cases would not be identical. Such differences are
likely to occur because of value judgment differences on qualitative aspects of the
analysis in two different agencies.

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1.13 Factors Affecting Credit Score
Credit score is a powerful number that affects your life now and, in the future, in ways
you might not even imagine. Credit Score determines interest rates you pay for credit
cards and loans, and helps lenders decide whether you even get approved for those
credit cards and loans in the first place. Unexpected businesses, such as insurance
companies, have started to use credit scores to make decisions about you. Utility
companies check your credit before establishing new service in your name. Here are
some Factors that affect the Credit Score for an Individual as well as a well-
established Corporate: Credit History: The most important aspect while determining
the score is the number of times you have been sanctioned loan previously and the
number of times you paid it successfully without any default. Utilization of Credit:
The utilization of borrowed funds also plays an important point of assessment as, if a
person or a company is one of the few that always utilizes their credit limit of the
maximum at any given point of time, this indicates higher burden of debt payments
and high chances of default and ultimately might lower the credit score. Repayment
History: While lending of funds a borrower is always bound to make timely payments
for the same. However, the failure to do so will have a definite impact on one Credit
Score and will always become a judgmental point for any organization to grant funds
in the first place. Guarantors on Loan: An impact shall also be created on one's score
based on the number and type of guarantee that person has provided to other applicant
as a subject matter for margin of safety for the bank or the funds lending organization.
In case of inability or failure of the applicant's capacity to repay the Credit Score of
the guarantor shall also affect accordingly. Settlement Cycles: The term Settlement
refers to the financial incapacity of the borrower to repay and the request to the
lending organization to either close the loan account at lower amount or to entirely
wave off the same. Banks are then very less likely to grant loans to such individuals.

However, on a broader spectrum these are the factors which most commonly pertain
to an individual rather than a company. A company's credit score shall be affected by
the factors like: The amount and composition of the debts and all other liabilities
outstanding in the current as well as the previous years. The organizations ability to
service its debt through the calculation of the past and likely future cash flows taking
into account all the interest rate compound and all other financial obligations.

The track records of the promoters, directors as well as all other key management
personnel regarding their ability and how successfully can they run the company and
expand it soon, the market wide position also gives an idea about the factors like
market share of the product, demand for the product, distribution channels etc. The
value of assets which are previously and currently hypothecated to any other Financial
Organization and its risk impact and assessment in case the company fails to pay its
debt. All these factors help the lending organization to know and judge he operational,
organizational and the market efficiency of the company and its products.

22
However, in the Scope of Credit Rating of Companies in India it is generally related
to evolution of the security being issued like debt, commercial papers and mutually
funds lately, rather than that of company. In other words, it could be simply explained
the M/s. Reliance Industries Limited gets an A2 rating for the issue of debenture. The
implementation this means that the debenture of the companywide for M/s. Reliance
Industries Limited have an A2 rating and not the company itself.

However, the Credit Rating will always differ from instrument to instrument and
company to company. For instance, a Company is issuing both Commercial Paper as
well as Certificate of Deposits, both these instruments of the same company will
always have a different rating as the pattern and nature for obligations have changed.
However as per the prevailing rules and regulations in India it is mandatory to have a
Valid and Genuine Credit Rating prior to the issues of securities.

1.14 Process of Assigning Credit Score in India

1. Personal Credit Rating (For Individuals):

The process of assigning a credit score to any individual is based on a very complex
mathematical as well as statistical calculations model In India the records and data
related to person or individual credit history is collected maintained and recorded by
three major firms known as Experian, Equifax and Central Information Bureau of
India Limited – Trans Union CIBIL. In terms of the numbers and ratings or credit
score card provided CIBIL is India's top firm and while asserting and referring to
credit score people general refer to CIBIL. The creditworthiness of an individual is
rated between a scale of 300-900 points while 300 being the worst and not suitable for
any credit; 900 is the best and can avail all sorts of credit, however banks and
Financial Institutions generally look for score anything above 700 which is an ideal
benchmark for them. The Credit Score allocation for an Individual can be divided into
major factors like:

A. Past Performance

While assessing an individual's credit line the past performance of the credit assigned
to them is a very important factor for evaluation as this tells a Bank or Financial
Institution lot about the behavioural pattern of the applicant and in what manner have
the pattern of repayment as well as his/her income has changed over the years. Hence
an individual must always clear their bills, installment, Government dues for taxation
etc. on time as this account for 35% of the weightage while assigning a Credit Score.
A single default or delayed payment is also well reflected in a Credit Score and will
deteriorate the same in due course of time.

B. Credit Exposure

Credit Balance in an individual's account is also checked while assigning a score, to

be certain that the individual's current obligations are well accounted for and their

23
income is stable enough to acquire a new loan. This also helps the banks and
Financial Institution to ascertain and be sure the applicant is not in lieu of acquiring a
new debt to pay off the older debts as this debt trap is a never-ending circle. A
utilization ratio is calculated based on the Income and the Loan Outstanding factor
which sets the limit to what extended a new credit can be acquired. This factor
accounts for 25% of the weightage to the total score assigned.

C. Credit Type and Duration

The type and duration of the previous credit always play vital role as this helps to
ascertains. What is the type of credit line extended and for what duration, as longer
duration credit line is always considered to be as risky in terms of repayment. This
also helps in analyzing the servicing of a credit over the due course of time. Credit
Type and Duration also accounts for 25% of the total weightage assigned to the Credit
Score.

D. Other Factors

Other factors consist of things such as the current application of the credit line, the
utilization of previous credit mix, the recent credit behaviour and various other
parameters set individually by each credit information bureau. These contribute for a
total of 20% weightage to the assigned Credit Score.

Company Credit Rating (For Companies):

Company Credit Report is a factual record of a credit payment history compiled from
information received from different credit institutions. The purpose of CCR is to help
lenders make informed credit decisions - quickly and objectively. The CCR is way
different from the CIBIL SCORE as this defines a rating and credit worthiness for an
individual and not for a company. The company credit report depends on two main
factors i.e. Past Performance and Credit Utilization of the funds granted.

1.15 Factors Affecting Assigned Rating

1. The ability of the borrower to repay its debt. This measures the actual and expected
potential cash flows and correlates them with the issuer's deferred interest
commitments.

2. The amount and nature of the debt left.

3. The reliability of potential cash flows and business sales.

4. The interest coverage level, i.e. how many days the borrower will satisfy its fixed
interest obligations.

5. Current asset ratio (i.e. current ratio) to existing liabilities is determined to

determine the status of the issuing company's liquidity.

24
6. The amount of properties offered as collateral protection and the importance of the
protection claim against the properties of the issuing entity.

7. The business goods' market place is determined by demand for the goods, market
share of the competition and distribution networks, etc.

8. The operating productivity is measured by power usage, growth opportunities,

modernization and diversification, raw material supply etc.

9. The track record of engineers, managers and personnel experience can impact a
company's ranking.

Credit Rating Agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of
certain types of debt obligations. In most cases, these issuers are companies, cities,
non-profit organizations, or national governments issuing debt-like securities that can
be traded on a secondary market. A credit rating measures credit worthiness, the
ability to pay back a loan, and affects the interest. rate applied to loans. (A company
that issues credit scores for individual credit-worthiness is generally called a credit
bureau or consumer credit reporting agency.)

Interest rates are not the same for everyone, but instead are based on risk-based
pricing, a form of price discrimination based on the different expected costs of
different borrowers, as set out in their credit rating. There exist more than 100 rating
agencies worldwide.

1.16 What is a credit rating agency?

A credit rating agency (CRA) evaluates and assesses an individual's or a company's
creditworthiness. That is, these agencies consider a debtor's income and credit lines to
analyze the debtor's ability to repay the debt or if there is any credit risk associated.
Securities and Exchange Board of India (SEBI) reserves the right to authorise and
regulate credit rating agencies according to SEBI Regulations, 1999 of the SEBI Act,
1992.

