Credit Rating

Project
on
Credit
Rating
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Journalist Thomas Friedman once said, There are two superpowers in the
world today. There is the United States and there is Moodys bond rating
service. The US can destroy by dropping bombs and Moodys can destroy you
by dropping your bonds. Rating agencies play a key role in the infrastructure
of the modern financial system.
Rating agencies, by making information widely available at a low cost have

increased market efficiency radically over the last few decades. However, in
the credit rating business, unlike any other business, the users of information
do not pay for it. Though this mechanism generates positive externalities, the
business tradition is rather strange. It is so because though investors, financial
intermediaries and other end users use the results of the rating agencies they
actually do not pay for it. The issuer of the financial instrument whose
information is disclosed by the rating agency actually pays it. This aspect
makes the rating business a different animal. The transaction is very peculiar
because the party who pays for the service does not use it and who uses it does
not pay for it.
Traditionally the agencies used to gather and analyze all sorts of pertinent
financial and non-financial information. Then they used to utilize it to provide
a rating of the intrinsic value or quality of a security. This was considered as a
convenient way for investors to judge quality and make investment decisions.
Rating agencies sell information and survive based on their ability to

accumulate and retain reputation capital. However, once regulation is passed, it
makes it mandatory for the company to incorporate ratings; rating agencies
begin to sell not only information but also valuable property rights associated
with compliance of regulation. Though the rating agencies will never force any
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company to buy their information, the companies will always try to oblige the
rating agencies by buying them. As the sale of these products generates
revenue, the rating agencies will not be willing to loose them.
How did Credit Rating evolve?
The role of financial markets in a market economy is that of an efficient

intermediator, mediating between savers and investors, mobilizing capital on
one hand and efficiently allocating them between competing uses on the other.
Such an allocative role hinges crucially on the availability of reliable
information. An investor in search of investment avenues has recourse to
various sources of information-offer documents of the issuer(s), research
reports of market intermediaries, media reports etc in addition to these
sources, Credit Rating Agencies have come to occupy a pivotal role as
information providers, particularly for credit related opinions in respect of debt
instruments; a role that have been strengthened byt the perception that their
opinions are independent, objective, well researched and credible.
The impetus for the growth of Credit Rating came from the high levels of
default in the U.S. capital markets after the Great Depression. In particular was
the 1970 default of $82 million of commercial paper by Penn Central,
consequent to which investors in commercial papers became panicky and
started refusing to rollover the commercial paper outstanding, which in turn,
resulted in massive defaults and liquidity crises. The issuers then felt the need
of getting their commercial paper programmes rated by independent credit
rating agencies to give the required degree of comfort and reassurance to their
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investors. Further impetus for the growth came when regulatory agencies
began to stipulate that institutions such as Government Pension Funds and
Insurance Comapniescould not buy securities rated below a particular grade. In
addition, investors themselves became aware of the ratings mechanism and
they started using ratings extensively as a tool of risk assessment. Merchant
bankers, underwriters and other intermediaries involved in the debt market also
found rating useful for planning and pricing the placement of debt instruments.
The other factors leading to the growing importance of the Credit Rating
Systems in many parts of the world over the last two decades are:
(1) the increasing role of capital and money markets consequent to
disintermediation;
(2) increased securitization of borrowing and lending consequent to
disintermediation;
(3) globalization of credit market;
(4) the continuing growth of information technology;
(5) the growth of confidence in the efficiency of the market mechanism; and
(6) the withdrawal of government safety nets and the trend towards privatization.
It was this growing demand on rating services that enabled credit rating
agencies to charge issuers for their services. This was much in variance with
the mode of financing used hitherto- with no fees charged to the issuers, a
credit rating agency used to provide rating information through the sale of their
publication and other materials.
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Rating, usually expressed in alphabetic or alphanumeric symbols, are a simple
and easy understood tool enabling the investor to differentiate between debt
instruments on the basis of their underlying credit quality.
The credit rating is thus a symbolic indicator of the current opinion of the
relative capability of the issuer to service its debt obligation in a timely
fashion, with specific reference to the instrument being rated. It is focused on
communicating to the investors, the relative ranking of the default loss
probability for a given fixed income investment, in comparison with other
rated instruments.
A rating is specific to debt instrument and is intended as a grade, an analysis of

the credit risk associated with the particular instrument. It is based upon the
relative capability and the willingness of the issuer of the instrument to service
the debt obligations (both principal and interest) as per the terms of contract.
Thus a rating is neither a general purpose evaluation of the issuer, nor an
overall assessment of the credit risk likely to be involved an all the debts
contracted or to be contracted by such entity.
The primary objective of rating is to provide guidance to the

investors/creditors in determining a credit risk associated with debt
instrument/credit obligation. It does not amount a recommendation to buy, hold
or sell an instrument as it does not take into consideration factors such as
market prices, personal risk preferences and other considerations which may
influence an investment decision. The rating process is itself based on givens.
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The agency does not perform an audit. Instead, it is required to rely on the
information that is provided by the issuer and collected by analyst from
different sources, including interactions in-person with various entities.
Consequently, the agency does not guarantee the completeness or accuracy of
the information on which the rating is based. The judgment is qualitative in
nature and the role of quantitative analysis is to help make the best possible
overall qualitative judgment because, ultimately, rating is an opinion.
What is Credit Rating?
Credit rating is an unbiased, objective and an independent opinion as to an

issuers capacity to meet financial obligations. Rating Agencies rating indicates
their current opinion as to the relative safety of timely payment of interest and
principal on a particular debt instrument. Usually, rating agencies ratings are
applicable to a particular debt of a company and are not a rating for the
company as a whole. The rating does not constitute a recommendation to buy
or sell or hold a particular security.
Moodys
A Rating is an opinion on the future ability and legal obligation of the issuer
to make timely payments of the principal and interest on a specific fixed
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Income security. The rating measures the probability that the issuer will default
on the security over its life, which depending on the instrument may be a
matter of days to 30 yrs or more. To addition, long term ratings incorporate an
assessment of the expected monetary loss should a default occur.
STANDARD & POORs
Credit Rating helps the investors by providing an easily recognizable, simple

tool that couples a possible unknown issuer with an informative and
meaningful symbol of credit quality.
A rating does not amount to recommendation to buy, sell or hold an instrument,

