C redit R
Credit Rating
ating Agencies
Agencies
A brief study on the Credit Rating
agencies in India and the rating
pattern
GROUP-5
C R
Credit Rating
redit ating
A credit rating estimates the credit worthiness of an
individual, corporation, or even a country.
Credit rating is an unbiased and independent opinion
as to issuer’s capacity to meet its financial
obligations.
It does not constitute a recommendation to buy/sell or
hold a particular security.”
Classification (India)
For Companies-Credit Rating
Agencies
(Crisil, ICRA etc)
For Individuals- Credit Bureau
(CIBIL and CRO)
Credit Rating Agencies
CRA is a company that assigns credit
ratings for issuers of certain types of debt obligations
as well as the debt instruments.
Issuers of securities are companies, special
purpose entities, state/local governments, non-profit
organizations.
Users-Investors, issuers, investment banks, broker-
dealers, and governments etc.
CRA in India
1. Crisil
2. ICRA
3. Fitch India
4. Care
5. Brickwork Ratings India
Worldwide: Dun & Bradstreet, A.M. Best,Moody's,
Standard and Poor's, Fitch Ratings etc…
Important Facts of CRAs
Assesses the ability and willingness of the issuer
company for timely payment of interest and principal on
a debt instrument.
Rating symbols may vary depending on the type of debt
instrument.
Issuer company pays the CRAs.
In India, only for corporate.
Ongoing activity. Continuous monitoring/rating.
Changes -through press and on their websites.
Rate securities offered by way of public or rights issue.
Contd…
SEBI regulates CRAs in India
Under SEBI Credit Rating Agencies Act 1999.
Amended in 2006.
Registered under Company Act 1956
Minimum net worth of Rs 5 cr.
SEBI is not involved in the rating exercise.
General Factors to be considered
Issuer company’s operational efficiency,
level of technological development,
financials, ratios, industry analysis,
competence and effectiveness of
management, past record of debt
servicing, macro-economic, regulatory
and political environment, future project
forecasts etc.
Benefits of the credit rating
Low cost information
Quick investment decision.
Independent investment decision.
Investor’s protection.
Increase the investor population
Alert Credit risks
Merchant banks job made easy
Foreign collaboration made easy
Low cost of borrowing
2010-Latest Disclosures by SEBI
Disclosures on shareholding and ownership patterns of
rating agencies will enhance investors 'confidence in
CRAs‘.
CRAs-Internal audits conducted on a half-yearly basis.
disclose rating methodology & compensation
arrangement with the issuer.
Individuals in the credit rating process will not be
allowed to hold shares of the issuer.
voting details of the rating committee for five years after
the maturity of the instrument.
CREDIT RATING INFORMATION
SERVICES LTD
CRISIL
CRISIL is India's leading Credit Rating, Research, Risk and Policy
Advisory company.
Started in 1987 January 29: CRISIL, India's first credit rating agency, is
incorporated, promoted by ICICI Ltd, along with UTI and other financial
institutions.
Standard & Poor's -major shareholder.
CRISIL's rating experience covers more than 24654 entities, including
14,500 small and medium enterprises (SMEs).
CRISIL CREDIT RATING
Timely payment of interest and principal on the rated obligation.
The debt obligations rated by CRISIL include:
– Non-convertible debentures/bonds/equity shares
– Commercial papers/certificates of deposits/short-term debt
– Fixed deposits
– Loans
– Structured debt
CRISIL's credit ratings are
– An opinion on probability of default on the rated obligation
– Forward looking
– Specific to the obligation being rated
But they are not
•A comment on the issuer's general performance.
•An indication of the potential price of the issuers' bonds or equity shares.
•A recommendation to buy/sell/hold a particular security
•An opinion on the associates, affiliates, or group companies, or the
promoters, directors, or officers of the issuer
CRISIL rates a wide range of entities, including:
•Industrial companies
•Banks
•Non-banking financial companies (NBFCs)
•Infrastructure entities
•Microfinance institutions
•Insurance companies
•Mutual funds
RATING SCALES
Long Term Rating Scale (AAA, AA, A, BBB, BB, B…D)
Fixed Deposit Rating Scale (FAAA,FAA,FA,FB,FC,FD)
Short Term Instruments Rating Scale (P1,P2,P3,P4,P5)
Corporate Credit Rating Scale
(CCRAAA,CCRAA,CCRA,CCRBBB…CCRB)
IPO Grading (5/5,4/5,3/5,2/5,1/5)
Rating methodology
1) Analysis of the past performance of the company and
assessment of projects
2) Evaluation of mgt and cash flows projections of the
company
3) Looks at operational efficiencies.