1.17 How do credit rating agencies work?

Credit rating agencies analyze an organization, individual, or entity and assign ratings
to it. These agencies have the authority to rate companies, state governments, non-
profit organizations, countries, securities, local government bodies, and special
purpose entities.

Many factors are considered while settling with a rating such as financial statements,
type of debt, lending and borrowing history, repayment capability, past credit
repayment behaviour, and more. Each of these factors contributes to a specified share
in computing the end result, credit Score.

25
The credit rating agency does not provide any decision to financial institutions on
whether an entity should get a credit facility or not; rather it provides the report and
additional inputs making it easier for the lender to analyze and an informed decision.

1.18 List of registered credit rating agencies

According to SEBI, the following credit rating agencies are registered and authorized
to compute and share credit score/report with the financial institutions and applicants.

• CRISIL Limited:

Credit Rating Information Services of India Limited (CRISIL), one of the oldest
credit rating agencies, was set up in 1987. The agency stepped on to infrastructure
rating in 2016. CRISIL has been operational in countries such as the USA, UK,
Poland, Hong Kong, China, and Argentina in addition to India.

• India Ratings and Research Pvt Ltd:

India Ratings and Research, a wholly-owned subsidiary of Fitch Group, provides

accurate and timely credit opinions on the country's credit market. The firm covers
corporate issuers, financial institutions, managed funds, urban local bodies, project
finance companies, and structured finance companies. The headquarters is in Mumbai
and the other branch offices are in Ahmedabad, Delhi, Chennai, Bengaluru,
Hyderabad, Pune, and Kolkata.

• ICRA Limited:

The Investment Information and Credit Rating Agency (ICRA), a joint venture of
Moody's and Indian Financial and Banking Service Organization was established in
1991. The organization is known for assigning corporate governance rating,
performance rating, mutual funds ranking, and more.

• CARE:

Credit Analysis and Research Limited (CARE) is a credit rating agency that is
operational since April 1993. The agency provides a credit rating that helps corporates
to raise funds for their investment requirements. Investors can make decisions based
on credit risk and risk-return expectations. In addition to the head office in Mumbai,
the firm has regional offices in New Delhi, Pune, Kolkata, Chandigarh, Jaipur,
Ahmedabad, Bengaluru, Chennai, Coimbatore, and Hyderabad.

• Brickwork Ratings India Pvt Ltd:

In addition to registering with SEBI, Brickwork Ratings (BWR) is accredited by RBI

and empanelled by NSIC, NCD, MSME ratings and grading services. It has received
accreditation from NABARD for MFI and NGO grading. Brickwork is also
authorized to grade companies seeking credit facilities from IREDA, Renewable

26
Energy Service Providing Companies (RESCOS) and System Integrators (SIs).
Canara Bank was the leading promoter and strategic planner for Brickwork.

• SMERA Ratings Limited:

SMERA analyses and establishes the credibility of existing micro, small, and medium
enterprises (MSMEs). MSMEs can improve, grow, and avail cheaper/faster loans.

• Infometrics Valuation and Rating Pvt Ltd:

This SEBI-registered, RBI- accredited credit rating agency was founded by finance
professionals, former bankers, and administrative services personnel. It evaluates
entities such as banks, non-banking financial companies, large corporates, and small
and medium scale units (SMUs).

1.19 Role of Credit Rating Agencies

The position of CRAS has increased with financial globalization, and an additional
boost has been obtained from Basel II that involves CRAS' ratings in credit risk
weight laws. Credit Rating Agencies (CRAS) are involved in the study and appraisal
of the creditworthiness of corporate and sovereign debt securities issuers. Lower
credit scores incur higher interest rates and reduced cost levels than higher ratings. In
addition, ratings decide the eligibility for some institutional investors' portfolios of
debts and other financial instruments, owing to national regulations which limit
investment in risky bonds. CRAS compare their scores with public and non-
governmental financial and accounting statistics, together with details on economic
and political conditions that can impact a government or a company's capacity and
commitment to fulfill its commitments in good time. However, CRAS do not have
clarity and explicit details regarding their methodologies. Ratings appear to be sticky,
lagging and overreact as shifts arise. In recent years, this overreaction could have
exacerbated financial problems, leading to global uncertainty and cross-country
contagion. The inability of the main CRAS in forecasting the 1997-1998 recession in
Asia and the Enron, WorldCom and Parmalat bankruptcies has posed concerns
regarding the rating transparency.

1.20 Uses of Ratings by Credit Rating Agencies

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and by
governments. For investors, credit rating agencies increase the range of investment
alternatives and provide independent, easy-to-use measurements of relative credit
risk; this generally increases the efficiency of the market, lowering costs for both
borrowers and lenders. 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 be shut out altogether: small governments, startup
companies, hospitals and universities.

27
1.21 CREDIT RATING IN INDIA
In the Indian context, the scope of credit rating is limited generally to debt,
commercial paper, fixed deposits, mutual funds and of late IPO's as well. Therefore, it
is the instrument, which is rated, and not the company. In other words, credit quality
is not general evaluation of issuing organization, i.e. if debt of company XYZ is rated
AAA and debt of company ABC is rated BBB, then it does not mean firm XYZ is
better than firm ABC. However, the issuer company gets strength and credibility with
the grade of rating awarded to the credit instrument it intends to issue to the public to
raise funds. Rating, in a way, reflects the issuer's strength and soundness of operations
and management. It expresses a view on its prospective composite performance and
the organizational behaviour based on the study of past results.

Further, the rating will differ for different instruments to be issued by the same
company, within the same time span. For example, credit rating for a debenture issue
will differ from that of a commercial paper or certificate of deposit for the same
company because the nature of obligation is different in each case. Credit rating has
been made mandatory for issuance of the following instruments.

(1) As per the regulations of Securities and Exchange Board of India (SEBI) public
issue of debentures and bonds convertible/ redeemable beyond a period of 18 months
need credit rating.

(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions for
issuance of Commercial Paper in India is that the issue must have a rating not below
the P2 grade from CRISIL/A2 grade from ICRA/PR2 from CARE.

(3) As per the guidelines of Reserve Bank of India (RBI), Non - Banking Finance
Companies (NBFCs) having net owned funds of more than Rs.2 core must get their
fixed deposit program rated. The minimum rating required by the NBFCs to be
eligible to raise fixed deposits are FA (-) from CRISIL/MA (-) from ICRA/BBB from
CARE. Similar regulations have been introduced by National Housing Bank (NHB)
for housing finance companies also.

(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of
Liquefied Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also
subjected to mandatory rating. The three rating agencies have a common approach for
such rating and the dealers are categorized into four grades between 1 to 4 indicating
good, satisfactory, low risk and high risk.

(5) There is a proposal for making the rating of fixed deposit program of limited
companies, other than NBFCs also mandatory, by amendment of the companies Act
1956.

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CRAS registered with SEBI.

Year of commencement of
Name of the CRA Operations
CRISIL 1998
ICRA 1991
CARE 1993
Fitch India 1996
Brickworks 2008
Acuite Ratings &Research Ltd 2005
Infomerics Valuation and Rating
Private Ltd 1986

1) CRISIL

Credit Rating Information Services Of India Limited (CRISIL) has been promoted by
Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of
India Ltd. (UTI) as a public limited company with its headquarters at Mumbai.
CRISIL incorporated in 1987, pioneered the concept of credit rating in India and
developed the methodology for rating of debt in the context of India's financial,
monetary and regulatory system. It was the first rating agency to rate Commercial
Paper Program in 1989, debt instruments of financial institutions and banks in 1992
and asset-backed securities in 1992.

The main objective of CRISIL has been to rate debt obligation of Indian companies.
Its rating provides a guide to the investors as to the risk of timely payment of interest
and principal on a particular debt instrument. Its rating creates awareness of the
concept of credit rating amongst corporations, merchant bankers, brokers, regulatory
authorities, and helps in creating environment that facilitates the debt rating.