as it does not take into consideration factors such as market prices, personal
risk preferences and other considerations, which may influence an investment
decision.
What Credit Rating isnt?
It would be useful to explain what credit rating does not connote.
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First, a Rating is specific to the issue, debt or instrument that is rated. A rating
is neither a general purpose evaluation nor overall assessment of credit risk
associated in all debts contracted by an issuer.
Second, it is not recommendation to buy, hold or sell. It is an opinion, perhaps

well informed opinions.
Third, they are not predictors of default but opinions about the relative
probability of default or loss. Thus, the difference between the highest rated
instrument and another rated a rung lower is that the probability of default of
interest and principal in case of the former is lower than that of the latter.
Fourth, ratings are not guarantees against losses.onder no conditions do them

or can they predict losses due to shocks or highly unexpected situations.
Fifth, Credit Ratings relate only to Credit and thus for example have no
relationship with the risk preferences with the investors or attractiveness of
equity. Hence, the perceptions of different stake holders, that is, creditors,
lenders, shareholders, etc in responding to ratings could be different.
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Need for Credit Rating
The process of rating is independent, external review of the management, its

strategies and corporate performance. The ratings are beneficial to both the
issuers and the investors.
Issuers
For the borrowing company, a rating assists in enhancing the marketability of

the instrument. A Rating offers an issuer a wider range of funding alternatives
as well as the opportunity to raise money at a relatively lower cost and from a
larger body of lenders thus leading to a broader investor base.
Highly credit worthy companies may not necessarily be well known in the
market. A rating can facilitate fund raising for such companies.
For institutional investors who usually operate order strict investment

guidelines, it is often necessary that the securities in which they invest, carry a
credit rating assigned by a recognized Rating Agency.
A Rating also benefits an organization to differentiate itself in the market and

establish its financial standing any time required.
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Investors
As ratings serve as an objective guide to the risk involved in a particular

investment, investors use Ratings to supplement their own credit evaluation
process. Ratings assist investors, particularly in instances where they do not
have th resources or access to the management, to perform a through credit risk
analysis of the borrower.
Credit rating also facilitated comparison of relative value between competing

securities. By providing a measure of relative creditworthiness, a credit rating
can help the investors decide if they wish to lend or to invest in securities
issued by a particular issuer and to determine the return on the investment they
should demand, given the relative degree of credit risk involved.
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Use of Credit Rating
Investors
For the investor, the rating is an information service, communicating the

relative ranking of the default loss probability for a given fixes income
investment in comparison with other rated instruments.
In absence of a credit rating system, the risk perception of a common investor

vis--vis instruments largely depend on his/her familiarity with the names of
the promoters or the collaborators. Such name recognition, often used to
evaluate credit quality in underdeveloped markets cannot be an effective
surrogate for systematic risk evaluation.
It is not true that every venture promoted by a well known name will be
successful and free from default risk. Nor is it true that every venture promoted
by a relatively lesser known entity is disproportionately risk prone. What is
therefore required for an efficient allocation of resources is systematic risk
evaluation. It is rarely, if ever feasible for the corporate issuer of the debt
instrument to offer every perspective investor the opportunity to undertake
detailed risk evaluation. It is even rarer for such a heterogeneous group of
investors to arrive at a meaningful and consistent conclusion as to the relative
credit quality of the instrument, especially when they do not possess the
requisite skills of credit evaluation.
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A professional credit rating agency is well equipped with the required skills,
the competence and the credibility, all of which eliminates the role of name
recognition and replaces it with well researched and scientifically analyzed
opinions as to the relative ranking of different debt instruments in terms of
credit quality. Moreover, these ratings are symbolic and therefore easier to
understand and use once their definitions and meanings are clearly enunciated.
These ratings seek to establish a link between risk and return. The investor
uses the rating to access the risk level of the instrument and compares the
offered rate of return with his expected rate of return to optimize his risk return
preference.
A rating provided by a professional credit rating agency is of significance not

just for the individual/small investor but also for organized institutional
investor. Rating for them provides low cost supplement to their own in-house
appraisal system. Large investors could use the information provided by rating
changes, by carefully watching upgrades and downgrades and altering their
portfolio mix by operating in the secondary market. Banks in some developed
countries use the ratings of other banks and financial intermediaries for their
decisions regarding inter banking lending, swap agreements and other counter
party risks.
The investor community, in general, also benefits from other services provided
by credit rating agencies, namely, research in the form of industry reports,
corporate reports, seminars and open access to the analysts of agencies for
discussion.
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Issuers
The benefit of credit rating for the issuers stems from the faith placed by the
market on the opinions of the rating provided, and the widespread use of
ratings as a guide for investment decisions. The issuers of rated securities are
likely to have access to much wider investor base as compared to unrated
securities as a large section of investors, not having the required resources and
skills to analyze each and every investment opportunity, would prefer to rely
on the opinion of the rating agency. The opinion of a rating agency enjoying
investor confidence could enable the issuers of highly rated instruments to
access the markets even under adverse market conditions. Credit rating
provides a basis for determining the additional return which the investors must
get in order to be compensated for the additional risk that they bear.
Intermediaries
Rating is a useful tool for merchant bankers and other capital market
intermediaries in the process of planning pricing, underwriting and placement
of issues. The intermediaries, like brokers or dealers in securities, could use
rating as an input for their monitoring of risk exposures. Regulators in some
countries specify capital adequacy rules linked to credit rating for pre-
packaging of issues by way of asset securitization/structured obligations.
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Regulators
Regulatory authorities worldwide have promoted the use of credit rating by

issuing mandatory requirements by issuers. Specific rules, for instance, restrict
entry to the market of new issues rated below a particular grade, stipulate
different margin requirements for mortgage of rated and unrated instrument
and prohibit institutional investors from purchasing or holding of instruments
rated below a particular level.
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The driving force behind the rating industry is essentially the question of
reputation for analytical credibility. Following are the ingredients essential for
the rating system to function effectively and serve the interests of all the
market participants and regulators.
(1) Creditable and independent structures and procedures:
To quote from Standard and Poors- ratings are of value only as long as they
are credible. Credibility arises mainly from objectivity which results from the
rater being independent of the issuers business. The investor is willing to
accept the judgement of a particular rater, that rater gains recognition as a
rating agency.
According to Moodys-the rating agency must do all it can to preserve its

