Credit Cra

1.
INTRODUCTION OF CRA
India was perhaps the first amongst developing countries to set up a credit rating agency in
1988. The function of credit rating was institutionalized when RBI made it mandatory for the
issue of Commercial aper !C" and su#se$uently #y %&BI' when it made credit rating
compulsory for certain categories of de#entures and de#t instruments. In (une 199)' RBI
made it mandatory for *on+Ban,ing -inancial Companies !*B-Cs" to #e rated. Credit rating
is optional for u#lic %ector .nderta,ings !%.s" #onds and privately placed non+
conve11i#le de#entures upto Rs. /0 million. -i1ed deposits of manufacturing companies also
come under the purview of optional credit rating. %ecurities. Credit Rating is valua#le
information' widely used measure for the ris,iness of the companies and #onds. It is
e1pensive information2 costly to o#tain. Credit Rating prediction is important for investors to
estimate ris,iness of unrated companies and for companies to monitor the companies3 credit
rating' predict the future rating.
4ith the increasing mar,et orientation of the Indian economy' investors value a systematic
assessment of two types of ris,s' namely 5#usiness ris,6 arising out of the 5open economy6
and lin,ages #etween money' capital and foreign e1change mar,ets and 5payments ris,6.
4ith a view to protect small investors' who are the main target for unlisted corporate de#t in
the form of fi1ed deposits with companies' credit rating has #een made mandatory.
The first mercantile credit agency was set up in *ew 7or, in 18)1 to rate the a#ility of
merchants to pay their financia 8#ligatons. 9ater on' it was ta,en over #y Ro#ert :un. This
agency pu#lished its first rating guide in 18/9. The second agency was esta#lished #y (on
Bradstreet in 18)9 which was later merged with first agency to form :un ; Bradstreet in
19<<' which #ecame the owner of =oody3s Investor3s %ervice in19>?. The history of
=oody3s can #e traced #ac, a#out a 100years ago. In 1900' (ohn =oody laid stone of
=oody3s Investors %ervice and pu#lished his @=anual of Railroad %ecurities3.
&arly 19?03s saw the e1pansion of credit rating industry when the oor3s u#lishing
Company pu#lished its first rating guide in 191>. %u#se$uently -itch u#lishing Company
and %tandard %tatistics Company were set up in 19?) and 19?? respectively. oor and
%tandard merged together in 19)1 to form %tandard and oor3s which was su#se$uently
ta,en over #y =cAraw Bill in 19>>. Between 19?) and 19C0' no maDor new rating agencies
were set up. But since 19C03s' a num#er of credit rating agencies have #een set up all over
the world including countries li,e =alaysia' Thailand' Eorea' Fustralia' a,istan and
hilippines etc. In India' CRI%I9 !Credit Rating and Information %ervices of India 9td." was
setup in 198C as the first rating agency
Definition
KES SHROFF COLLEGE Page 1
Fn independent company that evaluates the financial condition of issuers of debt
instruments and then assigns a rating that reflects its assessment of the issuerGs a#ility to
ma,e the de#t payments. otential investors' customers' employees and #usiness partners
rely upon the data and o#Dective analysis of credit rating agencies in determining the overall
strength and stability of a company.
2. WHAT IS A CREDIT RATING?
F credit rating assesses the credit worthiness of an individual' corporation' or even a
country.
Credit ratings are calculated from financial history and current assets and lia#ilities.
F credit rating tells a lender or investor the pro#a#ility of the su#Dect #eing a#le to
pay #ac, a loan.
F poor credit rating indicates a high ris, of defaulting on a loan' and thus leads to
high interest rates.
Credit is important since individuals and corporations with poor credit will have
difficulty finding financing 'and will more li,ely have to pay more due to ris,
of default.
The ratings are e1pressed in code num#ers which can #e easily comprehended #y lay
investors.
Credit rating' as e1ists in India' is done for a specific security and for the company as
a whole.
F credit rating does not create fiduciary relationship #etween the agency ; the users.
CRF play a ,ey role in the infrastructure of the modern financial system.
-or investors' credit rating agencies increase the range of investment alternatives and
provide independent' easy+to+use measurements of relative credit ris,2 this generally
increases the efficiency of the mar,et' lowering costs for #oth #orrowers; lenders.
This in turn increases the total supply of ris, capital in the economy' leading to stronger
growth. It also opens the capital mar,ets to categories of #orrower who might otherwise
#eshut out altogetherH small governments' start up companies 'hospitals' and universities
3. WHAT IS AND HOW CREDIT RATING IS
GENERALLY DONE?
F credit rating assesses the credit worthiness of an individual' corporation' or even a country.
Credit ratings are calculated from financial history and current assets and lia#ilities.
Typically' a credit rating tells a lender or investor the pro#a#ility of the su#Dect #eing a#le to
pay #ac, a loan. Bowever' in recent years' credit ratings have also #een used to adDust
insurance premiums' determine employment eligi#ility' and esta#lish the amount of a utility
or leasing deposit.
F poor credit rating indicates a high ris, of defaulting on a loan' and thus leads to high
interest rates or the refusal of a loan #y the creditor.
In countries such as the .nited %tates' an individualGs credit history is compiled and
maintained #y companies called credit #ureaus. In the .nited %tates' credit worthiness is
usually determined through a statistical analysis of the availa#le credit data. F common form
of this analysis is a <+digit credit score provided #y independent financial service companies
such as the -IC8 credit score.
The factors which may influence a personGs credit rating areH
a#ility to pay a loan interest
amount of credit used saving patterns
4. IMORTANCES OF CREDIT RATING AGENCIES
Credit Rating Fgencies are the main authority to assign rate of credit for the companies who
issue de#t. Fny investor can measure the ris, of #ad de#t after analysis these credit rates.
These credit rates are fi1ed on the #asis of a#ility to pay #ac, the loan.
Credit Rating Fgencies are also helpful to re#uild the investor confidence which is vital to
the glo#al capital mar,ets.
In capital mar,et' its importance is not less than %&BI #ecause credit rating agencies protect
different investors from ris, of financial loss #y providing them upto date information of
credit rate. =any other ,ey roles can #e e1plain with following wayH
To compare the loan on the #asis of $uality of credit and loan. %uppose I' 7 and J
are three companies offering de#entures to investors. Credit rating agencies will
assign their credit rate #ecause these are financial e1pert and assign rate on the #asis
of analysis of past financial records and statements. Credit rating agency will assign
rate FFF to #est of I' 7 and J and to invest FFF +credit rating company means low
ris, of loss.
*ot only show FFF #ut it show other range of credit rate li,e F for medium ris,y
company' BBB medium ris,y and BB high ris,y and speculative company.
Credit rating agencies also assist to portfolio monitoring. In portfolio monitoring'
they provide information a#out which investment is most secure and provide high
return of interest.
Credit $uality of transparency.
Credit rating of money mar,et securities.
!. MERITS AND DEMERITS OF CREDIT RATING
"enefit# of C$e%it R&tin' to In(e#to$#
He)*# in In(e#t+ent De,i#ion H
Credit rating gives an idea to the investors a#out the credi#ility of the issuer
company' and the ris, factor attached to a particular instrument. %o the investors can
decide whether to invest in such companies or not. Bigher the rating' the more will #e the
willingness to invest in these instruments and vice+versa.
"enefit# of R&tin' Re(ie-#
The rating agency regularly reviews the rating given to a particular instrument. %o'
the present investors can decide whether to ,eep the instrument or to sell it. -or e.g. if the
instrument is downgraded' then the investor may decide to sell it and if the rating is
maintained or upgraded' he may decide to ,eep the instrument until the ne1t rating or
maturity.
A##.$&n,e of S&fet/
Bigh credit rating gives assurance to the investors a#out the safety of the instrument
and minimum ris, of #an,ruptcy. The companies which get a high rating for their
instruments' will try to maintain healthy financial discipline. This will protect them from
#an,ruptcy. %o the investors will #e safe.
E&#/ Un%e$#t&n%&0i)it/ of In(e#t+ent $o*o#&)
The rating agencies gives rating sym#ols to the instrument' which can #e easily
understood #y investors. This helps them to understand the investment proposal of an
issuer company. -or e.g. FFF !Triple F"' given #y CRI%I9 for de#entures ensures
highest safety' whereas de#entures rated : are in default or e1pect to default on maturity.
C1oi,e of In#t$.+ent#
Credit rating ena#les an investor to select a particular instrument from many
alternatives availa#le. This choice depends upon the safety or ris, of the instrument.
S&(e# In(e#to$2# Ti+e &n% Effo$t
Credit ratings ena#le an investor to his save time and effort in analyzing the financial
strength of an issuer company. This is #ecause the investor can depend on the rating done
#y professional rating agency' in order to ta,e an investment decision. Be need not waste
his time and effort to collect and analyse the financial information a#out the credit
standing of the issuer company.
"enefit# of C$e%it R&tin' to Co+*&n/
Improves Corporate Image H
Credit rating helps to improve the corporate image of a company. Bigh credit
rating creates confidence and trust in the minds of the investors a#out the company.
Therefore' the company enDoys a good corporate image in the mar,et.