CRISIL provides rating and risk assessment services to manufacturing companies,

banks. non-banking financial companies, financial institutions, housing finance
29
companies. municipal bodies and companies in the infrastructure sector. CRISIL's
comprehensive offerings include ratings for long-term instruments such as
debentures/bonds and preference shares, structured obligations (including asset-
backed securities) and fixed deposits; it also rates short-term instruments such as
commercial paper program and short-term deposits. As part of bank loan ratings,
CRISIL also rates credit facilities extended to borrowers by banks. In addition,
CRISIL undertakes credit assessments of various entities including state governments.
CRISIL also assigns financial strength ratings to insurance companies.

CRISIL through the years has continued to innovate and play the role of a pioneer in
the development of the Indian debt market. CRISIL has pioneered the rating of
subsidiaries and joint ventures of multinationals in India and has rated several
multinational entities, both start- up entities as well as players with a well established
track record in India. Over the years, CRISIL has also developed several structured
ratings for multinational entities based on Guarantees from the parent as well as
Standby Letter of Credit arrangements from bankers. The rating agency has also
developed a methodology for credit enhancement of corporate borrowing program
through the use of partial guarantees. In essence, CRISIL is uniquely placed in its
experience in understanding the extent of credit enhancement arising out of such
structures.

CRISIL's Rating Process

CRISIL'S Ratings Processes in as Given Below:

(1) Request of the Company

The rating process beings at the request of a company desirous of having its issue
obligations under proposed instrument rated by CRISIL

(2) Assignment to Analytical Team

On receipt of the above request, CRISIL assigns the job to an analytical team that will
be responsible for carrying out the rating assignment.

(3) Obtaining and Processing of Data

The analytical team, which generally contains two experts, obtains requisite
information from the client company and analyses the same. To obtain clarification
and better understanding of the client's operations, the team meets and interacts with
company's executives.

(4) Findings Presentation

The findings of the team completion of investigation process are presented to Rating
committee (which comprises some directors not connected with any CRISIL
shareholder) which then decides on the rating.

30
(5) Communication of Decision

The decision of the Rating committee is communicated to the client company with
remarks that the company, if it so likes, may present some additional information for
reconsideration of rating grade assigned to the instrument. In case the company has
nothing to produce as additional fact, the rating grade is formally confirmed to the
company by CRISIL

(6) Monitoring of Change of Rating

Once the company has decides to use the rating, CRISIL is obliged to monitor the
rating, over the life of the instrument. Depending upon new information, or
developments concerning the company, CRISIL may change the rating. Any change,
so effected, is made public by CRISIL.

CRISIL'S Rating Methodology

CRISIL analyses five factors while assessing the instrument. These five factors are as
follows:

(1) Business Analysis

All the relevant information concerning the business is covered under the following
sub- heads.

(a) Industry Risk

CRISIL evaluates the industry risk by taking into consideration various factors like
nature and basis of competition, key success factors, demand and supply position,
structure of industry, government policies etc. Industry strength is evaluated within
the economy considering factors like inflation, energy requirements and availability,
international competitive situation and socio-political scenario; demand projection
growth stages and maturity of markets; cost structure of industry in domestic and
international scenario: or, the government policies toward industry. Industry risk
analysis may set an upper limit on rating.

(b) Market Position of the Company within the Industry

Market position of the company within the industry is evaluated form different angles,
i.e market share and stability of market share; competitive advantage through
marketing and distribution strength and weakness; marketing/support service
infrastructure; diversity of products and customers base; research and development
and its linkage to product obsolescence; quality important program; as finally, the
long term sales contract, strong marketing position of the company within the industry
attracts better grade rating.

31
(e) Operating Efficiency

Operating efficiency of the company is assessed vis-à-vis competitors' comparison.

For instance, the pricing or cost advantage; availability, cost, quality of raw material;
availability of labor and labor relations: integration of manufacturing operations and
cost effectiveness of plant and equipment; level of capital employed and productivity;
energy cost; or finally, the compliance to pollution control requirement on taken into
consideration.

(d) Legal Position

Legal position of issue of debt instrument is assessed by letter of offer: terms of

debenture trust deed, trustees and their responsibilities, system of timely payment of
interest and principal; or protection of forgery and fraud. Thus, business covers all
relevant aspects as related to business operations of the client company to assess the
creditworthiness of the company.

2) Financial Analysis

Under financial analysis, all relevant aspects connected with the business and
financial position of the company is assessed in the following four important
segments. Firstly the accounting finally is seen as qualifications of auditors; focus on
determining extent to which performance is overstated; method of income
recognition; depreciation policies and inventory calculations; Under Valued/Over
Valuing of assets; or off balance sheet liabilities.

Secondly, the Earning Potential return to long term earning potential under varying
conditions is assessed. Key consideration is: Profitability ratios; pretax coverage
ratios; earnings on assets/capital employed; source of future earnings; or ability to
finance growth internally.

Thirdly, the adequacy of the Cash Flows is appraised in relation to debt and fixed and
working capital requirements of the company. Main focus of analysis is on variability
of future cash flows; capital spending flexibility; cash flows to fixed and working
capital requirements; or Working Capital management. Fourthly, the Financial
Flexibility is assessed through financial plans in times of stress and their reliability;
ability to attract capital; capital spending flexibility; asset redeployment potential; or
the debt service schedule.

(3) Management Evaluation

The track record of management is evaluated by observing: the goals and

philosophies; strategies and ability to overcome adverse situations; judgment of
management performance based on past operating and financial results; planning and
control systems; conservatism or aggressiveness with reference to financial risk;
depths of managerial, talents and succession plans: shareholding pattern and

32
constitution of Board of Directors: relationship with shareholders; or mergers and
acquisition considerations.

(4) Regulatory and Competitive Environment

CRISIL evaluates structure and regulatory framework of the financial system in

which it works. Trends in regulation/ deregulation and their impact on the company
are evaluated.

(5) Fundamental Analysis

It covers aspects on liquidity management; assets quality; profitability and financial

position; and interest and tax sensitively. Liquidity management includes aspects on
capital structure, matching of assets and liabilities; or policy on liquid asset in relation
to financing commitments and maturing deposits. Asset Quality includes aspects
concerning quality of company's credit risk management, system for monitoring
credit, sector risk. exposure of individual borrowers, or management of problem
credits. Profitability and Financial Position includes aspects on historic profits,
spreads on fund deployment, revenues on non fund-based services, and accretion to
reserves. Interest or Tax Sensitivity includes aspects dealing with exposure to interest
rate changes, revenues on non-fund based activities, and accretion to reserves.

Factors listed above at serial number 1,2,3, are evaluated for manufacturing
companies but for finance companies, emphasis is laid in addition to above factors at
serial number 4 and 5.

CRISIL'S Rating Symbols for Long Term Instruments

Investment Grade Ratings:

LONG TERM MEDIUM TERM SHORT TERM

1. AAA-Highest Safety 1. FAAA: Highest Safety 1. Pl: Very strong

2. AA- Highest Safety 2. FAA: Adequate Safety 2. P2: Strong Safety
3. A- Adequate Safety 3. FA: Safety 3. P3: Adequate Safety
4. BBB-Moderate Safety 4. FB: Inadequate Safety 4. P4: Favourable
5. BB-Inadequate Safety 5. FC: High Risk 5. P5: Default
6. B- High Risk 6. FD: Default
7. C-Substantial Risk
8. D- Default

33
2) ICRA

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991
as an independent and professional company. ICRA is a leading provider of
investment information and credit rating services in India. ICRA's major shareholders
include Moody's Investors Service and leading Indian financial institutions and banks.
With the growth and globalization of the Indian capital markets leading to an
exponential surge in demand for professional credit risk analysis, ICRA has been
proactive in widening its service offerings, executing assignments including credit
ratings, equity gradings, specialized performance grading and mandated studies
spanning diverse industrial sectors. In addition to being a leading credit rating agency
with expertise in virtually every sector of the Indian economy, ICRA has broad-based
its services for the corporate and financial sectors, both in India and overseas, and
currently offers its services under the following banners:

ICRA'S Rating Process

The Rating Process Follows:

Rating Process: Rating is an interactive process with a prospective approach. It

involves series of steps. The main points are described as below:

(A) Rating Request

Ratings in India are initiated by a formal request (or mandate) from the prospective
issuer. This mandate spells out the terms of the rating assignment. Important issues
that are covered include, binding the credit rating agency to maintain confidentiality,
the right to the issuer to accept or not to accept the rating and binds the issuer to
provide information required by the credit rating agency for rating and subsequent
surveillance.