credibility and integrity in the market place. As a primary ingredient of
credibility, the agency must maintain independence from all the interested
market forces including issuers, security underwriters or the government.
A few other critical factors that serve to enhance the credibility of a rating
agency
Objectivity and impartiality of opinions
Analytical integrity and consistency
Professionalism and relevant expertise across industry
Strict rules of confidentiality relating to the sensitive and confidential
information of the issuer
Timeliness of rating review and announcement of changes
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Ability to reach a wide range of investors by means of press reports, print or
electronic publications and more investor friendly research services.
(2) Reliance on the market mechanism:
Reliance on the capital market for resource allocation generates a strong

demand for investment related information. Rating agencies provide this
information. An investor would be willing to look at rating as an important
input for his investment decision only when there is a perceived default risk.
(3) Corporate disclosure and credit education:
Rating agencies are not and they should not assume the role of regulators.
They are mostly carrying out an assignment on the mandate of an issuer
and in some countries the issuer has an option of publishing or not publishing
the rating assigned. This may result in investors not having all essential
information required for his decision. The regulatory guidelines for mandatory
disclosure of ratings could ensure that the information reaches the users.
However, it is not sufficient for the information to reach the

investor. He must be capable of arriving at meaningful conclusions by
interpreting the assigned rating. He should also be aware of the limitations of
credit rating and should not assume that the rating amounts to an insurance or
guarantee against default risk
(4) Creation of active debt market:
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The continued growth and evolution of the credit rating business would
depend on the size and growth of the debt market. An active primary and
secondary debt market is crucial for rating agencies to continue to provide their
service
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The rating process is similar for almost all the credit rating agencies. The
figure above shows the credit rating process for CRISIL which is also used by
ICRA, CARE and all other rating agencies.
This process can be explains as follows:
(1) Rating Agreement and Assignment of The Analytical Team:
The process of rating starts with the issue of the Rating Request
Letter by the issuer and the signing of the Rating Agreement. On receipt of the
request, rating agency assigns an analytical team comprising of at least two
analysts of whom one could be the lead analyst and would serve as issuers
primary contact. The analysts who have expertise in relevant business areas
will be responsible for carrying out the rating assignment.
(2) Management meeting:
Before meeting with the issuer, the analytical team obtains and
analysis information relating to the issuers financial statement, cash flow
projections and relevant information.
The analytical team then proceeds to have detailed meetings with

the companys management. The Rating Agency and the Management discuss
topics such as competitive position, strategies, financial policies, historical
performance and long-term financial and business outlook. Equal importance
is placed on discussing the issuers business risk profile and strategies, in
addition to reviewing financial data.
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The rating process ensures complete confidentiality of the provided
by the company. All information is kept strictly confidential by the ratings
group and is not used for any other purpose or any third party other than the
rating agency.
(3) Rating Committee:
After the meeting with the management, the analysts present their
report to a Rating Committee that then decides on the rating. The Rating
Committee Meeting is the only aspect of the process in which the issuer does
not participate directly. The rating is arrived at after a composite assessment of
all the factors concerning the issuer, with the key issues getting greater
attention from the Rating Committee.
Rating reviews:
If the rating is not acceptable to the issuer, he has a right to appeal for a review
of the rating. There reviews are usually taken up only if the issuer provides
fresh inputs on the issues that were considered for assigning the rating. Issuers
response is presented to the Rating Committee. If the inputs are convincing,
the committee can revise the initial rating decision.
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The Methodology of Rating by a Rating Agency:
The rating agency usually commences a rating exercise at the request of the
company. The rating methodology involves an analysis of the industry risk, the
issuers business and financial risk. The rating agency assigns a rating after
assessing all the factors that could affect the credit worthiness of the borrowing
entity. Typically, the industry risk assessment sets the stage for analyzing more
specific company risk factors and establishing the priority of these factors in
the overall evaluation. For example, if an industry is determined to be highly
competitive, careful assessment of the issuers market position is stressed. If the
company has large capital requirements, examination of cash flow adequacy
assumes major importance.
The Ratings are based on the current information provided to the credit rating
agencies by the borrowing company, or facts obtained by the Rating Agencies
from sources they consider being reliable. In evaluating and monitoring the
Ratings, the rating agencies apply both qualitative and qualitative criteria in
accordance with the industry practices.
Some important issues in credit rating:
Investment and speculative grades: These two terms have been popularized
by the regulators. Securities rated below BBB(S&P)/Baa (Moodys) are called
non investment grade or speculative grade or junk bonds. Rating agencies,
however, do not recommend as indicate the rating levels of instruments up to
which one should or should not invest.
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Surveillance: The ratings published by credit rating agencies are subjected to a
continuous surveillance during the life of the instrument till any amount is
outstanding against the specific instrument. In absence of any such
development, such reviews under surveillance are taken up periodically. A
formal and extensive written review is taken up at least once a year. However
in the event that there is some specific concern about the industry or the
issuing entity, the review is taken up immediately. As a result of such a review,
if the rating agency feels that there is a need for changing the rating, the rating
is upgraded or downgraded according to the likely impact of the changing
circumstances
On the debt servicing capability of the issuer. In all other cases, the rating is
retained at the same level.
Credit watch: when a major deviation from the expected trends of the issuers
business occurs, or when an event takes place which may have an impact on
the debt servicing capability of the issuer and may warrant a rating change, the
rating agency may put such ratings under credit watch till the exact impact of
such unanticipated developments is analyzed and the decision is taken
regarding the rating change. The credit watch listing may also specify
positive or negative outlooks. However being placed under credit watch
does not necessarily mean that there would be a rating change.
Sovereign rating ceiling: International credit rating agencies, while rating an

issue outside the issuers country or domicile, imposes a ceiling equal to the
sovereign rating assigns to the country of domicile. This implies that the rating
of any instrument of any issuer domiciled in that country would be above the
sovereign rating of the country of domicile. This concept may not, however, be
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applicable when domicile of the issuer in the country is wholly accidental to
otherwise internationally dispersed business operations.
Bank line coverage for commercial paper: According to Standard & Poors
credit overview international: an evaluation of bank line policy is an essential
component of a commercial paper rating. It is not, however, part of the rating
criteria and the rating decision itself is not persisted on the strength or amount
of bank lines.
Ownership as a rating consideration: Ownership by a strong concern may