9owers Cost of Borrowing
Companies that have high credit rating for their de#t instruments will get
funds at lower costs from the mar,et. Bigh rating will ena#le the company to offer
low interest rates on fi1ed deposits' de#entures and other de#t securities. The
investors will accept low interest rates #ecause they prefer low ris, instruments. F
company with high rating for its instruments can reduce the cost of pu#lic issue to
raise funds' #ecause it need not spend heavily on advertising for attracting investors.
4ider Fudience for Borrowing
F company with high rating for its instruments can get a wider audience for
#orrowing. It can approach financial institutions' #an,s' investing companies. This is
#ecause the credit ratings are easily understood not only #y the financial institutions
and #an,s' #ut also #y the general pu#lic.
Aood for *on+opular Companies
Credit rating is #eneficial to the non+popular companies' such as closely+held
companies. If the credit rating is good' the pu#lic will invest in these companies' even
if they do not ,now these companies.
Fct as a =ar,eting Tool H
Credit rating not only helps to develop a good image of the company among
the investors' #ut also among the customers' dealers' suppliers' etc. Bigh credit rating
can act as a mar,eting tool to develop confidence in the minds of customers' dealer'
suppliers' etc.
Belps in Arowth and &1pansion
Credit rating ena#les a company to grow and e1pand. This is #ecause #etter credit
rating will ena#le a company to get finance easily for growth and e1pansion.
De+e$it# of C$e%it R&tin'
ossi#ility of Bias &1ist
The information collected #y the rating agency may #e su#Dect to personal #ias of the
rating team. Bowever' rating agencies try their #est to provide an un#iased opinion of the
credit $uality of the company andKor instrument. If not' they will not #e trusted.
Improper :isclosure =ay Bappen H
The company #eing rated may not disclose certain material facts to the investigating
team of the rating agency. This can affect the $uality of credit rating.
Impact of Changing &nvironment
Rating is done #ased on present and past data of the company. %o' it will #e difficult
to predict the future financial position of the company. =any changes ta,e place due to
changes in economic' political' social' technological' legal and other environments. Fll
this will affect the wor,ing of the company #eing rated. Therefore' rating is not a
guarantee for financial soundness of the company.
ro#lems for *ew Companies

There may #e pro#lems for new companies to collect funds from the mar,et. This is
#ecause' a new company may not #e in a position to prove its financial soundness.
Therefore' it may receive lower credit ratings. This will ma,e it difficult to collect funds
from the mar,et.
:owngrading #y Rating Fgency
The credit+rating agencies periodically review the ratings given to a particular
instrument. If the performance of a company is not as e1pected' then the rating agency
will downgrade the instrument. This will affect the image of the company.
:ifference in Rating H
There are cases' where different ratings are provided #y various rating agencies for
the same instrument. These differences may #e due to many reasons. This will create
confusion in the minds of the investor.
3. CREDIT RATING ROCESS
The rating process #egins with the receipt of formal re$uest from a company desirous of
having its issue o#ligations rated #y credit rating agency. F credit rating agency constantly
monitors all ratings with reference to new political' economic and financial developments
and industry trends. The processKprocedure followed #y all the maDor credit rating agencies in
the country is almost similar and usually comprises of the following steps.
1. R&tin' Re4.e#t
The rating process #egins' with the receipt of formal re$uest for rating from a
company desirous of having its issue o#ligations under proposed instrument rated #y
credit rating agencies. Fn agreement is entered into #etween the rating agency and the
issuer company. The agreement spells out the terms of the rating assignment and covers
the following aspectsH
L It re$uires the CRF !Credit Rating Fgency" to ,eep the information
confidential.
L It gives right to the issuer company to accept or not to accept the rating.
L It re$uires the issuer company to provide all material information to the CRF
for rating and su#se$uent surveillance.
2. D&t& '&t1e$in'5An&)/#i#
To get all the information necessary for analysis' @Credit+Rating3 agency
sends a client the letter with information re$uirementsH a list of all the information
and documents necessary for credit rating analysis. @Credit+Rating3 guarantees that
your confidential information will #e ,ept safe.
3. M&n&'e+ent Meetin'#
=eetings and consultations with client company managers and officials are
very important in the process of credit rating assignment. Fs a rule' we need two or
three meetings. In the first meeting analysts would as, $uestions a#out financial plans
and further development prospects. This information helps us to remain o#Dective in
assessment of client3s financial position for the long+term period.
4. R&tin' ,o++ittee5A##i'n+ent of R&tin'
Rating team of the agnecy e1amines all the data' information and documents.
It also considers all the points presented #y the client. The team then recommends the
rating.
!. A%(i,e to t1e Co+*&n/5 in#tit.tion 6
The CompanyK institution are informed a#out the rating proposed #y the rating
agencies.
3. A**e&)
If the CompanyK institution feel that the rating can #e improved and has
ade$uate reason for it' it can appeal so to the agency. %uch appeal should #e
su#stantiated with proper reasoning and Dustification. 8n appeal the agency may or
may not revise the rating.
7. .0)i,&tion
:ecision a#out rating pu#lication is ta,en #y a client individually. Client may
decide not to pu#lish assigned rating. &ven if rating is not pu#lished the procedure of
credit rating assignment remains useful as conclusions of agency analysts written in
the rating report may help to determine factors influencing client3s credi#ility. Their
improvement in the future may lead to credit rating upgrade. Fgency may not su#mit
pu#lication of upgradesKdowngrades of once pu#lished rating to client3s approval.
8. A**e&)
If a client thin,s that in the process of rating assignment some important
factors have not #een ta,en into consideration' client3s authorized representatives
may appeal to rating committee within the ne1t ten days after rating assignment. The
appeal will #e accepted only if a client can #ring new data and documents that are
important for rating procedure. Ffter e1amination of these documents' credit rating
committee will ta,e a decision which cannot #e appealed .Fppeal procedure does not
influence on client3s rights on rating pu#lication.
9. S.$(e)i&n,e &n% Ann.&) Re(ie-
Rating is a dynamic activity. %o rating has to #e monitored continuously. Flso it
is mandatory.
7. CREDIT RATING AGENCY IN INDIA
C$e%it R&tin' Info$+&tion Se$(i,e# of In%i& Li+ite% :CRISIL;.
In(e#t+ent Info$+&tion &n% C$e%it R&tin' A'en,/ of In%i& :ICRA;.
C$e%it An&)/#i# < Re#e&$,1 Li+ite% :CARE;.
D.ff < 1e)*# C$e%it R&tin' In%i& $i(&te Lt%. :DCR In%i&;
Oni,$& C$e%it R&tin' A'en,/ of In%i& )i+ite%.
7.1. CRISIL : C$e%it $&tin' &n% info$+&tion #e$(i,e# of In%i& )t%. ;
CRI%I9' IndiaGs first credit rating agency' is incorporated' promoted #y the erstwhile ICICI
9td' along with .TI and other financial institutions. The head office of the company is
located at mum#ai and it has esta#lished offices outside india. it is a glo#al analytical
company providing ratings 'research and ris, and policy advisory services.it is the largest
credit rating agency in India. CRI%I93s maDority shareholder is %TF*:FR: and 88R3s.
4Ith sustaina#le competitive advantage arising from their strong #rand' unmatched
credi#ility' mar,et leadership across #usinesses' and large customer #ase' they deliver
analysis' opinions' and solutions that ma,e mar,ets function #etter.
they defining trait is our a#ility to convert data and information into e1pert Dudgements and
forecasts across a wide range of domains' with deep e1pertise and complete o#Dectivity.
Ft the core of their credi#ility' #uilt up assiduously over the years' are our valuesH Integrity'
Independence' Fnalytical Rigour' Commitment and Innovation.
CRI%I9 launches &ducation Arading' #eginning with #usiness schools
CRI%I9 Rating enhances access to funding for %=&s2 Fnnounces ?0'000th %=&
Rating
CRI%I9 Ratings launches %olar grading
CRI%I9 Research launches Aold and Ailt Inde1
CRI%I9 Alo#al Research ; Fnalytics receives *F%%C8= &1emplary Talent
ractices Fward
CRI%I9 was set up in the year 198C in order to rate the firms and then entered into the field
of assessment service for the #an,s. Bighly s,illed mem#ers manage the agency. =s. Roopa
Eudva who acts as the =anaging :irector and Chief &1ecutive 8fficer of the company heads
it. The company has set up large num#er of committees to loo, after dispersal of various
services offered #y the company for e1ample' investor grievance committee' investment
committee' rating committee' allotment committee' compensation committee and so on. The
head office of the company is located at =um#ai and it has esta#lished offices outside India
also.
CRI%I9 Ratings is the only ratings agency in India to operate on the #asis of sectoral
specialization. CRI%I9 Ratings plays a leading role in the development of the de#t mar,ets
in India. CRI%I9 has also spearheaded the formation of the Cari CRI%' the worldGs first
regional credit rating agency.
LONG TERM
INSTRUMENT
SHORT=TERM
I NSTRUMENTS
CRISIL AAA
:Hi'1e#t S&fet/;
Instruments with this rating are
considered to have the highest
degree of safety regarding timely
servicing of financial o#ligations.
%uch instruments carry lowest credit
ris,.
CRISIL A1
CRISIL AA
:Hi'1 S&fet/;
considered to have high degree of
safety regarding timely servicing of
financial o#ligations. %uch
instruments carry very low credit
ris,.