4) Evaluates the management of company
5) Also accesses the company’s ability to raise funds quickly in
various ways in times of necessity to meet the requirements
of servicing debt
Various ratings given to different business firms are as
follows:
AAA: Reflects Highest Financial Strength to meet
policyholder obligations
AA : only marginally weaker than the 'AAA' rated
insurance companies
A: change in circumstances can adversely affect such
companies more than those in the higher rating categories
BBB: Reflects Moderate Financial Strength to meet
policyholder obligations
BB: Reflects Inadequate Financial Strength to meet
policyholder obligations
B: Reflects Greater Susceptibility to default on
policyholder obligations
C: Policyholder obligations can be met only if
favorable circumstances prevail
WHY INVESTORS SELECT
CRISIL
Long track record of timely rating actions
Deeper analytical insights due to wider coverage
Dedicated investor outreach team
Sector-focused analytical teams
In-house industry and economic research team
Separation of business development function
from rating analysis
Separate criteria committee
ICRA
INVESTMENT INFORMATION AND
CREDIT RATING AGENCY OF INDIA
Ltd.
PROFILE
ICRA Limited (formerly Investment Information and Credit Rating
Agency of India Limited) was set up in 1991 by leading
financial/investment institutions, commercial banks and financial services
companies as an independent and professional Investment Information and
Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of
Companies (Group ICRA). ICRA is a Public Limited Company, with its
shares listed on the Bombay Stock Exchange and the National Stock
Exchange.
PROFILE (Cont…)
ICRA information products, Ratings, and solutions reflect
independent, professional and impartial opinions, which
assist businesses enhance the quality of their decisions and
help issuers access a broader investor base and even lesser
known business entities approach the money and capital
markets.
WHAT DOES ICRA DO?
Provide information and guidance to institutional and
individual investors/creditors.
Enhance the ability of borrowers/issuers
Assist the regulators in promoting transparency in the
financial markets .
Provide intermediaries with a tool to improve efficiency
in the funds raising process.
ICRA’s Ratings Scale
LONG TERM
LAAA -The highest-credit-quality rating assigned by
ICRA. The rated instrument carries the lowest credit risk.
LAA- The high-credit-quality rating assigned by ICRA.
The rated instrument carries low credit risk.
LA- The adequate-credit-quality rating assigned by ICRA.
The rated instrument carries average credit risk.
Long Term
LBBB- The moderate-credit-quality rating assigned by ICRA. The
rated instrument carries higher than average credit risk.
LBB- The inadequate-credit-quality rating assigned by ICRA. The
rated instrument carries high credit risk.
LB- The risk-prone-credit-quality rating assigned by ICRA. . The
rated instrument carries very high credit risk.
LC -The poor-credit-quality rating assigned by ICRA. The rated
instrument has limited prospects of recovery.
LD- The lowest-credit-quality rating assigned by ICRA. The rated
instrument has very low prospects of recovery.
Rating methodology for Non-Banking
Finance Companies
Business Risk
Operating Environment
Ownership structure
Franchise and Size, competitive position
Management, Systems and Strategy, governance
structure
Financial Risk
Asset Quality
Liquidity
Profitability
Capital Adequacy
CARE
Credit Analysis and Research
Limited
Credit Analysis and Research Limited
(CARE)
Credit Analysis & Research Ltd. (CARE Ratings) is a full
service rating company that offers a wide range of rating and
grading services across sectors.
CARE has an unparallel depth of expertise. CARE Ratings
methodologies are in line with the best international practices.
It was incorporated in 1993 by consortium of
Banks/financial institutions in India.
The three largest shareholders of CARE are IDBI Bank,
Canara Bank and State Bank of India.
Some important points about CARE
CARE Ratings has completed over 8488 rating assignments
having aggregate value of about Rs.26609 bn (as at Dec 30,
2010), since its inception in April 1993.
CARE is recognised by Securities and Exchange Board of
India (Sebi), Government of India (GoI) and Reserve Bank
of India (RBI) etc.
CARE is a founder member of Association of Credit Rating
Agencies in Asia (ACRAA).