enhance the credit rating of an entity, unless there exists a strong barrier
separating the activities of parent and subsidiary. The important issues
involved in deciding the relationship are the mutual dependence on each other,
legal relationship, to what extent one entity has the desire and ability to
influence the business of the other and how important is the operation of the
subsidiary to the owner.
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The rating coverage in India is of recent origin, beginning 1988 when the first
rating agency, CRISIL-Credit Rating and Information Services was
established. At present there are three rating agencies-
(1) CRISIL,
(2) ICRA(Investment Information and Credit Rating Agency of India Limited)
and
(3) CARE (Credit Analysis and Research).
(4) The fourth rating agency is a joint venture between Duff & Phelps, US and
Alliance Capital Limited, Calcutta.
CRISIL: It was promoted by the financial institution, ICICI, nationalized and

foreign banks and insurance companies 1988. it went public in 1992 and is the
only listed credit rating agency in India. In 1995 it entered into a strategic
alliance with Standard & Poors to extend its credit rating services to
borrowers from the overseas market. the services offered are broadly classified
as Rating, Information Services, Infrastructure Services and
Consultancy. Rating services cover rating of debt instruments- long, medium
and short term, securitized assets and builders. Information services offer
corporate research reports and CRISIL 500 index. The Infrastructure and
Consultancy division provides assistance such as Power, Telecom and
Infrastructure financing.
ICRA limited: IT was promoted by IFCI and 21 other shareholders comprising

nationalized and foreign banks and insurance companies. Established in 1991,
it is the second rating agency in India. The services offered can be broadly
classifies as Analytical Services, Advisory Services and Investment
Information services. The analytical services comprise of debt instruments and
credit assessment. The advisory services include strategic counseling, general
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assessment such as restructuring exercise and sector specific services such as
Power, Telecom, Ports Municipal ratings etc... The information or the research
desk provides research reports on specific industry, sector and corporate. The
Information services also include equity related services, that is, equity grading
and equity assessment. In 1996, ICRA entered into strategic alliance with
Financial Proforma Inc. a Moodys subsidiary to offer services on Risk
Management Training and software. Moodys and ICRA has entered into a
Memorandum of Understanding to support these efforts.
CARE: incorporated in the year 1992, it is promoted by IDBI and several other
banks and insurance companies. The devices offered cover rating of debt
instruments and sector specific industry reports from the research desk.
There are various other small agencies operating in the country but are not
significant players. The two- renowned organizations, which form a major
chunk of the world credit rating market Standard & Poors and Moodys.
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CRISIL was promoted by the financial institution, ICICI, nationalized
and foreign banks and insurance companies 1988. It went public in 1992 and is
the only listed credit rating agency in India. In 1995 it entered into a strategic
alliance with Standard & Poors to extend its credit rating services to
borrowers from the overseas market. The services offered are broadly
classified as Rating, Information Services, Infrastructure Services and
Consultancy. Rating services cover rating of debt instruments- long, medium
and short term, securitized assets and builders. Information services offer
corporate research reports and CRISIL 500 index. The Infrastructure and
Consultancy division provides assistance such as Power, Telecom and
Infrastructure financing.
CRISIL has helped shape the evolution of the debt markets in India, by
developing criteria and standards to facilitate its dynamic growth. In its role as
the pioneer in the ratings business, CRISIL has always set the standards in
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rigor of analysis, transparency and disclosure and has firmly established its
position as the provider of the most reliable opinion on risk.
CRISIL has always set the highest standards in analytical rigor and
transparency in the ratings industry in India.
What crisil does?
CRISILs association with Standard & Poors, a division of The McGraw-Hill

Companies, dates back to 1996 when both companies started working together
on rating methodologies and joint projects. S&P is the world's foremost
provider of independent credit ratings, indices, risk evaluation, investment
research, data and valuations. Since then, we have significantly broadened this
relationship, working together on critical, cutting-edge assignments for global
clients. This partnership has now culminated in Standard & Poors acquiring a
majority shareholding in CRISIL.
The following are the main functional areas of CRISIL:
(1) Ratings and Risk Assessment: CRISIL Ratings is the only ratings
agency in India to operate on the basis of sect oral specialization. It reflects
our sharpness of analysis, the responsiveness of the process and the large-scale
dissemination of opinion. CRISIL Ratings plays a leading role in the
development of the debt markets in India. The Rating Criteria & Product
Development Centre, responsible for policy research, new product
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development and ratings' quality assurance, has developed new ratings
methodologies for debt instruments and innovative structures across sectors.
(2) Policy, Regulatory and Transaction Advisory:
CRISIL Infrastructure Advisory:
Our Infrastructure Advisory enhances CRISIL's franchise in the areas of

policy-making and economic development. Our spectrum of activities includes
catalyzing economic development through creation of appropriate policy
Frameworks, sector reforms, regulatory support, project structuring and global
competitive bid process management for large and complex projects.
Gas Information & Solutions:

CRISIL has acquired UKs
Leading gas advisory and Information Company,
Gas Strategies Group Limited (earlier known as
EconoMatters limited) and its subsidiary companies. CRISIL
Now has a significant presence in the international gas and LNG
Markets.
Gas strategies is a leading global consulting firm in the domain
Of natural gas and liquefied natural gas (LNG). The Company
Focuses on market studies, project finance due diligence,
Regulation and liberalizations of markets, pipeline financial and
demand studies, pricing and contracts.
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Gas Strategies data provision service provides gas pricing and
Supply/demand data and an LNG database to companies
Worldwide. Gas strategies has a substantial resource base of
Associates with over 100 years of cumulative consulting
Experience.
(3) Investment and Risk Advisory: The Risk Advisory business provides
integrated risk management solutions and advice to Banks and Corporate by
leveraging the experience and skills of CRISIL in the areas of credit and
market risk. Taking cognizance of the market needs for integrated solutions
that quantify and manage complex risks, the Risk Advisory Group uses
cutting-edge research and methodologies. Also, the Group brings together the
experience of all business teams to offer modular or integrated solutions and
advisory services that are customized to meet client needs.
(4) Crisil research: CRISIL Research is India's largest independent integrated