34
(B) Rating Team

The team usually comprises two members. The composition of the team is based on
the expertise and skills required for evaluating the business of the issuer.

(C) Information Requirements

Issuers are provided a list of information requirements and the broad framework for
discussions. These requirements are derived from the experience of the issuers
business and broadly conform to all the aspects, which have a bearing on the rating.
These factors have been discussed in detail under rating framework.

(D) Secondary Information

The credit rating agency also draws on the secondary sources of information including
its own research division. The credit rating agency also has a panel of industry experts
who provide guidance on specific issues to the rating team. The secondary sources
generally provide data and trends including policies about the industry.

(E) Management Meetings and Plant Visits

Rating involves assessment of number of qualitative factors with a view to estimate

the future earnings of the issuer. This requires intensive interactions with the issuer's
management specifically relating to plans, outlook, and competitive position and
funding policies. Plan visits facilitate understanding of the production process, assess
the state of equipment and main facilities, evaluate the quality of technical personnel
and form an opinion on the key variables that influence level, quality and cost of
production. These visits also help in assessing the progress of projects under
implementation.

(F) Preview Meeting:

After completing the analysis, the findings are discussed at length in the internal
committee. comprising senior analysts of the credit rating agency. All the issues
having a bearing on the rating are identified. At this stage, an opinion on the rating is
also formed.

(G) Rating Committee Meeting

This is the final authority for assigning ratings. A brief presentation about the issuers
business and the management is made by the rating team. All the issues identified
during discussions in the internal committee are discussed. The rating committee also
considers the recommendation of the internal committee for the rating. Finally, a
rating is assigned and all the issues, which influence the rating, are clearly spelt out.

35
(H) Rating Communication

The assigned rating along with the key issues is communicated to the issuer's top
management for acceptance. The ratings, which are not accepted, are either rejected
or reviewed. The rejected ratings are not disclosed and complete confidentiality is
maintained.

(I) Rating Reviews

If the rating is not acceptable to the issuer, he has a right to appeal for a review of the
rating. These reviews are usually taken up only if the issuer provides fresh inputs on
the issues that were considered for assigning the rating. Issuer's response is presented
to the Rating Committee. If the inputs are convincing, the Committee can revise the
initial rating decision.

(J) Surveillance

It is obligatory on the part of the credit rating agency to monitor the accepted ratings
over the tenure of the rated instrument. As has been mentioned earlier, the issuer is
bound by the mandate letter to provide information to the credit rating agency. The
ratings are generally reviewed every year, unless the circumstances of the case
warrant an early review. In a surveillance review, the initial rating could be retained
or revised (upgrade or downgrade). The various factors that are evaluated in assigning
the ratings have been explained under rating framework.

Rating scale of ICRA.

LONG TERM MEDIUM TERM SHORT TERM

1. LAAA: Highest Safety 1. MAAA: Highest Safety 1. Al+, Al: Highest Safety

2. LAA+, LAA, LAA- : 2. MAA+, MAA. MAA-:

2. A2+,A2: High Safety
High Safety High Safety
3.LA+,LA, LA-: Adequate 3. MA+, MA. MA-: 3. A3+, A3: Adequate
Safety Adequate Safety Safety
4.LBBB+,LBBB,LBBB- : 4. MB+, MB, MB-:
4. A4+,A4: Risk Prone
Moderate Safety Inadequate Safety
5. LBB+, LB, LB- : Risk 5. MC+, MC, MC-: Risk
5. A5: Default
Prone Prone
6. LC+, LC, LC- :
6. MD: Default
Substantially Risk

Linkage between Long-Term and Short-Term Ratings

Although ICRA ratings are specific to the rated instruments, the short-term ratings in
general have a linkage with the assigned or implicit long-term ratings of the issuers

36
concerned. Besides the fact that short-term instruments like commercial paper are
usually on-going program, thus warranting a longer-term rating view, in ICRA's
opinion, refinancing risk or an issuer's access to other sources of funding, is also
largely influenced by the issuer's longer- term credit profile.

Thus, apart from focusing on short-term factors like near-term business risk drivers
and liquidity position of the issuers, ICRA also factors in an issuer's long-term credit
profile while assigning short-term ratings to debt instruments issued by it. The
following table presents a broad guidance. to the linkage between ICRA's short-term
and long-term ratings.

3) ONICRA CREDIT

ONICRA CREDIT RATING AGENCY OF INDIA Ltd. is recognized as the pioneers

of the concept of individual Credit rating in India. After being the first to introduce
the concept, ONICRA has been continuously conducting in-depth research into all
aspects of the behaviour of credit seekers and has developed a comprehensive rating
system for various types of credit extensions. ONICRA provides a platform to credit
seekers and granters build long lasting relationship.

Credit Rating

With the advance of credit, the principal has an increased level of exposure in the
market. So, a mandatory check is done to assess the credentials of the individual in
question before extending a loan or advance. We assess the financial visibility and
look into all related aspects. We have an in-house developed credit rating module
which is customized to suit various customer requirements.

37
Associate Rating

We provide an objective assessment of existing and potential associates of our clients,

with reference to infrastructure, resources, adherence to defined system and processes
and commitment to their customers. This evaluation helps our clients understand the
value their associates bring to their business relationships.

Employment Background Screening

This service provides our clients with authenticated and validated data on employee's
which includes but is not limited to the Physical Address, qualification both
educational and professional, criminal record check and other pertinent information.

SSI/SME Rating

We help Small Scale Industries that are looking for loans and financial assistance to
get assessed on their credit worthiness, financial viability and performance. This helps
their cause to get unbiased analysis in a funding situation.

4. CARE

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit
rating, information and advisory services company promoted by Industrial
Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other
leading banks and financial services companies. In all CARE have 14 shareholders.

CARE assigned its first rating in November 1993, and up to March 31, 2006, had
completed 3175 rating assignments for an aggregate value of about Rs 5231 billion.
CARE's ratings are recognized by the Government of India and all regulatory
authorities including the Reserve Bank of India (RBI), and the Securities and
Exchange Board of India (SEBI). CARE has been granted registration by SEBI under
the Securities & Exchange Board of India (Credit Rating Agencies) Regulations,
1999,

38
The rating coverage has extended beyond industrial companies, to include public
utilities, financial institutions, infrastructure projects, special purpose vehicles, state
governments and municipal bodies, CARE's clients include some of the largest
private sector manufacturing and financial services companies' as well financial
institutions of India. CARE is well equipped to rate all types of debt instruments like
Commercial Paper, Fixed Deposit, Bonds, Debentures and Structured Obligations.

CARE's Information and Advisory services group prepares credit reports on specific
requests from banks or business partners, conducts sector studies and provides
advisory services in the areas of financial restructuring, valuation and credit appraisal
systems. CARE was retained by the Disinvestment Commission, Government of
India, for assistance in equity valuation of a number of state owned companies and for
suggesting divestment strategies for these companies.

