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Credit rating assesses the creditworthiness of an individual, corporation or even a country. It is calculated from the financial history and current assets and liabilities. A rating agency collects qualitative and quantitative data from the company which has to be rated and assesses the relative strength and capacity of a company. The rating is given on the judgment of a team of experts from the agency. The rating of a company is a financial indicator to potential investors of debt securities such as the bonds. It is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. The rating are expressed alphabetically, numerically, alpha numerically or even symbolically on the basis of the information provided by the client. E.g. A++, A+, A, A1, B1, *****, very good, etc.


According to CRISIL, Credit rating is an unbiased and independent opinion as to issuers capacity to meet its financial obligations. It does not constitute a recommendation to buy or sell or hold a particular security.

According to Moodys, ratings are designed exclusively for the purpose of grading bonds according to their investment qualities.



1. Superior Information
Rating by an independent firm offers a superior and more reliable source of information on credit risk for three inter related risks.

2. Low Cost Information

A rating firm which gathers, analyses, interprets and summaries complex information in a simple and readily understood format for wide public consumption represents a cost effective arrangement.

3. Basis for proper Risk-return Trade off

If debt securities are rated professionally and if such ratings enjoy widespread investor acceptance and confidence, a more rational risk-return tradeoff would be established in the capital market. [5]

4. Healthy Discipline on Corporate Borrowers

Public exposure has healthy influence over the management of issuer because of its desire to have a clear image.

5. Formulation of public policy guidelines on institutional investment

The public policy on the kinds of securities that are eligible for inclusion in different kinds of institutional portfolios can be developed with great confidence if securities are rated professionally by independent agencies.

6. Indication of Risk
Through the study of credit rating, the investors can assess the degree of default risk involvement in the financial instrument issued by the company.

7. Gradation
Credit rating is designed for the purpose of grading the bonds in accordance with their investment quality.

8. Assessment of Solvency
Credit rating estimates or assesses the values of credit instruments by applying specialized and expert knowledge to assess the solvency position of the borrower or issuer of the credit instrument.

9. Symbolization
The companies or borrowers whose credit are rated by the credit rating agencies are expressed through certain predefined symbols, such as, AAA, AA, A, A+, BBB, BB, B+, C, D, etc. These symbols indicate the ability of the company or borrower to repay its debt. [6]

10.Assessment of Credit

The creditworthiness and reliability of the obligator are made available to the investors or lenders by credit rating.



1. Low cost information
It is a source of low cost information to the investors.

2. Quick investment decision

In the present day complex world ratings enables investors to take quick decisions based on ratings. Independent investment decision: For rated instrument, investors need not depend upon the advice of the financial intermediaries.

3. Investor protection
Hiring of credit agencies imply that the management of the company is ready to show its operations for independent scruting. So the investors who are not provided with confidential information can have overall assessment based on ratings.



1. Sources of Additional Certificate
Credit rating agency provides additional information to the issuers of debt/ financial instruments. A highly rated firm can enter the market with great confidence. Indian experience shows that use of rating, benefit a great deal by getting larger amount of money from a wider audience at lower cost.

2. Increases Investors Population

A sound credit rating system gives an alternative method to name recognition as a determining factor in making investment and helps increase the population of those investing in debt obligations.

3. Forewarns the Risk

Credit rating acts as a guide to the companies which get a lower rating.

4. Encourages Financial Discipline

Ratings also encourage discipline among corporate borrowers to improve their financial structure and performance. 5. Rating as a Marketing Tool Companies with rated instruments use rating as a marketing tool to create image in dealing with their customers, lenders and borrowers.


Low Cost of Borrowing A company with higher rated instrument has the opportunity to reduce the cost of borrowing by quoting lesser interest rate on fixed deposits or debentures as the investors with low risk preference would invest in safe securities through yielding low rate of return.