research house providing accurate and reliable research, analysis and forecasts
on the Indian economy, industries and companies to over 500 Indian and
international clients across financial, corporate, consulting and public sectors.
CRISIL Research leverages on its unique, integrated research platform and
capabilities spanning the entire economy-industry-company spectrum to
deliver superior perspectives and insights to its clients, through both,
subscription products and customized solutions.
(5) Financial news: CRISILs MARKETWIRE is CRISIL's cutting-edge financial

market newswire.
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A "Wire" agency with a strong India understanding and an unparalleled
combination of news, views, analytics and tools, CRISIL Market Wire enables
clients to take pricing and investment decisions to stay ahead of the curve. It is
widely acknowledged to provide unmatched expert coverage on India's money
and fixed income markets. Backed by the experienced team of the erstwhile
Bridge News, CRISIL Market Wire spearheads CRISIL's offerings in the
market place with real-time news on multi-delivery platforms.
Credit rating at crisil:
Crisil provides rating and risk assessment services to manufacturing services,

banks, non banking financial institutions, financial institutions, housing finance
companies, municipal bodies and companies in the infrastructure sector.
CRISIL rates all rupee denominated debt obligations. Its comprehensive

offerings include ratings for long term instruments such as debentures/bonds,
preference shares, structured obligations (including asset backed securities),
fixed deposits and short term instruments such as commercial paper
programmes and short term deposits. CRISIL undertakes credit assessments of
various entities including state governments. CRISIL also assigns financial
strength ratings to insurance companies.
CRISIL through the years has continued to innovate and play the role of a
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pioneer in the development of the Indian debt market. CRISIL has pioneered
the rating of subsidiaries and joint ventures of multinationals in India and has
rated several multinational entities, both start-up entities as well as players
with a well established track record in India. Over the years, CRISIL has also
developed several structured ratings for multinational entities based on
Guarantees and Letters of Comfort from the parent as well as Standby Letter of
Credit arrangements from bankers. The rating agency has also developed a
methodology for credit enhancement of corporate borrowing programmes
through the use of partial guarantees. In essence, CRISIL is uniquely placed in
its experience in understanding the extent of credit enhancement arising out of
such structures.
Credit rating process:
CRISIL's rating process and rating committee are designed to ensure that all
assigned ratings are based on the highest standards of independence and
analytical rigor.
The rating committee comprises members who have the professional

competence to meaningfully assess the credit analysis that underlies the rating,
and have no interest in the entity being rated. A team of analysts carries out the
credit analysis . Each team has at least two members. CRISIL's analysis is
based on issuer meetings and an understanding of the business environment.
The analysis is carried out within the framework of clearly spelt-out rating
criteria.
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Specific process safeguards that ensure independence from individual or
organizational bias include:
1. Multi-member rating teams

2. Multi-tier rating process
3. Rating committee comprising experienced, competent and reputed
professionals to assign all ratings
4. Organisation-wide internal transparency. Each stage of the rating
process for all ratings, including the final rating committee discussions,
is open to all analytical staff in CRISIL's rating division
5. Rating methodologies and criteria are clearly spelt out, published and
consistently applied
CRISIL ensures confidentiality of the information obtained for the rating

exercise by putting in place appropriate process safeguards. All CRISIL
employees are required to sign a confidentiality agreement. CRISIL does not
disclose confidential information that it has obtained for the purpose of credit
rating to anyone (other than market regulators or law enforcement authorities,
if required).
The process of Rating starts with the issue of the Rating request by the issuer
and signing of the Rating agreement. CRISIL employs a multi-layered decision
making process in assigning a rating. It assigns a team of at least two analysts
who interact with the company's management.
38
Integrity of rating:
CRISIL Ratings and all its employees shall comply with all applicable laws,
rules and regulations governing CRISIL Ratings' activities,
maintaining high standards of integrity.
CRISIL Ratings and all its employees shall deal fairly and
honestly with Issuers, investors, other market participants, and the
public.
CRISIL Ratings and all its employees shall adhere to the highest
ethical standards. Rating mandates shall not be solicited by
promising specific ratings to Issuers.
CRISIL shall designate an appropriately qualified and experienced

person as the Compliance Officer. Such designation shall be notified
to all CRISIL Ratings employees. The Compliance Officer shall be
responsible for compliance with the provisions of the Code of
Conduct, and with applicable laws and regulations. The Compliance
Officer shall not be a part of CRISIL Ratings.
Any CRISIL Ratings employee who comes to know about any

unethical conduct or breach of any law, regulation, or the Code of
Conduct, by any other CRISIL Ratings employee, is required to
39
report such matter to the Compliance Officer immediately. The
Compliance Officer shall promptly take appropriate action.
Quality of rating process in India (crisil)
All rating decisions in CRISIL Ratings shall be based on well-documented

and clearly specified processes and criteria. The rating process shall be
designed to ensure that all assigned ratings are based on the highest standards
of independence and analytical rigor. The rating practices and policies
followed shall be kept updated and made available to the public free of charge.
The rating criteria and processes shall be comprehensive and rigorous, and
shall take all the relevant factors impacting the rating into account.
The rating criteria shall be regularly reviewed and updated. CRISIL Ratings
shall ensure that criteria are developed by a team with appropriate
qualifications, skills and experience in the relevant field.
To ensure that all ratings are assigned objectively and after taking into
account all the relevant issues having a bearing on the credit quality of the
issue being rated, each rating shall be assigned by a committee (known as the
Rating Committee in CRISIL) comprising competent and experienced
professionals. The composition of the Rating Committee shall be appropriate
to meaningfully assess the credit risk that underlies the rating.
Staffing and allocation of responsibilities shall duly take into account the
qualifications, training and experience of ratings personnel.
40
To ensure that there is always a second opinion and that individual biases do
not influence the analysis, the rating exercise shall be carried out by a team
comprising at least two analysts.
The rating team shall make all reasonable efforts to collect all the relevant
public and non-public information on issues which may have a bearing on the
rating
Only information that is relevant or likely to be relevant for arriving at an