Rating Symbols of CARE

LONG TERM MEDIUM TERM SHORT TERM

1. CARE AAA: Highest CARE 1: Excellent Safe 1. PRI: High Rate of

Safety Return
2. CARE AA: High Safety 2. CARE 2: Very Well 2. PR2: Strong Capacity
Safe for repayment
3. CARE A: Adequate 3. CARE 3: Adequate 3. PR3: Adequate capacity
Safety Safety for Repayment
4. CARE BBB: Moderate 4. CARE 4: Favorable 4. PR4: Minimal Degree of
Safety Safe Safety
5. CARE BB: High Risk 5. CARE 5: Default 5. PR5: Likely to be
default
6. CARE B: Substantially
Risk
7. CARE C: Extremely
High Risk
8. CARE D: Likely to be
default soon

CARE'S Rating Process

The process involves:

(i) Client gives request for rating and submits information and details schedules;

(ii) CARE assigns rating team and team analyses the information,

(iii) The team interacts with the clients, undertakes site visits:

39
 (iv) The client interacts with the Team respond to queries raised and provides any
additional data necessary for the analyses:

(v) The team analyses the data submitted by the Client and put up to Internal
Committee of CARE for previews analyses:

(vi) Rating Committee of CARE awards rating to the Client;

(vii) Client may ask for review of the rating assigned and furnish additional
information for the purpose. Client has the option not to accept the final rating in
which case CARE will not publish the rating or monitor it; and, finally,

(viii) If the rating is accepted by the client, CARE gives it for notification and a
periodic surveillance is undertaken by CARE.

5. SMERA
SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI
(http://www.sidbi.in.), Dun & Bradstreet Information Services India Private Limited
(D&B) (http://www.dnb.co.in), Credit Information Bureau (India) Limited (CIBIL)
(http://www.cibil.com/) and several leading banks in the country. SMERA is the
country's first rating agency that focuses primarily on the Indian SME segment.

SMERA's primary objective is to provide ratings that are comprehensive, transparent

and reliable. This would facilitate greater and easier flow of credit from the banking
sector to SMEs.

Rating Process Simplified -

Based on receipt of application form, applicable rating fees and documents from the
SME, SMERA will begin its process of evaluation.

• A Questionnaire, seeking information on financial and qualitative factors, would be

sent to the SME and would need to be filled by an authorized representative of the
SME.
• A SMERA correspondent will contact the SME to collect a duly filled questionnaire
to facilitate the rating process.
• The correspondent would also conduct a site visit as part of the evaluation process.
• SMERA shall complete the evaluation exercise and provide SMERA rating within
15 business days of receipt of all documents from the SME.

40
Moody's Investor Service

Today, Moody's Investor Service rates thousands of issues of corporate and municipal
bonds, commercial paper, short-term municipal notes, and preferred stock. These
security ratings are reported in Moody's Bond Record, which is published monthly. In
addition to assigning issue ratings. Moody's also notes for its subscribers the essential
terms on each security issue; dates when interest, principal or dividend payments are
due; call provisions (if any); registration status: bid and asked price quotations; yield
to maturity; tax status; coverage; and amount of securities outstanding.

International Scale Ratings

International foreign currency ratings effectively benchmark credit quality off US

Government risk, and measure the ability of an organization to service foreign
currency obligations. In this regard, typically no organization or debt issue in a
country can be rated higher than the country's "sovereign risk rating" on the basis that,
regardless of a company's stand-alone strength, the government can "block" any
organization within its jurisdiction from obtaining/disbursing foreign currency.
Exceptions can arise in the case of structured finance transactions (if there is an
opportunity to pierce the sovereign cap, e.g. by trapping foreign currency offshore).

National Scale Ratings

The domestic local currency ratings assigned by GCR are tiered against an assumed
"best possible" (usually central government) rating of AAA' in each country and,
therefore, do not incorporate the sovereign risks of a country. Such ratings are
designed to give an indication of the relative risks only within a specific country and
are not comparable across different countries. Accordingly, a Zimbabwe Dollar rating
accorded to a Zimbabwean organization is not comparable to a South African Rand
rating accorded to a South African organization.

41
The rating methodologies and rating scales utilized in the accordance of both types of
ratings are very similar, but the key difference is that one scale measures the
probability of default on FOREIGN CURRENCY obligations (taking into account all
sovereign risk and currency conversion considerations), while the other measures the
probability of default on LOCAL CURRENCY obligations. It stands to reason that,
particularly in emerging markets such as Africa, there is a far higher probability of
default with regards to the former.

Long Term Short term

1. AAA – Highest Safety 1. P1 – Very Strong Safety
2. AA – High Safety 2. P2 – Strong Safety
3. A – Adequate Safety 3. P3 – Adequate Safety
4. BAA – Moderate Safety 4. NP – No safety in chances of default
5. BA – Inadequate Safety
6. B – High Risk
7. CAA – Substantial Risk
8. CA – High Risk with potential
default in near future.
9. C- Highest Risk, probably in
default already.

42
 2. LITERATURE REVIEW

1. Vepa (2006):

In her study made an attempt to trace trends in the corporate debenture issues of the
private sector in India and the rating trends of the same with special reference to the
pioneer rating agency of India- CRISIL. The time period of the study was from 1991-
1992 to 2004-05. The author observed that the number of public and right issues had
deceased during the period under study, whereas the percentage of private placement
out of total issues had increased consistently. Many of the debt instruments including
debentures were downgraded during the period but the presence of multiple credit
rating agencies gave scope to issuers to approach more than one credit rating agency
with a hope to secure better ratings. The author highlighted that when credit rating
becomes mandatory in 1192-93 in India, private placements of debentures gained
importance as a preferred route of financing as a credit rating was not mandatory for
private placements but in spite of that, the debentures or issues which were rated were
more safe and reliable than the unrated ones by the investors.

2.Cantor at al. (2007):

He analyzed the behaviour of various plan sponsors and investment managers

regarding the use of rating guidelines in the conduct of their investment activities. For
the purpose of study, 200 plan sponsors and investment managers of US and Europe
were taken as sample. They also investigated a number of important issues regarding
the linkage between market dynamic and guidelines were widespread but their forms
and motivations vary considerably but the usage of ratings appeared remarkably
similar in US and Europe. Further, they found that the adoption of rating-based
guidelines by investment managers was dominated by client requirements rather than
the regulatory needs. They also highlighted that the market participants expressed a
preference on more accuracy of ratings over more stability of ratings.

3.Czarnitzki and Kraft (2007):

In their study, tested whether the credit ratings give more specific information about
creditworthiness of the firms as compared to the publicly available information
(which is available to the potential investors without any substantial cost). They select
a sample of about 8000 firms of German manufacturing sector for the purpose of
study and the time period of study was 1999-00. They compared the ratings given by
leading German credit rating agency Credit reform' with the publicly available
information. The study revealed that the young firms were more likely to default than
the established ones. Further, the lower the productivity the more would be
probability of default. They further inferred that credit rating has some additional
informational value for lenders but the rating agencies overemphasized the factor
'firm size' in construction of rating index.

43
4.Jain and Sharma (2008):

In their paper, attempted to examine the working of credit rating agencies in the light
of role played by them in capital market as information disseminators. The author
identifies conflicts of interest affecting the rating decisions and the manner in which
the regulations have attempted to address them. Further, they also studied the
regulatory framework for credit rating agencies in India. The authors revealed that
credit rating agencies play a certain role in the capital markets through their informed
and independent analysis. The various conflicts of interest highlighted in the study
were relating to the fee charged, ancillary services of credit rating agencies,
ownership interest of credit rating agencies in client securities and the problem of
notching. The study highlighted that despite the significance role played by credit
rating agencies in capital markets, they are not properly regulated as not much
responsibility is put on them in respect of their rating actions. Further, in the Indian
context too, the authors revealed certain loopholes in the regulatory system of credit
rating agencies. These included deficient disclosure regime, lack of private
enforcement regime, management conflict of interest and lack of rules for structured
finance ratings, which need to be corrected in a proper and timely manner.