1. ICRA (Information and Credit Agency of India)

ICRA limited 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 was established in the year 1991 by the collaboration of financial institutions, investment companies, and banks. The company has formed the ICRA group together with its subsidiaries. The company is headed by Mr.Piyush G. Mankad and offers products like short-term debt schemes, Issue-specific long-term rating and offers fund based as well as non-fund based facilities to its clients. The Grading Services offered by ICRA employ pioneering concepts and methodologies, and include Grading of Initial Public Offers (IPOs); Microfinance Institutions (MFIs); Construction Entities; Real Estate Developers and Projects; Healthcare Entities; and Maritime Training [11]

Institutes. ICRAs IPO Grade represents a relative assessment of the fundamentals. ICRAs MFI Grading exercise on evaluating the candidate institutions business and financial risks. ICRAs Construction Entities seeks to provide an independent opinion on the quality of performance. ICRAs Real Estate Developers and Projects seek to make property buyers aware of the risks associated with real estate projects. ICRAs Healthcare Gradings present an independent opinion on the quality of care provided by healthcare entities. In the education sector, ICRAs offers the innovative service of Grading of Maritime Training Institutes in India.

2. CRISIL (Credit Rating Information Services of India Limited)

CRISIL, i.e. Credit Rating Information Services of India Limited was the first credit rating agency floated on January 1, 1988. It was started jointly by ICICI and UTI with an equity capital of Rs. 4 crores. Each of them holds 18% of the capital. The other promoters are Asian development bank(15%), the LIC, GIC and its subsidiaries and the SBI(5%), HFDC(6.2%), nine public and private sector Banks(19.25%) and 10 foreign banks. In 1991, CRISILs operations are now well established . It begins to acquire brand identify, with a reputation for analytical independence. In 1992, CRISIL offers technical assistance and training to help set up Rating Agency. In 1993, CRISILs IPO is a whopping success its 20, 00,000 shares, sold at a premium of Rs. 40 per share, are oversubscribed by 2.47 times. In 2009, CRISILs SME Rating group assigns its 5000th SME rating. CRISIL captures about half of Indias bank loan rating market. [12]

In 2010, CRISIL moves into a new, corporate head office the new CRISIL House, at Powai, Mumbai, is a state-of-the-art, green building. CRISIL SME Rating crosses its 15,000th SME rating. CRISIL launches Real Estate Star Rating. CRISIL acquires Pipal Research, further strengthening its leadership in the KPO industry.

The CARE was promoted in 1993 jointly with investment companies, banks and finance and companies. Services offered by CARE are: 1. 2. 3. 4. Credit Rating, Information Service, Equity Research, Rating of Parallel Market of LPG and Kerosene.

CARE provides rating services to Debentures, Certificates of Deposits, Commercial paper, fixed Deposits also it provides analysis of companies for the use of bankers, lenders and business enterprises. 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. CARE Ratings has completed over 8488 rating assignments having aggregate value of about Rs 26609 billion (as at Sep 2010), since its inception in April 1993. CARE IS RECOGNISED BY Securities and Exchange Board of India (Sebi), Government of India (Gol) and Reserve Bank of India (RBI) etc. CARE was promoted by major Banks/ FIs (financial institution) in India. The three largest shareholders of CARE are IDBI Bank, Canara Bank and state bank of India. CARE, is set-up with two divisions: [13]

CARE Ratings
The ratings division of CARE has over a decade long experience in rating debt instrument/ Enterprise rating covering the full spectrum of Universe comprising: 1. 2. 3. 4. 5. 6. 7. 8. 9. Industrial Companies Service Companies Infrastructure Companies Banks Financial Institutions (FIs) Non-Bank Finance companies (NBFCs) Public Sector Undertakings (PSUs State Government Undertakings Municipal Corporations

In addition to debt rating CARE Ratings has experience in providing the following specialized grading/rating services: 1. 2. 3. 4. 5. 6. 7. 8. Corporate Governance rating IPO grading Mutual Fund Credit quality Rating Insurance Claims Paying Ability Ratings Issuer Ratings Grading of Construction entities Grading of Maritime training institutes LPG/ SKO Ratings