objective rating is to be sought from the entity being rated (hereinafter referred
to as 'the Issuer'). Although analysts shall assess the information gathered
based on their existing knowledge, they are not required to perform the role of
auditors or investigators.
When information sufficient to arrive at a rating is collected and analyzed

within the framework of clearly spelt out parameters, the rating team shall
make a presentation to the Rating Committee covering all relevant information
and analysis.
The Rating Committee shall deliberate and carefully consider all the relevant
issues before arriving at the rating. The proceedings of the Rating Committee
shall be minted. However, in order to maintain the integrity and objectivity of
the rating processes and the robustness of internal deliberations, the minutes of
the meetings and details of the discussions are to be kept strictly confidential
and not disclosed to outsiders.
The rating assigned by the Rating Committee shall be communicated to the
41
Issuer along with the rationale underlying the assigned rating.
CRISIL Ratings must clearly establish and document a rigorous process to be

followed during the entire rating exercise, and the surveillance period. The
process shall also clearly indicate the rights and duties of the Issuers. The
Issuer shall have a right to accept or not accept the rating. CRISIL Ratings will
also entertain appeals based on material new information or clarifications. The
entire rating, surveillance and appeal process shall be published and be freely
available in public domain.
In the event of an appeal, the rating team will present the new information
and analysis along with the Issuer's views to the appropriate Rating
Committee, which will decide on the appeal.
CRISIL Ratings shall institute appropriate procedures and quality control

mechanisms to ensure objective, consistent, and timely rating actions, and
compliance with existing processes and criteria.
Default and transition studies shall be regularly conducted using empirical

ratings data. Default and transition analysis will provide an objective
assessment of the efficacy of the rating criteria and processes.
Default and transition rates derived through such studies shall be published
on a regular basis. This would provide the market participants an objective tool
to assess the reliability of CRISIL's ratings.
CRISIL Ratings shall also institute, document, and publish well-structured

surveillance and appeal processes.
42
Rating scales:
Long term instrument:
High investment grades:
AAA Debentures rated ÀAA' are judged to offer highest safety of timely
(Triple A) Highest payment of interest and principal. Though the circumstances
Safety providing this degree of safety is likely to change, such changes as
can be envisaged are most unlikely to affect adversely the
fundamentally strong position of such issues.
AA Debentures rated 'AA' are judged to offer high safety of timely

(Double A) High payment of interest and principal. They differ in safety from ÀAA'
Safety issues only marginally.
Investment grades:
A Debentures rated À' are judged to offer adequate safety of timely

Adequate Safety payment of interest and principal; however, changes in
circumstances can adversely affect such issues more than those in
the higher rated categories.
Debentures rated `BBB' are judged to offer sufficient safety of

BBB timely payment of interest and principal for the present; however,
(Triple B) Moderate changing circumstances are more likely to lead to a weakened
Safety capacity to pay interest and repay principal than for debentures in
43
higher rated categories.
Speculative grades
BB Debentures rated `BB' are judged to carry inadequate safety of

(Double B) timely payment of interest and principal; while they are less
Inadequate Safety susceptible to default than other speculative grade debentures in the
immediate future, the uncertainties that the issuer faces could lead to
inadequate capacity to make timely interest and principal payments
B Debentures rated `B' are judged to have greater susceptibility to

High Risk default; while currently interest and principal payments are met,
adverse business or economic conditions would lead to lack of
ability or willingness to pay interest or principal.
C Debentures rated `C' are judged to have factors present that make
Substantial Risk them vulnerable to default; timely payment of interest and principal
is possible only if favorable circumstances continue.
D Debentures rated `D' are in default and in arrears of interest or

In Default principal payments or are expected to default on maturity. Such
debentures are extremely speculative and returns from these
debentures may be realized only on reorganization or liquidation
Note:
1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C
to reflect comparative standing within the category.
44
2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on
Rating Watch will not carry outlooks. A rating outlook indicates the direction
in which a rating may move over a medium-term horizon of one-to-two years.
A rating outlook can be 'Positive', 'Stable' or 'Negative'. A rating outlook is not
necessarily a precursor of a rating change.
3) The contents within parenthesis are a guide to the pronunciation of the
rating symbols.
4) Preference share rating symbols are identical to debenture rating symbols
except that the letters "pf" are prefixed to the debenture rating symbols, e.g.
pfAAA ("pf Triple A").
Medium term instruments:
FAAA This rating indicates that degree of safety regarding timely payment
("F Triple A") of interest and principal is very strong.
Highest Safety
FAA This rating indicates that the degree of safety regarding timely
("F Double A") High payment of interest and principal is strong. However, the relative
Safety degree of safety is not as high as for fixed deposits with "FAAA"
rating.
FA This rating indicates that the degree of safety regarding timely

Adequate Safety payment of interest and principal is satisfactory. Changes in
circumstances can affect such issues more than those in the higher
45
rated categories.
FB This rating indicates inadequate safety of timely payment of interest

Inadequate Safety and principal. Such issues are less susceptible to default than fixed
deposits rated below this category, but the uncertainties that the
issuer faces could lead to inadequate capacity to make timely
interest and principal payments.
FC This rating indicates that the degree of safety regarding timely

High Risk payment of interest and principal is doubtful. Such issues have
factors at present that make them vulnerable to default; adverse
business or economic conditions would lead to lack of ability or
willingness to pay interest or principal.
FD This rating indicates that the issue is either in default or is expected