CRISIL A2
CRISIL A
:A%e4.&te S&fet/;
considered to have ade$uate degree
of safety regarding timely servicing
of financial o#ligations. %uch
instruments carry low credit ris,.
CRISIL A3
CRISIL """
:Mo%e$&te S&fet/;
considered to have moderate degree
of safety regarding timely servicing
of financial o#ligations. %uch
instruments carry moderate credit
ris,.
CRISIL A4
CRISIL ""
:Mo%e$&te Ri#>;
considered to have moderate ris, of
default regarding timely servicing of
financial o#ligations.
CRISIL D
CRISIL "
:Hi'1 Ri#>;
considered to have high ris, of
CRISIL C
:?e$/ Hi'1 Ri#>;
considered to have very high ris, of
CRISIL D
Def&.)t
Instruments with this rating are in
default or are e1pected to #e in
default soon.
CRISIL Ri#> So).tion#
198C
(anuary ?9H CRI%I9' IndiaGs first credit rating agency' is incorporated'
promoted #y the erstwhile ICICI 9td' along with .TI and other
financial institutions.
=r. * Maghul and =r. radip %hah are CRI%I9Gs first Chairman and
=anaging :irector' respectively.
1988
(anuary 1H CRI%I9 commences operations within a year of its
incorporation. The #usiness environment is far from promising for the
one+year old + the lending rates are fi1ed' and India has no such thing
as a corporate #ond mar,et as yet. Fnd' whatGs more' credit rating is
an idea thatGs far ahead of its times.
1990
The CRI%I9CFR: %ervice + providing comprehensive information
and analytical opinion on IndiaGs corporate entities + is launched.
1991
:espite the odds' and the initial lac, of mar,et acceptance of credit
ratings' CRI%I9Gs operations are now well esta#lished. It #egins to
ac$uire #rand identity' with a reputation for analytical rigour and
independence.
199?
CRI%I9 offers technical assistance and training to help set up Rating
Fgency =alaysia Berhad' and =FF98T' the Israeli securities rating
company.
199<
CRI%I9Gs I8 is a whopping success + its ?0' 00'000 shares' sold at a
premium of Rs.)0 per share' are oversu#scri#ed #y ?.)C times.
199)
=r. R Ravimohan ta,es over as CRI%I9Gs =anaging :irector.
CRI%I9 diversifies #usiness portfolio with a strategic entry into
advisory services' and wins its first maDor mandate in the
infrastructure policy advisory domain.
199/
In partnership with the *ational %toc, &1change of India 9td
!*%&I9"' CRI%I9 develops and launches the CRI%I9/00 &$uity
Inde1' helping investors clue in on stoc, price movements.
199>
CRI%I9 forges a strategic #usiness alliance with %tandard ; oorGs
!%;" Ratings Aroup. The tie+up is part of CRI%I9Gs strategy to
develop its s,ills and processes.
199C
%; ac$uires a 9.>8 per cent sta,e in CRI%I9. The alliance with the
worldGs leading rating agency adds a new dimension to CRI%I9Gs
methodologies. It provides CRI%I9 with e1posure to the international
rating mar,ets and to %;Gs rating processes.
1998
CRI%I9 sets up India Inde1 %ervices 9td !II%9"' a Doint venture with
*%&I9' to provide a variety of indices and inde1+related services and
products to IndiaGs capital mar,ets.
1999
CRI%I9Gs proprietary Ris, Fssessment =odel !RF=" #ecomes the
#an,ing industry standardH given the heightened regulatory focus on
the #an,sG ris, management practices' RF= serves as a customised
credit rating model for the #an,s.
?000
CRI%I9 ac$uires the #usiness' and #rand' I*-FC' of Information
roducts and Research %ervices !India" vt 9td. I*-FC is a leading
provider of research to IndiaGs financial sector. The ac$uisition
strengthens CRI%I9Gs research #usiness' and ma,es it IndiaGs leading
provider of integrated research.
CRI%I9 launches the CRI%I9 Composite erformance Ran,ing
!CRI%I9NCR" to provide performance evaluation standards and
investment decision support to mutual fund houses' distri#utors' and
investors.
?001
CRI%I9 sets up su#sidiary' Alo#al :ata %ervices of India 9td' to
standardize pu#lished financial data for analysis.
CRI%I9 launches =utual -und Fwards in association with C*BC+
TM18 + a #enchmar, award for IndiaGs #est performing mutual funds.
CRI%I9 launches the CR!" #oun$ %&ou$&t "eader 'C#%"(
)*ard + to attract outstanding talent and provide a platform to IndiaGs
future #usiness leaders to showcase their views.
?00?
CRI%I9 sets upH
The Centre for &conomic Research + to apply economic principles to
live #usiness situations
CRI%I9 =ar,et 4ire + to provide real+time financial news services to
help clients ma,e pricing+ and investment+related decisions
?00<
CRI%I9 sets up its investment and ris, management services group to
offer integrated ris, management solutions and advice to #an,s and
corporates.
CRI%I9 follows it up with its first overseas ac$uisition +
&cono=atters 9td !later the Aas %trategies Aroup"' a 9ondon+#ased
company providing natural gas related consulting' information and
training' and conference+organizing services.
?00) CRI%I9 e1pands its glo#al reach further with an e$uity investment in
the worldGs first regional rating agency' the Cari##ean Information
and Credit Rating %ervices 9imited !CariCRI%"' which CRI%I9 also
helps set up.
The CRI%I9 Fwards for &1cellence in =unicipal Initiatives are
instituted' to recognize outstanding programms in ur#an development.
?00/
The strategic alliance with %; since 199> culminates in %;Gs
ac$uiring maDority control of CRI%I9.
CRI%I9 ma,es its second overseas ac$uisition' of Irevna' thus adding
e$uity research to its wide canvas of wor,. Irevna is a leading glo#al
e$uity research and analytics company.
CRI%I9 launches !mall and +edium ,nterprise '!+,( Ratin$s to
serve the specialized needs of the %=& sector.
CRI%I9 partners C*BC+TM18 for &merging India Fwards + the first
platform to recognize and reward the achievements of IndiaGs %mall ;
=edium &nterprises.
?00>
CRI%I9 launches I8 grading services to provide investors with
independent' relia#le' and consistent assessments of the fundamental
strengths of new pu#lic issues.
Irevna is ran,ed glo#ally as the top Investment Research 8utsourcing
-irm #y The Blac, Boo, of 8utsourcing.
?00C
=s. Roopa Eudva ta,es over as =anaging :irector and C&8 of
CRI%I9' following =r. RavimohanGs appointment as =anaging
:irector and Region Bead of %;' %outh Fsia.
CRI%I9 assigns IndiaGs first Ban, 9oan Rating under the Reserve
Ban, of IndiaGs Basel+II related regulations.
The ension -und Regulatory and :evelopment Futhority awards
CRI%I9 with a prestigious mandate to assist in the selection of -und
=anagers under the *ew ension %cheme.
The Blac, Boo, of 8utsourcing ran,s Irevna the *o. 1 -inancial
%ervices Industry Fnalytics 8utsourcing -irm.
CRI%I9 launches Real &state Fwards with C*BC F4FFJ. The
award honors IndiaGs e1emplary developers and #uilders.
?008
CRI%I9 launches Comple1ity 9evels' an initiative to strengthen
IndiaGs capital mar,ets #y providing greater transparency to investors.
CRI%I9Gs revenues cross Rs./ #illion in ?008.
?009 CRI%I9Gs %=& Ratings group assigns its /000th %=& rating.
CRI%I9 captures a#out half of IndiaGs #an, loan rating mar,et.
Irevna is ran,ed glo#ally #y The Blac, Boo, of 8utsourcing as the
*o. 1 Investment Research and Fnalytics 8utsourcing -irm.
CRI%I9 Research launches Independent &$uity Research !I&R".
?010
CRI%I9 moves into a new' corporate head office + the new CRI%I9
Bouse' at owai' =um#ai' is a state+of+the+art' green #uilding.
CRI%I9 %=& Ratings crosses its 1/'000th %=& rating.
CRI%I9 launches Real &state %tar Ratings.
CRI%I9 ac$uires ipal Research' further strengthening its leadership
in the E8 industry.
?011
CRI%I9 launches &ducation Arading' #eginning with #usiness schools
CRI%I9 Rating enhances access to funding for %=&s2 Fnnounces
?0'000th %=& Rating
CRI%I9 Ratings launches %olar grading
CRI%I9 Research launches Aold and Ailt Inde1
CRI%I9 Alo#al Research ; Fnalytics receives *F%%C8=
&1emplary Talent ractices Fward
F.n,tion# of ,$i#i)
R&tin'#
CRISIL R&tin'# :
It is the only ratings agency in India with sectoral specialization It has played a
critical role in the development of the de#t mar,ets in India. The agency has developed
new ratings methodologies for de#t instruments and innovative structures across sectors.
CRI%I9 Ratings provides technical ,now+how to clients all over the world and has helped
set up ratings agencies in =alaysia !RF="' Israel !=FF98T" and in the Cari##ean.
Re#e&$,1
It provides research' analysis and forecasts on the Indian economy' industries and
companies to over /00 Indian and international clients across financial' corporate' consulting
and pu#lic sectors.
CRI%I9 -und %ervicesH It provides fund evaluation services and ris, solutions to the
mutual fund industry.