5. Reddy and Gowda (2008):

In their paper explained the importance and problems of credit ratings in India. They
also highlighted the basis of credit rating and credit rating practices prevalent in India.
For this purpose, the opinions of sample of investors from Hyderabad were taken. The
results of the study inferred that majority of the respondents were aware of the
existence of various credit rating agencies including CRISIL, CARE, ICRA, etc.
About 40% (80 out of 200) of the respondents depend on credit rating for their
investment in debt instruments but more than 50% from them (94 out of 180) rely on
CRISIL for their investment than the other credit rating The study worked out that
though there is confusion among vario existence of more than one credit rating
agency but majority satisfied with the guidance of credit agencies.

6. Bhattacharyya (2009):

In her paper, evaluate the issuer rating system in India with special reference to
ICRA's issuer rating model, since ICRA introduced the issuer rating services in India
in 2005. The author identified various quantitative variables having major impact on
the issuer rating along with their relative importance with the help of discriminant
analysis. The time period of the study is from the date when the issuer rating started in
2005 to March 2008 and the sample consists of 17 companies which have been rated
by ICRA during this period. The study highlighted that out of the ten variables being
used by ICRA for issuer rating the PBIT & debt plus net worth ratio, current ratio and
net sales growth rate play an important role but the qualitative factors can also affect
the ratings at any time.

44
7. Bheemanagauda and Madegowda (2010):

They made an attempt to evaluate the performance of credit rating agencies in India
including CRISIL, ICRA and FITCH. Secondary data relating to long-term debt
instruments from time period 2000-08 has been used fir the purpose of the study. The
analysis of the study brings out that during the given period there is substantial
increase in the rating business in India. During the study period, the maximum
percentage of instruments rated is assigned the investment grade rating. As far as
rating revisions are concerned, the study depicts that the downgrades were more than
double the upgrades both in terms of number of instruments and the volume of debt.
This depicts that the ratings were issuer biased. So, the authors suggested that
stringent methods should be adopted to avoid frequent downgrades. The study further
highlights that among the agencies which maintain the stability of ratings, Fitch India
Ratings hold the top most position followed by CRISIL, ICRA and CARE in line.

8. Frank Partnoy (2017):

This article discusses about three problems which are been faced by credit rating
agencies because of congress government. The author proposed suggestions for these
problems in this article. Author strongly put pressure on the ongoing problem faced
by both the parties i.e., rating agencies and investors. The theme of credit rating is
missing because of the methodologies which are followed by the rating agencies. He
even pointed out the problem of unwarranted and mechanistic reliance with credit
ratings. He observed the lack of oversight of credit rating agencies and suggested
some regulatory reforms for this problem. He addressed about the methodologies and
different types of risks of corporate.

9. Patrick Bolton, Xavier Freixas and Joel Shapiro (2012):

Author talks about the competition among credit rating agencies which was expected
to reduce the efficiency of market with help of a model. They explained about the
features of credit rating agencies in brief. Author's organized the study in the form of
sections explaining the comparison and expansion of credit rating agencies. They also
made some assumptions indicating about the information on investment. They
explained the study by examining the game with monopoly credit rating agencies.
They explained the competition among credit rating agencies and their empirical
implications.

10. Timothy F. Lynch (2009):

Author specified the fundamentals of credit rating agencies and the important role
played by credit rating agencies for the information flow for investment. Author
evaluated the role of credit rating agencies in the capital market and investment
policy. He explained about the usage of credit rating information by private
contracting parties. He even specified about the problematic issues which are been

45
presented by credit rating agencies. He argued about the integrity defences of credit
rating agencies. There are many problems with the current regulatory environment
which are evaluated in the study.

Finally author has highlighted the significance of the credit rating industry in capital
market and the problems faced in the credit rating industry under the current
regulatory regime. He even brought to light the problems with the issuer-pays conflict
of interest.

11. Abdullah Ash-shu'ayree Al-khawaldeh (2013):

Author reviewed many papers and evaluated the hypothesis by using the statistical
tools like regression analysis. According to the study there is no empirical evidence of
whether it is based on bivariate or multivariate analysis, which supported the
relationship between the Jordanian listed company's capital intensity and credit rating.
The study identified the fixed assets level as relatively small. Authors concluded the
research confirming the different techniques using credit rating internal data models
for the analysis which results that some variable have a significant impact on credit
ratings. The results of the study specifies even the size and growth potential are
associated with positively strongly credit ratings.

12. Omaima. G. Hassan and Ray Barrell (2013):

Author analysis the study and examines the problem of, to what extent banks ratings
reflect banks and the characteristics explains the accounting information to determine
the problem. Author explained the study using descriptive research by taking the
samples of US and UK. Statistical tools like correlation matrix and regression results
are used to evaluate the study. The results revealed the performance of the model
which helped 74% to 78% of banks in assigning correct credit ratings. There was a
difference of assigning ratings to the banks, as highest rated banks and lowest rated
banks.

13. Marwan Elkhoury (2008):

Author discussed about the information gap in the international financial system.
using qualitative and quantitative methods as procedures and methods for evaluation.
Author elaborated the methodology profile of standard and Poor. The determinants of
credit ratings explain both the mature and emerging markets. Author discussed about
the two other various independently. They are increased in international interest rates
and the exports structure. He discussed about the shortcomings which arise out of
regulatory initiative. Credit rating agencies analyze many factors for assigning rating,
that factors have been discussed in the study.

46
 3. RESEARCH METHODOLGY

This report is based on primary as well as secondary data, however primary data
collection was more importance since it is overhearing factor attitude studies. One of
the most important users of research methodology is that it helps in identifying the
problems, collecting, analyzing the required information data and providing an
alternative solution to the problem. It also helps in collecting the vital information that
is required by the top management to assist them for the better decision making both
day by day decision and critical ones. Methodology is an essiantial part of research to
find answer to the research objective that initimate the same. Therefore, it figures as
an important part of the study.

3.1 Objectives

❖ To study about Credit Rating Agencies of India.

❖ To understand the importance of Credit Rating Agencies.
❖ To know about the role of Credit Rating Agencies
❖ To know about the working process of Credit Rating Agencies.
❖ To study factor which affect the Credit Score.

3.2 Hypothesis

HO= There is no significant difference in the study of Credit Rating Agencies in India.
H1= There is significant difference in the study of Credit Rating Agencies in India.

3.3Research Design

A. Universe Population:
The study is conducted in Mumbai city of Maharashtra state.
B. Sample Area:
The current study is conducted in the area between Santacruz to Sion area within
Mumbai city.
C. Sample Size:
The current study is conducted by survey method using more than 30 respondents.
D. Sample Techniques:
The study conducted using survey method, using questionnaire techniques and
interview sample.

47
E. Sample Period:
The data collected for the current study is conducted in the month of March to April
2023.

48
 4: DATA ANALYSIS AND
INTERPRETATION & REPRESENTATION

4.1 Primary Data

2. Age
• 18 to 25 years
• 25 to 35 years
• 35 to 50 years
• Above 5o years

Table no 4.2 Age of the Respondents

Age Group Frequency Percentage%
18-25 years 23 76.67
26-40 years 7 23.33
40-50 years 0 0
Above 50 years 0 0
Total 30 100

Figure no 4.2 Age of the Respondents

Age Group
40-50 years
Above 50 years 0%
0%
26-40 years
23%
18-25 years
77%

18-25 years 26-40 years 40-50 years Above 50 years

Interpretation : The above chart indicates that most of the respondents are from age
group of 18-25yrs is 77% and 23% respondents are of age group between 26-40yrs
and there are no responses above 40years.

49
3. Gender
• Male
• Female

Table no 4.3 Gender of the Respondents

Gender Frequency Percentage %

Male 15 50

Female 15 50

Total 30 100

Figure no 4.3 Gender of the Respondents

Gender

Female 50% Male 50%

Male Female

Interpretation : The above chart indicates that there are equal number of male and
female respondents.