4. DCR
DCR India or Duff &Phelps Credit Rating India Private Ltd is one of the top credit rating agencies in India. Over the years, DCR India has been providing excellent services to its clients. Duff & Phelps Credit Rating India Private Ltd (DCR India) has played an important role in rating Indias forex debt obligations. Duff & Phelps Credit Rating India Provide Ltd (DCR India) rated the forex debt obligations of India as BBB- or a Triple B Minus. This rating is of great importance for the economy of India and the credibility of the national government. This rating reflects the fact that the Indian national government is trying its best to improve the state of Indian economy. As per the rating of DCR India, the national government of India is trying to bring about a better economic environment through the introduction of several economic policies and plans for the last 17 years. Over the year India has had powerful account of payments. Since the decade of 1990s the records of debt services have also been impressive. The services provided by duff & Phelps Credit Rating India Private Ltd (DCR India) are considered to be at par with other leading providers of credit rating services in India like Credit Rating Information Services of India limited (CRISIL), ONICRA Credit Rating Agency of India Ltd.


Onicra was established in 1993, by Mr.SonuMirchandani, who at the time, promoted consumer durable major, Onida. Operations began with one office that conducted 10 cases per month. The company now operates with a network of over 148 branches, covering more than 500 locations pan-India, and touches over 30,000 unique case every day.

Almost all credit rating agencies established in India undertake credit analysis work of corporate bodies only. Unlike these agencies, the ONICRA has taken up the individual borrowers. It does not rate the individual as such but the risk associated with such transaction with that the individual. ONICRA is recognised 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... ONICRA has a nationwide infrastructure to meet the ever- growing need of our customers.



There are several limitations of credit ratings. 1. Credit rating are changed when the agencies feel that sufficient changes have occurred. The opinions of rating agencies may have an adverse impact on asset quality of the issuer. 2. the use of credit rating imposes discrete categories on default risk, while, in reality default risk is a continuous phenomenon. 3. owing to time and cost constraints, credit ratings are unable to capture all characteristics for an issuer and issue. 4. The absence of widespread branch network of the rating agency may limit its skills in rating. 5. Inexperienced, unskilled or overloads staff may not do justice give their job and the resulting rating may not be perfect. 6. Since the rating agencies receive a sizable fee from the companies for award in rating, a tendency to inflate these rating may develop. 7.The time factor greatly affects the rating and gives misleading conclusions. 8. Borrowing entities may give misleading advertisements about the rating symbols to their instruments.



The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information on the client. Rating decisions are made by the Rating Committee. The rating assigned is communicated to the client along with a detailed rationale. The rating accepted by the clients are published and then monitored on a continuous basis over the life of the instrument. CARE has a comprehensives and companies operating in these industries. Each rating is reviewed formally at least once a year, when analysts meet the issuers management. A review can also be triggered by a major development in the company or in the industry, which may have a significant bearing on the credit-worthiness of the company. As a part of the review exercise, actual financial performance is analysed in the light of the estimates made earlier and deviation are examined. CARE puts the rating under Credit Watch, when any event or deviation from the expected trend has occurred or is expected and additional information is necessary to take rating action.


The rating may be retained, upgraded or downgraded based on the changed prospects for the issuer. A rating change is at the absolute discretion of CARE, without concurrence of the client.


A credit rating is a useful tool not only for the investor, but also for the entities looking for investors. An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging market economies, the credit rating is key to showing their worthiness of money from foreign investors. And because the credit rating acts to facilitate investments, many countries and companies will strive to maintain and improve their ratings, hence ensuring a stable political environment and a more transparent capital market. Ratings of debt instruments are an integral part of U.S. financial markets. Reliance on these ratings is increasing, but their reliability is pathetic. Practically every issuer involved in a major unexpected financial collapse received high ratings immediately before the failure. The most recent and important example involves the failed AAA-rated collateralized debt obligations that set off the 2007 liquidity crisis and current recession. Other notable examples include Enron, Orange County, and Bear Stearns.


BOOKS 1. Financial Service Management N.G. KALE M.AHMED 2. Financial Service Management Michael Vaz

1. www.google.com 2. www.wikipedia.com 3. www.hgexperts.com 4. www.investopedia.com