The Centre for &conomic ResearchH It applies economic principles to live #usiness
applications and provide #enchmar,s and analyses for IndiaGs policy and #usiness
decision ma,ers.
Investment Research 8utsourcingH CRI%I9 added e$uity research to its wide
#ou$uet of services' #y ac$uiring Irevna' a leading glo#al e$uity research and
analytics company. Irevna offers investment research services to the worldGs leading
investment #an,s and financial institutions.
A%(i#o$/
CRISIL Inf$&#t$.,t.$e A%(i#o$/6
It provides policy' regulatory and transaction level advice to governments and
leading organizations across sectors.
In(e#t+ent &n% Ri#> M&n&'e+ent Se$(i,e#6
CRI%I9 Ris, %olutions offers integrated ris, management solutions and
advice to Ban,s and Corporates #y leveraging the e1perience and s,ills of CRI%I9 in
the areas of credit and mar,et ris,.
7.2. ICRA : In(e#t+ent Info$+&tion &n% C$e%it R&tin' A'en,/
of In%i& Li+ite%;
ICRF 9imited !formerly Investment Information and Credit Rating Fgency of India 9imited"
was set up in 1991 #y leading financialKinvestment institutions' commercial #an,s and
financial services companies as an independent and professional Investment Information and
Credit Rating Fgency.
Today' ICRF and its su#sidiaries together form the ICRF Aroup of Companies !Aroup
ICRF". ICRF is a u#lic 9imited Company' with its shares listed on the Bom#ay %toc,
&1change and the *ational %toc, &1change.
ICRA@S G$&%in' of IO
ICRFGs Arading of Initial u#lic 8fferings !I8s" is a service aimed at facilitating
assessment of e$uity issues offered to the pu#lic. The Arade assigned to any individual I8
is a sym#olic representation of ICRFGs assessment of the GfundamentalsG of the issuer
concerned on a relative grading scale. I8 Arades are assigned on a five+point point scale'
where I8 Arade / indicates the highest grading and I8 Arade 1 indicates the lowest
grading' i.e. a higher score indicates stronger fundamentals. Fn ICRF I8 Arade does not
comment on the valuation or pricing of the issue that has #een graded' nor does it see, to
indicate the li,ely returns to shareholders from su#scri#ing to the I8. The emphasis of the
I8 Arading e1ercise is on evaluating the prospects of the industry in which the company
operates' the companyGs competitive strengths that would allow it to address the ris,s
inherent in the #usinesses and effectively capitalize on the opportunities availa#le as well as
the companyGs financial position. In case the I8 proceeds are planned to #e used to set up
proDects' either Areenfield or Brownfield' ICRF evaluates the ris,s inherent in such proDects'
The capacity of the companyGs management to e1ecute the same' and the li,ely #enefits
accruing from the successful completion of the proDects in terms of profita#ility and returns
to shareholders. ICRFGs five point I8 Arading %cale is as followsH
I8 Arade / %trong fundamentals
I8 Arade ) F#ove+average fundamentals
I8 Arade < Fverage fundamentals
I8 Arade ? Below+average fundamentals
I8 Arade 1 oor fundamentals
The company changed its name to ICRF 9imited' and went pu#lic on 1< Fpril 199C'
with a listing on the Bom#ay %toc, &1change and the *ational %toc, &1change.
=oodyGs continues to #e the largest single shareholder in ICRF. ICRF has a pan+
India presence and has offices in 8 locations. Fpart from the four metros' it has
offices in une' Fhmeda#ad' Bangalore and Bydera#ad.
ICRF 9imited
Type u#lic Traded as B%& H /<?8</
*%&H ICRF Industry -inancial services -ounded 1991 Bead$uarters *ew :elhi'
India Eey people *aresh Ta,,ar' C&8 %ervices Credit ratings
-inancial consulting 8perating income 1'?9< million !.%O?/.8 million" *et income
))9 million !.%O8.9> million"
P1Q
%u#sidiaries T. ICRF Indonesia
ICRF 9an,a 9imited
ICRF =anagement Consulting %ervices 9imited
ICRF Techno Fnalytics 9imited
ICRF 8nline 9imited
P?Q
4e#site www.icra.in
7.3. CARE :C$e%it &n&)/#i# &n% $e#e&$,1 )i+ite%;
CFR& Ratings commenced operations in Fpril 199< and over nearly two decades' it has
esta#lished itself as the second+largest credit rating agency in India. 4ith the rating volume
of de#t of around Rs.<<'0>? #n !as on (une <0' ?011" ' CFR& Ratings is proud of its rightful
place in the Indian capital mar,et #uilt around investor confidence. CFR& Ratings has also
emerged as the leading agency for covering many rating segments li,e that for #an,s' su#+
sovereigns and I8 gradings.
CFR& Ratings provides the entire spectrum of credit rating that helps the corporates to raise
capital for their various re$uirements and assists the investors to form an informed
investment decision #ased on the credit ris, and their own ris,+return e1pectations. 8ur
rating and grading service offerings leverage our domain and analytical e1pertise #ac,ed #y
the methodologies congruent with the international #est practices. 4ith maDority
shareholding #y leading domestic #an,s and financial institutions in India' CFR&3s intrinsic
strengths have also attracted many other investors.
CFR& was registered #y %&BI as per %ecurities ; &1change Board of India Regulations
1999.%ervices offered #y CFR& The various services offered #y CFR& includeH
R&tin' Se$(i,e#6
4ith regard to rating services offered #y CFR& or Credit Fnalysis ; Research 9td' the
agency carries out rating of the following de#t instrumentsH
%tructured o#ligations
Commercial paper
:e#entures
-i1ed deposits
Bonds
C$e%it Re*o$t#
In addition to rating industrial houses' Credit Fnalysis ; Research 9td !CFR&" also does
rating of financial institution' state governments' municipalities' special purpose vehicles.
Credit Fnalysis ; Research 9td !CFR&" also prepares credit reports. These credit reports are
availed of #y different corporate houses. The credit reports wor,ed out #y CFR& are
instrumental in ma,ing decisions pertaining to colla#orations' Doint ventures' mergers'
ac$uisitions.
?&).&tion#
CFR& conducts enterprise evaluations for #ig investors' #usiness partners !e1isting partners
as well as prospective partners"' managements of #ig companies. The Indian governmentGs
:isinvestment Commission had availed the services of CFR& for carrying out evaluation of
state owned enterprises' which were ?0 in num#er.
C$e%it A**$&i#&)H
Credit Fnalysis ; Research 9td !CFR&" also assists non #an,ing companies and different
#an,s in setting up or #ringing a#out modifications in the credit appraisal.
Re(ie-in' De0t M&$>et6
In order to remain a#reast with the prevailing mar,et conditions' CFR& pu#lishes a #ulletin
every month. The #ulletin is called :e#t mar,et review. This #ulletin contains information
regarding the latest developments in the de#t mar,ets. It also pu#lishes information regarding
changes in the economic structure of the country.
A #>e)et&) o.t)ine of t1e i+*o$t&nt #e$(i,e# offe$e% 0/ C$e%it An&)/#i# <
Re#e&$,1 Lt% :CARE;6
A%(i#o$/ #e$(i,e#
reparing credit reports
Conducting studies in different
sectors.
R&tin' #e$(i,e#
:ifferent ,inds of de#t+
Converti#le #onds
Bonds
:e#entures
Commercial paper
Certificates of deposits
fi1ed deposits
Inter corporate deposits
Ruasi de#ts
G$&%in' #e$(i,e# I8 !initial pu#lic offer" gradings.

7.4. DCR: D.ff < 1e)*# ,$e%it $&tin' in%i& )i+ite%;
It was founded in 19<? to provide high $uality investment research services focused on the
utility industry. 8ver the decades' it evolved into a diversified financial services firm that
provides financial advisory' investment #an,ing' credit rating and investment management
services. The investment management and credit rating #usinesses were ac$uired #y Mirtus
Investment artners and -itch' respectively. The firm3s current management team ac$uired
:uff ; helps3 financial advisory and investment #an,ing #usiness in ?00). The following
year' :uff ; helps strengthened its valuation capa#ilities with the ac$uisition of %tandard ;
oorGs Corporate Malue Consulting #usiness
F leading glo#al financial advisory and investment #an,ing firm' :uff ; helps !*7%&H
:.-" #alances analytical s,ills' deep mar,et insight and independence to help clients ma,e
sound decisions. The firm provides e1pertise in the areas of valuation' transactions' financial
restructuring' alternative assets' disputes and ta1ation. 4ith more than 1'000 employees'
:uff ; helps serves clients from offices in *orth Fmerica' &urope and Fsia.
rofile of :uff ; helps Credit Rating India rivate 9td !:CR India"
:uff ; helps Credit Rating India rivate 9td !:CR India" rated the fore1 de#t o#ligations
of India as G BBB+G or a Triple B =inus. This rating is of great importance for the economy of
India and the credi#ility of the national government.
This rating reflects the fact that the Indian national government is trying its #est to improve
the state of Indian economy. Fs per the rating of :CR India' the national government of
India is trying to #ring a#out a #etter economic environment through the introduction of
several economic policies and plans for the last 1C years.
8ver the years India has had powerful accounts of payments. %ince the decade of 1990s the
records of de#t service have also #een impressive. The e1ternal de#t indicators of India are
also showing #etter patterns. Fll these support the rating provided #y :uff ; helps Credit
Rating India rivate 9td !:CR India".