50
4. Educational Qualification
• Under Graduate
• Graduate
• Post Graduate
• Other

Table no 4.4 Qualification of Respondents

Educational Qualification Frequency Percentage

Under Graduate 4 13.33

Graduate 11 36.67

Post Graduate 13 43.33

Other 2 6.67

Total 30 100

Figure no 4.4 Qualification of Respondents

Qualification
Other
Under Graduate
7%
13%

Post Graduate Graduate

43% 37%

Under Graduate Graduate Post Graduate Other

Interpretation : The above chart indicates that there are 37% of graduate respondents
and 43% respondents are post graduate.

51
5. Occupation
• Student
• Services/ Business
• Housewife/Unemployed
• Employees

Table no 4.5 Occupation of Respondents

Occupation Frequency Percentage%

Student 18 60

Services/ Business 3 10

Housewife/Unemployed 0 0

Employees 9 30

Total 30 100

Figure no 4.5 Occupation of Respondents

Occupation

Employees
30% Student
Housewife/Unem 60%
Services/
ployed
Business
0%
10%

Student Services/ Business Housewife/Unemployed Employees

Interpretation : the above chart indicates that there are 60% respondents are
students, 30% are employees and 10% respondents are business/ services.

52
6. Annual Income
• Less than 2 lakh
• 2-5 lakh
• 5-10 lakh
• Above 10 lakh

Table no 4.6 Annual Income of Respondents

Annual Income Frequency Percentage

Less than 2lakh 17 56.67

2-5lakh 12 40

5-10lakh 1 3.33

Above10lakh 0 0

Total 30 100

Figure no 4.6 Annual Income of Respondents

Annual Income
Above10lakh
0%
5-10lakh
3%

2-5lakh
40% Less than 2lakh
57%

Less than 2lakh 2-5lakh 5-10lakh Above10lakh

Interpretation : The above chart indicates that there are majority of respondents are
earning less than 2lakh annually i.e 57% and 40% respondents are earning between
2-5lakh and 3% respondents earning 5-10lakh.

53
7. What is the purpose of investment?
• For tax exemption
• Capital Appreciation
• Security
• Returns

Table no 4.7 Purpose of Respondents

Purpose of Investment Frequency Percentage

For tax exemption 2 6.67

Capital Appreciation 4 13.33

Security 7 23.33

Returns 17 56.67

Total 30 100

Figure no 4.7 Purpose of Respondents

Purpose of Investment

For tax exemptionCapital

7% Appreciation
13%
Returns
57% Security
23%

For tax exemption Capital Appreciation Security Returns

Interpretation : The above chart indicates that there are 57% respondents invest for
gaining returns , 23% respondents invest for security purpose and 7% respondents for
tax exemptions.

54
8. Which factor do you consider before investment?
• High risk and High return
• Moderate risk and Moderate return
• Low risk and low risk

Table no 4.8

Factor to be consider Frequency Percentage

High risk and High return 5 16.67

Moderate risk and Moderate return 22 73.33

Low risk and low risk 3 10

Total 30 100

Figure no 4.8

Factor to be consider
Low risk and low High risk and High
risk return
10% 17%

Moderate risk and

Moderate return
73%

High risk and High return Moderate risk and Moderate return Low risk and low risk

Interpretation : The above chart indicates that there 73% respondents who are
willing to take moderate risk and moderate returns and 17% respondents take high
risk and high returns and 10% respondents take low risk and low returns.

55
9. Invested in the instruments of
• Corporate sector
• Banking sector
• Not yet invested

Table no 4.9

Invested sector Frequency Percentage

Corporate Sector 10 33.33

Banking Sector 13 43.33

Not yet invested 7 23.33

Total 30 100

Figure no 4.9

Invested Sector

Not yet invested

Corporate Sector
23%
34%

Banking Sector
43%

Corporate Sector Banking Sector Not yet invested

Interpretation : The above chart indicates that there are 43% of respondents have
invested in banking sector and 34% respondents have invested in corporate sector and
23% of respondents are not yet invested.

56
10. Choice of investment
• Bank term deposit
• Fixed deposit
• Mutual fund
• Equity
• Bonds
• Debentures
• Government securities

Table no 4.10

Choice of Investment Frequency Percentage

Bank term deposit 2 6.67
Fixed deposit 4 13.33
Mutual fund 5 16.66
Equity 14 46.67
Bonds 2 6.67
Debentures 0 0
Government Securities 3 10
Total 30 100

Figure no 4.10

Choice of investment
0%
10% Bank term deposit
7% 13%
7% Fixed deposit
Mutual fund
17%
Equity
46%
Bonds
Debentures
Government Securites

Interpretation : The above chart indicates that there are 46% of respondents invest in
Equity and 17% respondents in Mutual funds and 13% respondents in fixed deposits
and 10% respondents invest in government securities.

57
11. Do you have knowledge about Credit Rating Agency?
• Yes
• No

Table no 4.11

Frequency Percentage
Yes 30 100
No 0 0
Total 30 100

Figure no 4.11

Percentage

No 0

Yes 100

0 20 40 60 80 100 120

Interpretation : The above chart indicates that there are 100% respondents who have
knowledge about Credit Rating Agency.

58
12. Do you think that the number of Credit Rating Agencies established in India is
enough?
• Yes
• No

Table no 4.12

Frequency Percentage
Yes 20 66.66
No 10 33.33
Total 30 100

Figure no 4.12

Percentage

NO 33.33

YES 66.66

0 10 20 30 40 50 60 70

Interpretation : The above chart indicates that there are 66.66% respondents think
that there are enough credit rating agencies established in India and remaining 33.33%
don’t think that credit rating agencies is enough in India.

59
13. Do you think Credit Rating Agency help investors from risk?
• Yes
• No

Table no 4.13

Frequency Percentage

Yes 25 83.33

No 5 16.67

Total 30 100

Figure no 4.13

Percentage

No 16.67

Yes 83.33

0 10 20 30 40 50 60 70 80 90

Interpretation : The above chart indicates that there are 83.33% respondents think
credit rating agency help investors from risk and remaining 16.67% respondents don’t
think so helpful for investor from risk.

60
14. What are the sources of your knowledge about Credit Rating Agency?
• Newspaper
• Market source
• Prospectus
• Magazines
• Friends and company
• Credit rating agency guides

Table no 4.14

Sources Frequency Percentage

Newspaper 4 13.33
Market source 13 43.33
Prospectus 0 0
Magazines 1 3.33
Friends and Company 8 26.67
Credit rating agency guides 4 13.33
Total 30 100

Figure no 4.14

Sources
Credit rating
agency guides Newspaper
13% 13%

Friends and
Company Market source
27% 44%
Magazines
3%
Prospectus
0%

Newspaper Market source

Prospectus Magazines
Friends and Company Credit rating agency guides

Interpretation : The above chart indicates that there are 44% respondents get to
know from market source and 27% respondents got knowledge from friends and
company and 13% from credit rating agency guides and 13% from newspaper and 3%
from magazines.

61
15. Which credit rating agency will you prefer?
• CRISIL
• CARE
• ICRA
• FITCH
• No Idea

Table no 4.15

Rating Agencies Frequency Percentage

CRISIL 13 43.33
CARE 9 30
ICRA 4 13.33
FITCH 0 0
No Idea 4 13.33
Total 30 100

Figure no 4.15

Rating Agencies
FITCH
0% No Idea
13%
ICRA
13% CRISIL
44%

CARE
30%

CRISIL CARE ICRA FITCH No Idea

Interpretation : The above chart indicates that there are 44% respondents will prefer
CRISIL company for Credit rating agency and 30% respondents will prefer CARE
and 13% respondents will prefer ICRA and remaining 13% respondents don’t have
any idea.