CARE has seven offices in India located at - Mumbai,
Delhi, Kolkata, Chennai, Hyderabad, Bangalore and
Ahmedabad.
Quality of Credit Ratings
Independent & Renowned External Rating
Committee
CARE believes in independence in rating decisions
and has an external rating committee that decides
each rating.
It consists of members who are reputed professionals
from various industries like IDBI Ltd, Reserve Bank
of India, Hindustan Lever Ltd, etc.
Impressive Track Record of more than 15 years
CREDIBILITY OF CREDIT
RATINGS
Regulatory Recognition
Independent
Professional
Experienced
Wide Sectoral Coverage
Market Acceptance
RATING EXPERIENCE OF
CARE
Total Assignments 8488
Completed
Total Instruments 7989
Rated
Total Volume of Rs.26609 bn
Debt Rated
Total Issuers Rated 3071
FITCH INDIA
RATING
FITCH RATING
Fitch Ratings is a global rating agency committed
to providing the world’s credit markets with
independent and prospective credit opinions,
research, and data. It is founded by John Knowles in
1913.
Fitch solution offers range of comprehensive data,
analytical tools and risk services .
Global presence
50 worldwide offices and spans across
capital markets in over 150 countries. Fitch
conducts analysis of the credit markets
covering Corporate Finance (including
Financial Institutions and Insurance),
Structured Finance, Public Finance, and
Global Infrastructure and Project Finance.
1)1,700 Banks and Non-Bank Financial Institutions
2)1,100 Corporates
3)1,200 Insurance Companies
4)37,000 Municipal Transactions
5)Structured Finance – 6,600 deals under surveillance
a)1,300 U.S. asset-backed securities
b)4,000 U.S. residential mortgage-backed securities
c)425 U.S. commercial mortgage-backed securities
d)790 European structured finance
e)160 International structured finance
f)81 Sovereigns
FITCH VALUE PROPOSITION
1)Quality and frequency of research and communication
2) Clear rating rationales/expectations
3) Innovative research
4) Timely delivery
5) Annual/Semi-annual published updates on issuers
6) Experience (averages 10+ years experience per analyst)
COMPARISON
ICRA FITCH INDIA
Rating inputs: Interaction with Rating inputs: Interaction with
client, site visit, data analysis client, site visit, data analysis
Site inspection team: 2 Site inspection team: 2-4
Internal meeting team: Changes Internal meeting team:
according to circumstances Minimum 4
Disclosure of interest of Disclosure of interest of
committee members: Yes committee members: Yes
Turnaround time: 3 weeks Turnaround time: 8 weeks
Rating decision: Rating committee Rating decision: Rating committee
Public dissemination: Press Public dissemination: Press
release release
External committee External committee
members: No members: No
Review: At least once a year Review: Annually
CARE ADD CRISIL
Rating inputs: Interaction with Rating inputs: Entity information,
client, site visit, data analysis preliminary analysis, and site visit
Site inspection team: 2-6 Site inspection team: At least 2
Internal meeting team: 6 Internal meeting team: Yes
Disclosure of interest of
Disclosure of interest of
committee members: Yes committee members: Yes
Turnaround time: 3-4 weeks
Turnaround time: 3-4 weeks
Rating decision: Rating
Rating decision: Rating
committee & issuer decision
committee
Public dissemination: Local &
Public dissemination: Press international media, website,
release CRISIL’s subscriber base
External committee External committee
members: Yes members: Yes
Review: Quarterly Review: At least once a year
Overall comparison of Credit Rating
Agencies
Activity Procedure
Rating inputs Financial statements, site visits,
Management meetings, sometimes some
Third party visits such as bankers, auditors etc.
Site inspection Minimum 2
Team
Internal rating 4-6
Committee members
Disclosure of interest Of committee Yes
members
Turn around time 2 weeks- 3 months
Rating decision Rating committee
Public dissemination via press release, website etc.
External committee Members Not in all cases
Research support Yes
Review Annually or quarterly
Rating fee According to the turnover of the
entity
CONCLUSION
Credit rating approach in a credit rating is not an easy task.
The main problem the credit rating agencies across the world
facing is the lack of standardization.
The rating agencies have links between number banks and
other rating agencies. This will increase the potential of
rating agencies in the future.
These rating agencies are not only providing rating services
but they are filling the gap between the credit seekers and the
credit providers through their better services.
THANK YOU