D.ff < 1e)*# C$e%it R&tin' In%i& $i(&te Lt% :DCR In%i&; Se$(i,e#
%&e ser-ices pro-ided by .uff / 0&elps Credit Ratin$ ndia 0ri-ate "td '.CR ndia(
are considered to be at par *it& ot&er leadin$ pro-iders of credit ratin$ ser-ices in
ndia li1e Credit Ratin$ nformation !er-ices of ndia "imited 'CR!"(2 34CR)
Credit Ratin$ )$ency of ndia "td.2 n-estment nformation and Credit Ratin$ )$ency
of ndia 'CR)(2 3peration Researc& 5roup / +ar1etin$ / Researc& 5roup and
Credit )nalysis / Researc& "imited 'C)R,(.
Ae/ Hi#to$i,&) Hi'1)i'1t#
1932 :uff ; helps opened to provide investment research2 e1panded
services su#stantially over su#se$uent decades
1994 %old credit rating and investment management #usiness
2BB! Fc$uired %tandard ; oorGs Corporate Malue Consulting' which
included wC3s legacy valuation #usiness
2BB3 Fc$uired Chan in Capital artners
2BB7 Conducted initial pu#lic offering via *7%&
Fc$uired Rash ; Fssociates
2BB8 Fc$uired :u#ins,y ; Company
Fc$uired Eane Reece Fssociates
Fc$uired 9umin &1pert Aroup
2BB9 -inancial advisor to the &1aminer in the 9ehman BrotherGs
#an,ruptcy
Maluation advisor to the &uropean Commission
Maluation advisor for the ..%. Congressional 8versight
CommitteeGs Trou#led Fsset Relief rogram !TFR"
2B1B Fc$uired Cole ; artners' esta#lishing a presence in Canada
Fc$uired :ynamic Credit artnersG ..%. consulting #usiness
Fc$uired (une Consulting Aroup
2B11 Fc$uired Arowth Capital artners
Fc$uired =CR' greatly e1panding our presence in the .E
Fc$uired R%= Richter3s financial restructuring practice in
Toronto
Fc$uired age mill artners
&1pert witness regarding the =ad off &state
2B12 Fdministrator for Rangers in the largest foot#all clu# insolvency
in .E history
7.!. Oni,$& C$e%it R&tin' A'en,/ of in%i& )i+ite%
8nicra Credit Rating Fgency is one of the leading Credit and erformance Rating agencies
in India. It provides ratings' ris, assessment and analytical solutions to Individuals' =%=&s
and Corporates.
These services ena#le the lender or service provider to ma,e smart' value #ased decisions on
the Individuals' =%=&s and corporates #y providing them essential information that
includes financial' operational' productivity and <>0 degree analysis' thus providing a holistic
view a#out the entity.
Third party credit and performance rating and assessment helps to create 5trust6 #etween
players in mar,ets that underpins transactions.
8*ICRF plays a central and critical role in collecting and analyzing a variety of financial'
operational' industry and mar,et information' synthesizing that information' and providing
autonomous' relia#le assessments of the entity' there#y providing sta,eholders with an
important input into their decision ma,ing process.
To realize our goal we have committed ourselves to providing the sta,eholders with
o#Dective' timely' independent and forward+loo,ing credit and performance opinions. The
foundation of that dedication is em#edded in several core principles S o#Dectivity' $uality'
independence' integrity and transparency.
=ilestones 8nicra operates as a financial services organisation. Its products and services
include Individual Credit Rating' %=& rating' &mployee Bac,ground %creening' Customer
rofiling ; Rating !CR"' Fssociate Rating and IT solutions' across the telecom' #an,ing'
health' insurance' education and auto sectors.
The company has #een ac,nowledged as pioneers in this field #y the =inistry of -inance in
the &conomic %urvey !199<T199)". It is recognised and empanelled #y the li,es of *%IC
!*ational %mall Industries Corporation 9td.' and the IBF !Indian Ban,s Fssociation"' for
performance and financial ratings. The &mployee Bac,ground %creening division is certified
#y *F%%C8= and *:=F.
The company operates with a networ, of over 1)C #ranches' covering more than /00
locations pan+India with the help of over ?/00 -leet on %treet personnel.
=ilestone 4hy onicra
2B12 Conducted first of its ,ind study in agriculture sector
9eadership achieved in the =%=& Rating Business
Completed 10000 =%=& Ratings
2BB9=11 9aunched &ducation Rating Business + Conducted %trength' wea,ness
opportunity and threat analysis !%48T" and Training *eed Fnalysis !T*F"
for engineering colleges under the Technical Education Quality
Improvement Program (TEQIP)
9aunched Mendor Rating Business
Tied with %tate Aovernment for Rating Business
9aunched Fssociate Rating Business
%inged =emorandum of understanding with ?0 Ban,sK-inancial Institutions
2BB3 9aunched Rating Business
2BB! Registration with *ational %mall Industries Corporation !=inistry of =icro'
%mall and =edium &nterprises' Aovernment of India " to underta,e =icro'
%mall and =edium &nterprises Ratings
2BB2 *ationwide Infrastructure set up
8. SE"I=REGULATOR
The capital mar,et regulator regulates rating agencies in most regions. In India' the capital
mar,ets regulator' the %ecurities and &1change Board of India !%&BI"' regulates the rating
agencies in the country. %&BI laid down an e1tensive set of regulations for rating agencies in
1999.
SE"I I##.e% G.i%e)ine# to C$e%it R&tin' A'en,ie#
%&BI vide CIRK=IR%:KCRFK>K?010 dated =ay <' ?010 has provided for certain
transparency and disclosure norms for the Credit Rating Fgencies !5CRFs6". The
maDor measures ta,en in this regard are summarized #elowH
CRFs should maintain records of the rating committee' including voting details and
notes of dissent' for a period of five years.
It has #een made mandatory for CRFs to pu#lish information a#out the historical
default rates of their rating categories and whether the default rates of these categories
have changed over time.
CRFs should ensure that its analysts do not participate in any ,ind of mar,eting and
#usiness development' including negotiations of fees with the issuer whose securities
are #eing rated. Flso' the employees involved in the credit rating process and their
dependants cannot own shares of the issuer.
CRFs while rating structured finance products' are #arred from providing
consultancy or advisory services regarding the design of the structured finance
instrument. This prohi#ition would apply to the su#sidiaries of CRFs too. 4hile
pu#lishing the ratings of structured finance products and their movements' CRFs
apart from following all the applica#le re$uirements in case of non+structured ratings
should also disclose the trac, record of the originator and details of nature of
underlying assets while assigning the credit rating.
In case of unsolicited credit ratings !the credit ratings not arising out of the
agreement #etween the CRFs and the issuer"' credit rating sym#ol should #e
accompanied #y the word 5.*%89ICIT&:6 in the same font size.
CRFs should also disclose
1. the policies' methodology and procedures in detail followed #y them regarding
solicited and unsolicited credit ratings'
?. the history of credit rating of all outstanding securities'
<. the general nature of its compensation arrangements with the issuers and
). the details of any relationship it has with the issuer whose securities are #eing rated
and any of its associate of such issuer and the CRFs or its su#sidiaries.
The ,$e%it $&tin' &'en,ie# in In%i& mainly include ICRF and CRI%I9. ICRF was formerly
referred to the Investment Information and Credit Rating Fgency of India 9imited. Their
main function is to grade the different sector and companies in terms of performance and
offer solutions for up gradation.
9. GUIDELINES FOR CREDIT RATING AGENCIES IN
INDIA

The %ecurities and &1change Board of India !Credit Rating Fgencies" Regulations'
1999 offers various guidelines with regard to the registration and functioning of the
credit rating agencies in India. The registration procedure includes application for the
esta#lishment of a credit rating agency' matching the eligi#ility criteria and providing
all the details re$uired. They have to undergo the strict e1amination procedure with
regard to the details furnished #y them. They are re$uired to prepare internal
procedures ' a#idance with circulars. They are offered guidelines regarding the credit
rating procedure' #y the Fct. The credit rating agencies are provided with compliance
officers. They are re$uired to show their accounting records.
1B. USES OF RATINGS
Credit ratings are used #y in-estors2 issuers' investment #an,s' #ro,er+dealers' and
governments. -or investors' credit rating agencies increase the range of investment
alternatives and provide independent' easy+to+use measurements of relative credit ris,2 this
generally increases the efficiency of the mar,et' lowering costs for #oth #orrowers and
lenders. This in turn increases the total supply of ris, capital in the economy' leading to
stronger growth. It also opens the capital mar,ets to categories of #orrower who might
otherwise #e shut out altogetherH small governments' startup companies' hospitals' and
universities
1B.1. R&tin'# .#e 0/ 0on% i##.e$#
Issuers rely on credit ratings as an independent verification of their own credit+worthiness
and the resultant value of the instruments they issue. In most cases' a significant #ond
issuance must have at least one rating from a respected CRF for the issuance to #e successful
!without such a rating' the issuance may #e undersu#scri#ed or the price offered #y investors
too low for the issuerGs purposes". %tudies #y the Bond =ar,et Fssociation note that many
institutional investors now prefer that a de#t issuance have at least three ratings.