62
16. What are your opinions about Credit Rating?
• Simply a grading system
• An indicator of credit risk
• It shows the exact financial position of the company
• Just a marketing strategy of the issuing company

Table no 4.16

Frequency Percentage
Simply a grading system 6 20
An indicator of credit risk 14 46.67
It shows the exact financial position 10 33.33
of the company
Just a marketing strategy of the 0 0
issuing company
Total 30 100

Figure no 4.16

Frequency
0% Simply a grading system
20%
33% An indicator of credit risk

It shows the exact financial

47% position of the company
Just a marketing strategy of
the issuing company

Interpretation : The above chart indicates that there are 47% respondents think credit
rating agency is an indicator of credit risk and 33% respondents think that it shows the
exact financial position of the company and 20% respondents think it’s a simply a
grading system.

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17. Are you satisfied with the services provided by credit rating agencies?
• Highly Satisfied
• Satisfied
• Neutral
• Dissatisfied
• Highly Dissatisfied

Table no 4.17

Services Provided Frequency Percentage

Highly Satisfied 5 16.67
Satisfied 11 36.67
Neutral 14 46.67
Dissatisfied 0 0
Highly Dissatisfied 0 0
Total 30 100

Figure no 4.17

Service Provided
46.67
50
36.67
40

30
16.67
20

10
0 0
0

Interpretation : The above chart indicates that there are 46.67% respondents have
neutral view with the services provided by credit rating agencies and 36.67%
respondents are satisfied with the services provided and 16.67% respondents are
highly satisfied with the services.

64
18. Are you satisfied with the rating given by the agencies?
• Highly Satisfied
• Satisfied
• Neutral
• Dissatisfied
• Highly Dissatisfied

Table no 4.18

Ratings services Frequency Percentage

Highly Satisfied 1 3.33
Satisfied 10 33.33
Neutral 19 63.33
Dissatisfied 0 0
Highly Dissatisfied 0 0
Total 30 100

Figure no 4.18

Rating Services

70 63.33

60
50
40 33.33

30
20
10 3.33
0 0
0

Interpretation : The above chart indicates that there are 63.33% respondents have
neutral view with the ratings provided by credit rating agencies and 33.33%
respondents are satisfied with the ratings provided and 3.33% respondents are highly
satisfied with the rating services.

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19. Are you satisfied with the process of credit rating agencies?
• Highly Satisfied
• Satisfied
• Neutral
• Dissatisfied
• Highly Dissatisfied

Table no 4.19

Process of Agencies Frequency Percentage

Highly Satisfied 5 16.67
Satisfied 7 23.33
Neutral 18 60
Dissatisfied 0 0
Highly Dissatisfied 0 0
Total 30 100

Figure no 4.19

Process of Agencies
60
60

50

40

30 23.33
16.67
20

10
0 0
0

Interpretation : The above chart indicates that there are 60% respondents have
neutral view with the process of credit rating agencies and 23.33% respondents are
satisfied with the process and 16.67% respondents are highly satisfied with the
process of agencies.

66
20. Are the investors are helpful with the benefits provided by rating agencies?
• Highly Satisfied
• Satisfied
• Neutral
• Dissatisfied
• Highly Dissatisfied

Table no 4.20

Benefits Frequency Percentage

Highly Satisfied 3 10
Satisfied 14 46.67
Neutral 13 43.33
Dissatisfied 0 0
Highly Dissatisfied 0 0
Total 30 100

Figure no 4.20

Benefits by Agency
46.67
50 43.33
45
40
35
30
25
20
15 10
10
5 0 0
0

Interpretation : The above chart indicates that there are 46.67% respondents are
satisfied with the benefits provided by credit rating agencies and 43.33% respondents
have neutral view with the benefits provided and 10% respondents are highly satisfied
with the benefits by agency.

67
• 4.2 Secondary Data

SWOT Analysis – CRISIL Ltd

Strengths

❖ Consistently high demand for Credit Rating Agency.

❖ 60% market share particularly in SME ratings.
❖ Strong leadership of S&P Global Inc

Weakness

❖ Post IL & FS defaults, creditability of credit rating agency is questioned.

❖ Widening trust deficit.

Opportunities

❖ Subdued market sentiments.

❖ SME need to approach best credit rating agency before raising capital or
funds.

Threats

❖ Government regulations, control of SEBI.

❖ In-house research capabilities of Institutional Investors/clients, reduce EBIT%
margins of CRISIL research.
❖ Adverse Macro Economy results into fall in capital raising activities, in turn
reduced bond issuances & bond rating businesses.

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4.3 Findings of the study

1. Most of the investors are youngsters i.e age groups between 18-25yrs of age is
76.67%.
2. There are equal respondents of male and female.
3. More than 50% of respondents are Students.
4. Around 56% of the respondents earn salary below 2lakh annually.
5. Many of the respondents invest to gain returns is 56% & for security is 23%.
6. Almost many of the respondents are willing to take moderate risk and
moderate returns.
7. Above 20% of respondents are not yet invested in the market.
8. Majority of respondent choice of investment is Equity.
9. 100% of the respondents have knowledge about Credit Rating Agency.
10. Almost many of the respondents think Credit rating agencies help investors
from risk.
11. Majority of the respondents get aware of Credit rating agency through Market
source & friends and company.
12. Many respondents have neutral view with the service provided by the Credit
rating agencies.
13. Respondents are satisfied with the ratings and benefits provided by the Credit
rating agencies.

69
 CHAPTER 5: CONCLUSION & SUGGESTIONS

Thus we can say that Credit rating is a qualified assessment and formal evaluation of
company's credit history and capability of repaying obligations. It measures the
default probability of the borrower, and its ability to repay fully and timely its
financial debt obligations. The main purpose of credit rating is to provide investors
with comparable information on credit risk based on standard rating scale, regardless
of specifics of companies, separate sector of the economy and country as a whole.

Credit rating has proven itself to be effective instrument of risk assessment in

countries with advanced economy since it demonstrates transparency of an enterprise.
Credit rating reflects financial, sectorial, operational, legal and organizational sides of
companies, which characterize ability and willingness duly and in full amount to
repay obligations. In world practice, credit rating can be assigned to sovereign
governments, regional and local executive bodies, corporations, financial
organizations and etc.

Credit Rating is as very important since investors should be equipped with easy
methods to make their investment decisions. If ratings are assigned in a proper,
systematic, transparent way, then it will be a boon for investors and will go a long
way in making the investment world a safe place.

70
 BIBLIOGRAPHY
• WEBSITE:-

1). https://www.scribd.com/doc/169675953/Blackbook-Project-on-Credit-Rating

2) https://cleartax.in/s/credit-rating-agencies-in-india

3) https://byjus.com/free-ias-prep/credit-rating-agencies-in-india/

4) https://www.bankbazaar.com/cibil/credit-rating-agencies-in-india.html

5) http://ignited.in/I/a/252568

6) https://ijcrt.org/papers/ILCRT2010164.pdf

7) https://www.sebi.gov.in/sebiweb

References books:

1. M.com sem3 Financial Markets – Credit Rating.

2. M.com sem4 Financial Services – Credit Rating Agency.

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 Annexure
1. Name
2. Age
3. Gender
4. Educational Qualification
5. Occupation
6. Annual Income
7. What is the purpose of investment?
8. Which factor do you consider before investment?
9. Invested in the instruments of
10. Choice of investment
11. Do you have knowledge about Credit Rating Agency?
12. Do you think that the number of Credit Rating Agencies established in India is
enough?
13. Do you think Credit Rating Agency help investors from risk?
14. What are the sources of your knowledge about Credit Rating Agency?
15. Which credit rating agency will you prefer?
16. What are your opinions about Credit Rating?
17. Are you satisfied with the services provided by credit rating agencies?
18. Are you satisfied with the rating given by the agencies?
19. Are you satisfied with the process of credit rating agencies?
20. Are the investors are helpful with the benefits provided by rating agencies?

72