Issuers also use credit ratings in certain structured finance transactions. -or e1ample' a
company with a very high credit rating wishing to underta,e a particularly ris,y research
proDect could create a legally separate entity with certain assets that would own and conduct
the research wor,. This Uspecial purpose entityU would then assume all of the research ris,
and issue its own de#t securities to finance the research. The %&Gs credit rating li,ely would
#e very low' and the issuer would have to pay a high rate of return on the #onds issued.
Bowever' this ris, would not lower the parent companyGs overall credit rating #ecause the
%& would #e a legally separate entity. Conversely' a company with a low credit rating might
#e a#le to #orrow on #etter terms if it were to form an %& and transfer significant assets to
that su#sidiary and issue secured de#t securities. That way' if the venture were to fail' the
lenders would have recourse to the assets owned #y the %&. This would lower the interest
rate the %& would need to pay as part of the de#t offering.
The same issuer also may have different credit ratings for different #onds. This difference
results from the #ondGs structure' how it is secured' and the degree to which the #ond is
su#ordinated to other de#t. =any larger CRFs offer Ucredit rating advisory servicesU that
essentially advise an issuer on how to structure its #ond offerings and %&s so as to achieve a
given credit rating for a certain de#t tranche. This creates a potential conflict of interest' of
course' as the CRF may feel o#ligated to provide the issuer with that given rating if the
issuer followed its advice on structuring the offering. %ome CRFs avoid this conflict #y
refusing to rate de#t offerings for which its advisory services were sought.
1B.2 R&tin'# .#e 0/ 'o(e$n+ent $e'.)&to$/
Regulators use credit ratings as well' or permit ratings to #e used for regulatory purposes. -or
e1ample' under the Basel II agreement of the Basel Committee on Ban,ing %upervision'
#an,ing regulators can allow #an,s to use credit ratings from certain approved CRFs !called
U&CFIsU' or U&1ternal Credit Fssessment InstitutionsU" when calculating their net capital
reserve re$uirements. In the .nited %tates' the %ecurities and &1change Commission !%&C"
permits investment #an,s and #ro,er+dealers to use credit ratings from U*ationally
Recognized %tatistical Rating 8rganizationsU !*R%R8" for similar purposes. The idea is that
#an,s and other financial institutions should not need ,eep in reserve the same amount of
capital to protect the institution against !for e1ample" a run on the #an,' if the financial
institution is heavily invested in highly li$uid and very UsafeU securities !such as ..%.
government #onds or short+term commercial paper from very sta#le companies".
CRF ratings are also used for other regulatory purposes as well. The .% %&C' for e1ample'
permits certain #ond issuers to use a shortened prospectus form when issuing #onds if the
issuer is older' has issued #onds #efore' and has a credit rating a#ove a certain level. %&C
regulations also re$uire that money mar,et funds !mutual funds that mimic the safety and
li$uidity of a #an, savings deposit' #ut without -ederal :eposit Insurance Corporation
insurance" comprise only securities with a very high *R%R8 rating. 9i,ewise' insurance
regulators use credit ratings to ascertain the strength of the reserves held #y insurance
companies.
In ?008' the .% %&C voted unanimously to propose amendments to its rules that would
remove credit ratings as one of the conditions for companies see,ing to use short+form
registration when registering securities for pu#lic sale.
This mar,s the first in a series of upcoming %&C proposals in accordance with :odd+-ran,
to remove references to credit ratings contained within e1isting Commission rules and
replace them with alternative criteria.
.nder #oth Basel II and %&C regulations' not Dust any CRFGs ratings can #e used for
regulatory purposes. !If this were the case' it would present a moral hazard"

Rather' there is a
vetting process of varying sorts. The Basel II guidelines !paragraph 91' et al."' for e1ample'
descri#e certain criteria that #an, regulators should loo, to when permitting the ratings from
a particular CRF to #e used. These include Uo#Dectivity'U Uindependence'U Utransparency'U
and others. Ban,ing regulators from a num#er of Durisdictions have since issued their own
discussion papers on this su#Dect' to further define how these terms will #e used in practice.
!See The Committee of &uropean Ban,ing %upervisors :iscussion aper' or the %tate Ban,
of a,istan &CFI Criteria".
In the .nited %tates' since 19C/' *R%R8 recognition has #een granted through a U*o Fction
9etterU sent #y the %&C staff. -ollowing this approach' if a CRF !or investment #an, or
#ro,er+dealer" were interested in using the ratings from a particular CRF for regulatory
purposes' the %&C staff would research the mar,et to determine whether ratings from that
particular CRF are widely used and considered Urelia#le and credi#le.U If the %&C staff
determines that this is the case' it sends a letter to the CRF indicating that if a regulated
entity were to rely on the CRFGs ratings' the %&C staff will not recommend enforcement
action against that entity. These U*o FctionU letters are made pu#lic and can #e relied upon
#y other regulated entities' not Dust the entity ma,ing the original re$uest. The %&C has since
sought to further define the criteria it uses when ma,ing this assessment' and in =arch ?00/
pu#lished a proposed regulation to this effect.
8n %eptem#er ?9' ?00>' .% resident Aeorge 4. Bush signed into law the Credit Rating
Reform Fct of ?00>. This law re$uires the .% %ecurities and &1change Commission to
clarify how *R%R8 recognition is granted' eliminates the U*o Fction 9etterU approach and
ma,es *R%R8 recognition a Commission !rather than %&C staff" decision' and re$uires
*R%R8s to register with' and #e regulated #y' the %&C. % ; protested the Fct on the
grounds that it is an unconstitutional violation of freedom of speech In the %ummer of ?00C
the %&C issued regulations implementing the act' re$uiring rating agencies to have policies to
prevent misuse of nonpu#lic information' disclosure of conflicts of interest and prohi#itions
against Uunfair practicesU.
Recognizing CRFsG role in capital formation' some governments have attempted to Dump+
start their domestic rating+agency #usinesses with various ,inds of regulatory relief or
encouragement. This may' however' #e counterproductive' if it dulls the mar,et mechanism
#y which agencies compete' su#sidizing less+capa#le agencies and penalizing agencies that
devote resources to higher+$uality opinions
1B.3 R&tin'# .#e in #t$.,t.$e% fin&n,e
Credit rating agencies may also play a ,ey role in structured financial transactions. .nli,e a
UtypicalU loan or #ond issuance' where a #orrower offers to pay a certain return on a loan'
structured financial transactions may #e viewed as either a series of loans with different
characteristics' or else a num#er of small loans of a similar type pac,aged together into a
series of U#uc,etsU !with the U#uc,etsU or different loans called UtranchesU". Credit ratings
often determine the interest rate or price ascri#ed to a particular tranche' #ased on the $uality
of loans or $uality of assets contained within that grouping.
Companies involved in structured financing arrangements often consult with credit rating
agencies to help them determine how to structure the individual tranches so that each
receives a desired credit rating. -or e1ample' a firm may wish to #orrow a large sum of
money #y issuing de#t securities. Bowever' the amount is so large that the return investors
may demand on a single issuance would #e prohi#itive. Instead' it decides to issue three
separate #onds' with three separate credit ratingsSF !medium low ris,"' BBB !medium
ris,"' and BB !speculative" !using %tandard ; oorGs rating system".
The firm e1pects that the effective interest rate it pays on the F+rated #onds will #e much less
than the rate it must pay on the BB+rated #onds' #ut that' overall' the amount it must pay for
the total capital it raises will #e less than it would pay if the entire amount were raised from a
single #ond offering. Fs this transaction is devised' the firm may consult with a credit rating
agency to see how it must structure each trancheSin other words' what types of assets must
#e used to secure the de#t in each trancheSin order for that tranche to receive the desired
rating when it is issued.
There has #een criticism in the wa,e of large losses in the collateralized de#t o#ligation
!C:8" mar,et that occurred despite #eing assigned top ratings #y the CRFs. -or instance'
losses on O<)0.C million worth of C:8s issued #y Credit %uisse Aroup added up to a#out
O1?/ million' despite #eing rated FFF or Faa #y %tandard ; oorGs' =oodyGs Investors
%ervice and -itch Aroup.
The rating agencies respond that their advice constitutes only a Upoint in timeU analysis' that
they ma,e clear that they never promise or guarantee a certain rating to a tranche' and that
they also ma,e clear that any change in circumstance regarding the ris, factors of a particular
tranche will invalidate their analysis and result in a different credit rating. In addition' some
CRFs do not rate #ond issuances upon which they have offered such advice.
Complicating matters' particularly where structured finance transactions are concerned' the
rating agencies state that their ratings are opinions !and as such' are protected free speech'
granted to them #y the UpersonhoodU of corporations" regarding the li,elihood that a given
de#t security will fail to #e serviced over a given period of time' and not an opinion on the
volatility of that security and certainly not the wisdom of investing in that security. In the
past' most highly rated !FFF or Faa" de#t securities were characterized #y low volatility and
high li$uiditySin other words' the price of a highly rated #ond did not fluctuate greatly day+
to+day' and sellers of such securities could easily find #uyers.
Bowever' structured transactions that involve the #undling of hundreds or thousands of
similar !and similarly rated" securities tend to concentrate similar ris, in such a way that even
a slight change on a chance of default can have an enormous effect on the price of the
#undled security. This means that even though a rating agency could #e correct in its opinion
that the chance of default of a structured product is very low' even a slight change in the
mar,etGs perception of the ris, of that product can have a disproportionate effect on the
productGs mar,et price' with the result that an ostensi#ly FFF or Faa+rated security can
collapse in price even without there #eing any default !or significant chance of default". This
possi#ility raises significant regulatory issues #ecause the use of ratings in securities and
#an,ing regulation !as noted a#ove" assumes that high ratings correspond with low volatility
and high li$uidity
11. FUTURE OF CREDIT RATING IN INDIA
Ft present commercial paper' , #onds and de#entures with maturities e1ceeding 18
month and fi1ed deposit of large non+ #an,ing companies registered with RBI are re$uired to
#e compulsorily rated. There are moves to ma,e rating compulsory for other types pf
#orrowing such as the fi1ed program of manufacturing companies. In addition' the rating
agencies are e1pected to #e called upon you enlarge volume of securitisation of de#t and
structuring of customized instrument to meet the need of issuers of different class of investor.
There are num#er of areas where rating agencies will have to cover new ground in the
coming year. The rating of municipal #onds' state government #orrowing' commericial#an,
and pu#lic sector underta,ing etc. will #e covered in the near future. %o' the outloo, for the
credit rating industry is positive.
The e1perience of India rating agencies so far is that a#out <0V of the rating are no
accepted or used. Instances are their when companies with poor rating assigned #y one
company have gone to another for #etter rating. this raise dou#t a#out efficiency of credit
rating agencies in serving the investors. Marious constraint are faced #y credit ratting
agencies. The maDor constraint is the low level disclosure #y Indian companies. Rating
agencies have complained of inade$uate access to information' poor $uality of audit and long
time lags in the availa#ility of data. The companies often do not co+operate whenever the feel
that disclosure of a particular piece of information might not #e in their interest. Fll these act
as systematic constraint on the rating service.
The India credit rating agencies have made strategic alliance with reputed
international agencies. They adopt' to a large e1tent' the rating methodologies adopted #y
their western counterparts the suita#ility of rating methods and models formulated well
developed mar,ets in the west is highly dou#tful in India condition. The rating agencies in
India have to evolve their on methodologies with in the conte1t of macro economic
environment
The environment that prevailed in Fmerica when first rating were assigned' prevails
in many developing countries today. The India capital mar,et has witnessed a tremendous
growth in the past few years. Companies are relying on capital mar,et for financing e1isting
operations as well as for new proDects rather than on institution. In this process' the average
size of de#enture issued #y company' the num#er of companies issuing de#enture end the
num#er of invertors have grown su#stantially.
Fs the num#er of companies #orrowing directly from capital mar,et increases'
investors find that the company3s size or name is no longer a sufficient assurance of the
timely payment of interest and principal. :efault #y large and well ,nown company recently
in payment of interest on fi1ed deposit or de#enture has reinforced this #elief among
investors. They felt the need for an independent and credi#le agencies which Dudges the
$uality of de#t o#ligation of different companies and assist individual and institution
investors in ma,ing investment.
In this conte1t' the credit rating information services of India limited was in 198C.
following this' investment information and credit rating agencies of India was promoted in
1991 and credit analysis and research limited was floated in199<. all the credit rating
agencies have #een approved #y the R&%&RM& BF*E 8- I*:IF.
12. CRITICISM
Credit rating agencies have #een su#Dect to the following criticismH
Credit rating agencies do not downgrade companies promptly enough. -or
e1ample' &nronGs rating remained at investment grade four days #efore the
company went #an,rupt' despite the fact that credit rating agencies had #een
aware of the companyGs pro#lems for months. 8r' for e1ample' =oodyGs gave
-reddie =ac preferred stoc, the top rating until 4arren Buffett tal,ed a#out
-reddie on C*BC and on the ne1t day =oodyGs downgraded -reddie to one tic,
a#ove Dun, #onds.
P11Q
%ome empirical studies have documented that yield spreads
of corporate #onds start to e1pand as credit $uality deteriorates #ut #efore a rating
downgrade' implying that the mar,et often leads a downgrade and $uestioning the
informational value of credit ratings.
P1?Q
This has led to suggestions that' rather
than rely on CRF ratings in financial regulation' financial regulators should
instead re$uire #an,s' #ro,er+dealers and insurance firms !among others" to use
credit spreads when calculating the ris, in their portfolio.
9arge corporate rating agencies have #een criticized for having too familiar a
relationship with company management' possi#ly opening themselves to undue
influence or the vulnera#ility of #eing misled.
P1<Q
These agencies meet fre$uently
in person with the management of many companies' and advise on actions the
company should ta,e to maintain a certain rating. -urthermore' #ecause
information a#out ratings changes from the larger CRFs can spread so $uic,ly
!#y word of mouth' email' etc."' the larger CRFs charge de#t issuers' rather than
investors' for their ratings. This has led to accusations that these CRFs are
plagued #y conflicts of interest that might inhi#it them from providing accurate
and honest ratings. Ft the same time' more generally' the largest agencies
!=oodyGs and %tandard ; oorGs" are often seen as promoting a narrow+minded
focus on credit ratings' possi#ly at the e1pense of employees' the environment' or
long+term research and development. These accusations are not entirely
consistentH on one hand' the larger CRFs are accused of #eing too cozy with the
companies they rate' and on the other hand they are accused of #eing too focused
on a companyGs U#ottom lineU and unwilling to listen to a companyGs e1planations
for its actions.
4hile often accused of #eing too close to company management of their e1isting
clients' CRFs have also #een accused of engaging in heavy+handed U#lac,mailU
tactics in order to solicit #usiness from new clients' and lowering ratings for those
firms . -or instance' =oodyGs pu#lished an UunsolicitedU rating of Bannover Re'
with a su#se$uent letter to the insurance firm indicating that Uit loo,ed forward to
the day Bannover would #e willing to payU. 4hen Bannover management
refused' =oodyGs continued to give Bannover Re ratings' which were downgraded
over successive years' all while ma,ing payment re$uests that the insurer
re#uffed. In ?00)' =oodyGs cut BannoverGs de#t to Dun, status' and even though
the insurerGs other rating agencies gave it strong mar,s' shareholders were
shoc,ed #y the downgrade and Bannover lost O1C/ million .%: in mar,et
capitalization.
The lowering of a credit score #y a CRF can create a vicious cycle and self+
fulfilling prophecy' as not only interest rates for that company would go up' #ut
other contracts with financial institutions may #e affected adversely' causing an
increase in e1penses and ensuing decrease in credit worthiness. In some cases'
large loans to companies contain a clause that ma,es the loan due in full if the
companiesG credit rating is lowered #eyond a certain point !usually a UspeculativeU
or UDun, #ondU rating". The purpose of these Uratings triggersU is to ensure that the
#an, is a#le to lay claim to a wea, companyGs assets #efore the company declares
#an,ruptcy and a receiver is appointed to divide up the claims against the
company. The effect of such ratings triggers' however' can #e devastatingH under
a worst+case scenario' once the companyGs de#t is downgraded #y a CRF' the
companyGs loans #ecome due in full2 since the trou#led company li,ely is
incapa#le of paying all of these loans in full at once' it is forced into #an,ruptcy
!a so+called Udeath spiralU". These rating triggers were instrumental in the collapse
of &nron. %ince that time' maDor agencies have put e1tra effort into detecting these
triggers and discouraging their use' and the ..%. %ecurities and &1change
Commission re$uires that pu#lic companies in the .nited %tates disclose their
e1istence.
Fgencies are sometimes accused of #eing oligopolists' #ecause #arriers to mar,et
entry are high and rating agency #usiness is itself reputation+#ased !and the
finance industry pays little attention to a rating that is not widely recognized". 8f
the large agencies' only =oodyGs is a separate' pu#licly held corporation that
discloses its financial results without dilution #y non+ratings #usinesses' and its
high profit margins !which at times have #een greater than /0 percent of gross
margin" can #e construed as consistent with the type of returns one might e1pect
in an industry which has high #arriers to entry.
Credit Rating Fgencies have made errors of Dudgment in rating structured
products' particularly in assigning FFF ratings to structured de#t' which in a
large num#er of cases has su#se$uently #een downgraded or defaulted. The actual
method #y which =oodyGs rates C:8s has also come under scrutiny. If default
models are #iased to include ar#itrary default data and URatings -actors are #iased
low compared to the true level of e1pected defaults' the =oody3s PmethodQ will
not generate an appropriate level of average defaults in its default distri#ution
process. Fs a result' the perceived default pro#a#ility of rated tranches from a
high yield C:8 will #e incorrectly #iased downward' providing a false sense of
confidence to rating agencies and investors.U 9ittle has #een done #y rating
agencies to address these shortcomings indicating a lac, of incentive for $uality
ratings of credit in the modern CRF industry. This has led to pro#lems for several
#an,s whose capital re$uirements depend on the rating of the structured assets
they hold' as well as large losses in the #an,ing industry. FFF rated mortgage
securities trading at only 80 cents on the dollar' implying a greater than ?0V
chance of default' and 8.9V of FFF rated structured C:8s are #eing considered
for downgrade #y -itch' which e1pects most to downgrade to an average of BBB
to BB+. These levels of reassessment are surprising for FFF rated #onds' which
have the same rating class as .% government #onds. =ost rating agencies do not
draw a distinction #etween FFF on structured finance and FFF on corporate or
government #onds !though their ratings releases typically descri#e the type of
security #eing rated". =any #an,s' such as FIA' made the mista,e of not holding
enough capital in reserve in the event of downgrades to their C:8 portfolio. The
structure of the Basel II agreements meant that C:8s capital re$uirement rose
Ge1ponentiallyG. This made C:8 portfolios vulnera#le to multiple downgrades'
essentially precipitating a large margin call. -or e1ample under Basel II' a FFF
rated securitization re$uires capital allocation of only 0.>V' a BBB re$uires ).8V'
a BB re$uires <)V' whilst a BB!+" securitization re$uires a /?V allocation. -or a
num#er of reasons !fre$uently having to do with inade$uate staff e1pertise and the
costs that ris, management programs entail"' many institutional investors relied
solely on the ratings agencies rather than conducting their own analysis of the
ris,s these instruments posed. !Fs an e1ample of the comple1ity involved in
analyzing some C:8s' the F$uarius C:8 structure has /1 issues #ehind the cash
C:8 component of the structure and another 1?9 issues that serve as reference
entities for O1.) #illion in C:% contracts for a total of 180. In a sample of Dust )0
of these' they had on average >/00 loans at origination. roDecting that num#er to
all 180 issues implies that the F$uarius C:8 has e1posure to a#out 1.? million
loans." imco founder 4illiam Aross urged investors to ignore rating agency
Dudgments' descri#ing the agencies as Uan idiot savant with a full command of the
mathematics' #ut no idea of how to apply them.6
=any of the structured financial products that they were responsi#le for rating'
consisted of lower $uality GBBBG rated loans' #ut were' when pooled together into
C:8s' assigned an FFF rating. The strength of the C:8 was not wholly
dependent on the strength of the underlying loans' #ut in fact the structure
assigned to the C:8 in $uestion. C:8s are usually paid out in a GwaterfallG style
fashion' where income received gets paid out first to the highest tranches' with the
remaining income flowing down to the lower $uality tranches i.e. WFFF. C:8s
were typically structured such that FFF tranches which were to receive first lien
!claim" on the BBB rated loans cash flows' and losses would tric,le up from the
lowest $uality tranches first. Cash flow was well insulated even against heavy
levels of home owner defaults. Credit rating agencies only accounted for a N/V
decline in national housing prices at worst' allowing for a confidence in rating the
many of these C:8s that had poor underlying loan $ualities as FFF. It did not
help that an incestuous relationship #etween financial institutions and the credit
agencies developed such that' #an,s #egan to leverage the credit ratings off one
another and GshopG around amongst the three #ig credit agencies until they found
the #est ratings for their C:8s. 8ften they would add and remove loans of
various $uality until they met the minimum standards for a desired rating' usually'
FFF rating. 8ften the fees on such ratings were O<00'000 + O/00'000' #ut ran up
to O1 million.
It has also #een suggested that the credit agencies are conflicted in assigning
sovereign credit ratings since they have a political incentive to show they do not
need stricter regulation #y #eing overly critical in their assessment of
governments they regulate.
Fttempts to regulate more strictly credit rating agencies in the wa,e of the
&uropean sovereign de#t crisis have #een rather unsuccessful. %ome &uropean
financial regulation e1perts have argued that the hastily drafted' unevenly
transposed in national law' and poorly enforced &. rule on rating agencies
!RXglement C& nY 10>0K?009" has had little effect on the way financial analysts
and economists interpret data or potential conflict of interests created #y the
comple1 contractual arrangements #etween credit rating agencies and their
clientsU
13.RATING METHODOLOGY FOR RIMARY
DEALERS
1. C&*it&)
The RBI norms stipulate a minimum capital of Rs. /00 million for the standalone :
operations and a Capital Fde$uacy Ratio !CFR" of 1/V of the ris,+weighted assets.
Currently' all :s meet the norm on CFR easily as the assets held #y them are
primarily in government securities' which carry zero credit ris, weight. The ratio
would #ecome important when the de#t mar,ets widen and the :s increase their
corporate de#t !non+government securities" e1posure' which have a 100V credit ris,
weight age associated with it. ICRF analyses the financial capa#ility of a : in terms
of *et worth or own funds. ICRF e1pects the capital re$uirements to increase with
increase in the scale of operations of the :. Flso' in view of the inherent ris,s in a
: #usiness' a high net worth acts as a #uffer. ICRF' while placing high importance'
views the networth of a : as a very strong #uffer against insolvency.
2. M&$>et Ri#>
The mar,et ris,' one of the inherent ris,s in the : #usiness' is e1pressed #y the
decline in the mar,et value of its assets. ICRF analyses the portfolio of the : and
su#Dects the same to stress analysis under varying interest rate scenarios. Fs the
potential loss is determined #y the duration of the portfolio' ICRF studies the a#ove
stress test for different duration and the gearing levels of the :. ICRF views the net
worth to potential loss as an important ratio while evaluating the :. In case of
erosion of the a#ove cover' ICRF e1pects the :s to scale down its operations or
infuse more capital in form of e$uity. ICRF also studies the mar,et ris, models used
#y the :' if any' for their operations and evaluates the :s contingency plans.
3. C$e%it Ri#>
%ince the :s primarily deal in government securities' the credit ris, is negligi#le.
Bowever' with the :s gradually increasing their e1posure to corporate de#t paper to
its improve yields and margins' the credit ris, would assume a greater importance.
ICRF evaluates the internal norms and the control systems used to measure the credit
ris, #y the :.
4. F.n%in' &n% Le(e$&'e
Currently the funding profile for a :s is s,ewed in favour of call money and
repo #orrowings. Fs a : is #asically a trader' it #orrows from the short+term call
mar,et and deploys them in government securities' there#y earning an interest spread.
4ith the #orrowings on call money and repo #eing repriced daily and the associated
volatility with the call mar,ets' a lower leverage would mitigate the interest rate ris,s
for the : on the lia#ility side. ICRF e1pects the :s funding profile to change in
favour of the term money mar,et once the de#t mar,et in the country deepens. F
higher proportion of the own funds in the funding profile provides comfort.
!. M&n&'e+ent &n% S/#te+#
This is one of the important factors while evaluating the ris, profile of a :.
Currently as most of the :s are #ac,ed #y strong promoters' ICRF factors in the
implicit support of the parent while evaluating the :. ICRF views a sta#le and
e1perienced management to manage the interest rate and li$uidity ris, profile of the
#usiness #etter. The a#ility of the management to retain ,ey operating personnel is an
important factor in this line of #usiness. ICRF also evaluates the internal operating
guidelines and ris, management systems such as the prudential norms and Malue at
Ris, !MFR" set in place #y the management. The adherence and efficient usage of
such systems #y the management are construed as a comforting factor. ICRF
appreciates that due to e1ternal mar,et environment' there could #e periods when the
internal norms were #reached. ICRF studies and analyses such nstances and the
actions ta,en #y the : to rectify the same. In addition' ICRF evaluates :s
performance as regards conformity regulatory norms in respect of
the primary mar,et and secondary mar,et operations in terms of #idding
commitments and turnover ratios. Though confirming to these norms are not a
pro#lem for the :s currently with a fewer num#er of : operating and steadily
growing government #orrowings programmes' ICRF feels that this could #ecome
important with entry of more players in the : #usiness and the any changes in the
regulatory norms.
3. $ofit&0i)it/
The financial performance of a : is largely dependent on e1ternal environment
such as the economic cycle' government #orrowing programme and the interest rates
movements. The profita#ility is seen over a meaningful period of time to understand
the income sta#ility of a : with respect to its peers. 4hile considering the
performance of the : in terms of revenues' gearing and Return on *etworth' ICRF
notes the profita#ility is dependent on the aggressiveness of the :. The a#ility of the
management to $uic,ly adapt to the changing environment provides comfort in form
of a relatively lower volatility in income. There are low li$uidity ris,s for a :s as
most of their assets are in government securities' which are highly li$uid. Fs their
main #usiness revolves around trading' their investments in non government
securities are usually in instruments that carry high credit rating !rating of 9FF and
e$uivalent and a#ove". The growing repo mar,et for government securities and
li,ely introduction of repo on corporate #onds further alleviates any li$uidity
concerns of a : operation
14.CONCLUSION
Credit rating as an industry has passed through several cycles and phases' and will
continue to evolve going forward. Running through all of these' however' is one common
thread' which serves as the ,ey determinant of success in the industryH
credi#ility.
In the sense of recognition #y the mar,et' credi#ility is theulitimate touchstone of a
rating agency3s success' and is #uilt up through a period of sustained performance in the core
rating area. %ome ,ey factor feeding into credi#ility areH
In%e*en%en,e &n% o0Ce,ti(it/ + signals of the agency3s freedom from #ias.
Inte'$it/ + freedom from influence' the capacity to stic, to the correct decision even
in the face of #usiness consideration.
An&)/ti,&) $i'o$ + the cultivation of analytical strength in the #edroc, of accuracy
and progress in any rating agency' and is the strongest guarantee of sustaina#le
#usiness success.
1!."I"LOGRAHY
We0#ite
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=. 7 .Ehan !financial service"
Aorden ; *atrages !financial =ar,ets ; %ervices"

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