Default to be in default upon maturity.
Note:
1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from FAA to
FC to indicate the relative position within the rating category of the company
raising fixed deposits.
2) CRISIL may assign rating outlooks for ratings from 'FAAA' to 'FB'. Ratings
on Rating Watch will not carry outlooks. A rating outlook indicates the
direction in which a rating may move over a medium-term horizon of one-to-
two years. A rating outlook can be 'Positive', 'Stable' or 'Negative'. A rating
outlook is not necessarily a precursor of a rating change.
46
rating symbols.
Short Term Instruments Rating Scale:
P-1 This rating indicates that the degree of safety regarding timely
payment on the instrument is very strong.
payment on the instrument is strong; however, the relative degree of
safety is lower than that for instruments rated "P-1".
payment on the instrument is adequate; however, the instrument is
more vulnerable to the adverse effects of changing circumstances
than an instrument rated in the two higher categories.
payment on the instrument is minimal and it is likely to be adversely
affected by short-term adversity or less favorable conditions.
P-5 This rating indicates that the instrument is expected to be in default

on maturity or is in default.
47
Credit Quality Rating Scale
Rating Definition:
Bond fund credit quality ratings, which range from AAAf to C-f, are based
on the overall creditworthiness of the securities in a funds portfolio. The
ratings are broadly classified into two categories: secure and vulnerable.
Ratings from AAAf to BBB-f are classified as secure ratings, indicating
the relative safety of the funds portfolio against credit defaults of underlying
securities. Ratings from BB+f to C-f are classified as vulnerable ratings,
indicating the portfolios relative vulnerability to losses from credit defaults of
the underlying securities.
A credit quality rating is not a recommendation to purchase, sell or hold a

security in as much as it is not a comment on the market price, yield or
suitability for a particular investor. The ratings are based on current
information furnished by the fund or obtained from other sources that CRISIL
48
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in or unavailability of such information or based on other
circumstances. The rating symbols and definitions are as follows:
Secure Ratings:
AAAf The funds portfolio holdings provide very strong protection against
losses from credit defaults
AAf
The funds portfolio holdings provide strong protection against
Af
The funds portfolio holdings provide adequate protection against
BBBf
The funds portfolio holdings provide moderate protection against
Vulnerable Ratings:
49
BBf The funds portfolio holdings provide uncertain protection against
Bf The funds portfolio holdings exhibit vulnerability to losses from

credit defaults
Cf The funds portfolio holdings make it extremely vulnerable to losses

from credit defaults
Note: The ratings from AAf to Cf may be modified by the addition of a plus
(+) or minus (-) sign to show the relative standing within the major rating
categories.
Fund Governance and Process Quality Ratings Scale:
CRISIL Fund House Asset Management Companies rated Fund House Level 1 are
Level-1 judged to possess Highest governance levels and process quality in
fund management practices
Level-2 judged to possess High governance levels and process quality in
fund management practices.
50
Level-3 judged to possess Average governance levels and process quality in
Level-4 judged to possess Below Average governance levels and process
quality in fund management practices.
Level-5 judged to possess Poor governance levels and process quality in
Bond Fund Portfolios Rating Scales:

AAAf The funds portfolio holdings provide very strong protection against
losses from credit defaults.
AAf The funds portfolio holdings provide strong protection against

Af The funds portfolio holdings provide adequate protection against

51
BBBf The funds portfolio holdings provide moderate protection against
Bf The funds portfolio holdings provide inadequate protection against

Cf The funds portfolio holdings have factors present which make them
vulnerable to credit defaults.
Composite Performance Ranking (CPR):

Based on percentile of number of schemes considered in each category:
CRISIL CPR~1 Top 10% Very Good Performance
CRISIL CPR~2 Next 20% Good Performance
CRISIL CPR~3 Next 40% Average Performance
CRISIL CPR~4 Next 20% Below Average Performance
CRISIL CPR~ 5 Last 10% Poor Performance
Non Credit Risk Rating Scale:
52
AAAr Debentures rated AAAr are judged to offer highest safety of timely
(Triple A r) payment of interest and/ or principal. Though the circumstances
Highest Safety providing this degree of safety are likely to change, such changes as
can be envisaged are most unlikely to affect adversely the
fundamentally strong position of such issues.
Debentures rated AAr are judged to offer high safety of timely

AAr payment of interest and/ or principal. They differ in safety from
(Double A r) AAAr issues only marginally
High Safety
Debentures rated Ar are judged to offer adequate safety of timely
Ar payment of interest and/ or principal; however, changes in
(Single A r) circumstances can adversely affect such issues more than those in
Adequate Safety the higher rated categories.
Debentures rated BBBr are judged to offer sufficient safety of timely

BBBr payment of interest and/ or principal for the present; however,
(Triple B r) changing circumstances are more likely to lead to a weakened
Moderate Safety capacity to pay interest and repay principal than for debentures in
higher rated categories.
Speculative grades:
53
BBr Debentures rated BBr are judged to carry inadequate safety of timely
(Single B r) payment of interest and/ or principal; while they are less susceptible
High Risk to default than other speculative grade debentures in the immediate
future, the uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments
Debentures rated Br are judged to have greater susceptibility to

default; while currently interest and/ or principal payments are met,
Br adverse business or economic conditions would lead to lack of
(Single B r) ability or willingness to pay interest or principal.
High Risk
Debentures rated Cr are judged to have factors present that make

them vulnerable to default; timely payment of interest and/ or
principal is possible only if favorable circumstances continue
Cr
(Single C r)
Substantial Risk Debentures rated Dr are in default and in arrears of interest and/ or
principal payments or are expected to default on maturity. Such
debentures are extremely speculative and returns from these
debentures may be realized only on reorganization or liquidation
Dr
(Single D r)
In Default
Note: 1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from
AA to C to reflect comparative standing within the category.
54
2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on
Rating Watch will not carry outlooks. A rating outlook indicates the direction
in which a rating may move over a medium-term horizon of one-to-two years.
A rating outlook can be 'Positive', 'Stable' or 'Negative'. A rating outlook is not
necessarily a precursor of a rating change.

rating symbols.
4) The 'r' symbol attached to the rating indicates that the instrument has an
element of non-credit risk (such as market risk). The risk represented by the 'r'
symbol would be specific for each instrument.
5) In situations where there is any arrangement for payment on the instrument

by an obligor other than the issuer or any means of enhancing credit including
arrangements such as guarantees, letters of credit, etc., CRISIL can add the
structured obligations rating symbol '(so)' to this rating scale.
Risk Adjusted Return Ranking (RRR): In RRR, for each

category, CRISIL ranks schemes on a numerical scale (RRR1, RRR2, RRR3
and so on) to cover all schemes.
55
CRISIL Vb1+ Scheme's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity less than 4.0 years
CRISIL Vb1 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 4.0 to 4.5 years
CRISIL Vb2+ Scheme 's NAV volatility is comparable to the volatility of G-sec
CRISIL Vb3+ Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity more than 6.0 years
Bond Funds:
56
Gilt Funds:
CRISIL Vg1+ Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity less than 8 years
CRISIL Vg1 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 8 to 9 years
57
Portfolios of Maturity 12 to 15 years
Portfolios of Maturity more than 15 years
58
59
ICRA Limited formerly known as INVESTMENT INFORMATION
AND CREDIT RATING AGENCY OF INDIA LIMITED was incorporated
in 1991 by the lending financial/investment institutions, commercial banks and
financial service companies as an independent and professional Investment
Information and Credit Rating Agency. ICRA is a leading provider of
investment information and credit rating services in India.
Alliance with Moodys investors service:

The International Rating Agency Moodys INVESTOR SERVICE has
taken up stake in the equity capital of ICRA and is currently ICRAs largest
share holder. The other shareholders include banks and other financial
institutions.
The ICRA factor
(1) Facilitating efficiency in business

ICRA information products, ratings and solutions reflect
independent professional and impartial opinions which aid business to enhance
the quality of their decisions and help issuers to access a broader investor base
and even lesser known companies to access money and capital markets.
60
(2) The research factor
ICRA strongly believes that the quality and the authenticity of
information are derivatives of the organizations research base. They have
dedicated teams for Monetary, Fiscal, Industry and Sector research, and a panel
of advisors to enhance our in-house capabilities. Our research base equips us to
maintain the highest standards of quality and credibility.
(3) Committed to development of the financial market.

The focus of ICRA in the coming years will continue to be on
developing innovative concepts and products in a dynamic market
environment, generating and promoting wider investor education and interest,
enhancing efficiency and transparency in the financial market, and providing a
healthiest environment for market participants and regulators.
ICRA products and services are designed to:
Provide information and guidance to institutional and individual investors or

creditors.
Enhance the ability of the borrowers or issuers to access the money market and
the capital market for tapping a larger volume of resources from a wider range
of the investing public.
Assist the regulators in promoting transparency in the financial markets
61
Provide intermediaries with a tool to improve efficiency in the funds raising
process.
With the growth and globalisation of the Indian capital markets leading
to an exponential surge in demand for professional credit risk analysis, ICRA
has been proactive in widening its service offerings, executing assignments
including credit ratings, equity grading, specialized performance grading and
mandated studies spanning diverse industrial sectors. In addition to being a
leading credit rating agency with expertise in virtually every sector of the
Indian economy, ICRA has broad-based its services for the corporate and
financial sectors, both in India and overseas, and currently offers its services
under the following banners:
(1 ) Rating services:
As an early entrant in the credit rating business, ICRA is one of the
most experienced credit rating agencies in the country today. ICRA rates rupee
dominated debt instruments issued by manufacturing companies, commercial
banks, non banking finance companies, financial institutions, public sector
undertakings and municipalities, among others. The obligations include long
term instruments such as bonds and debentures, medium term instruments such
as fixed deposit programmes and short term instruments such as commercial
paper programmes and certificate of deposit. ICRA also rates structured
obligations and sector specific debt obligations such as instruments issued by
62
Power, Telecom and Infrastructure companies. The other services offered
include Corporate Governance rating, Stakeholder value and Governance
rating, rating of claims payable ability of Insurance companies, Project Finance
Rating and Line of Credit Rating.
(2) Information:
The Information Services Division focuses on providing authentic
data and value- added products used by intermediaries, financial institutions,
banks, asset managers, institutional and individual investors and others. The
division portfolio of products includes sector/industry- specific studies/
publications, corporate reports and mandate based studies (customized
research). These products, covering a diverse spectrum of industrial sectors
besides the economy, seek to facilitate investment decision making while
providing a perspective on underlying micro variables.
(3)Grading services:
The Grading services offered by ICRAs Information Services
Division employ pioneering concepts and methodologies and include grading
of:
(a) Construction entities (ICRA and Construction Industry Development
Council seek to provide lenders with an independent opinion on the quality of
entities graded);
(b) Real Estate Developers & Projects: (ICRA and The National Real Estate
Development Council seek to make property buyers aware of the risks
63
associated with real estate projects and with the developers ability to deliver
according to terms ).
(c) Mutual Fund Schemes: (These seek to provide an independent opinion
on the credit risk associated with investing in various mutual fund schemes).
(d) Healthcare Entities: (present an independent opinion on the quality of
care provided by healthcare entity).
(3) Advisory services:

The advisory Services Division offers wide ranging management
Advisory Services covering the areas of Strategic Practice, Risk management
Practice, Regulatory Practice and Content. While Strategy Practice focuses on
improving the organizations competitiveness across its value chain, Regulatory
Practice advises clients like Governments and Regulators on formulation of
economic and financial policies. ICRA Advisory provides consulting service at
transaction level to infrastructure projects, while under Risk Management
Practice is offered on the efficient management of risks to banks and other
lenders. On the content side, ICRA advisory provides customized and
diagnostic reports for diverse entities including governments, investors, project
developers and e-commerce websites.
THE RATING PROCESS:
ICRAs rating process is initiated on receipt of a formal request (or

mandate) from the prospective issuer. A rating team, which usually consists of
two analyst, with the expertise and skills required to evaluate the business of
64
the issuer, is involved with the rating assignment. An issuer is provided a list of
information requirements and a broad framework of discussions. These
requirements are derived from ICRAs experience of the issuers business, and
broadly cover all aspects that have a bearing on the rating.
ICRA also draws on secondary sources of information, including

its own research division. The rating involves assessment of qualitative factors
with a view to estimating the future earnings of the issuer. This requires
extensive interactions with the issuers management, specifically on subjects
related to plans, outlook, and competitive position and funding policies.
Plant visits are made to gain a better understanding of the issuers

production process, make an assessment of the state of equipment and main
facilities, evaluate the quality of technical personnel and form an opinion on
the key variables that influence the level, quality and the cost of production.
These visits also help in assessing the progress of projects under
implementation.
After completing the analysis, a Rating Report is prepared, which

is presented to the ICRA Rating Committee. A presentation on the issuers
business and management is also made by the Rating Team. The Rating
Committee is the final authority for assigning ratings.
The assigned rating, along with the key issues, is communicated to

the issuers top management for acceptance. the ratings that are not accepted
may be reviewed.. the non- accepted ratings are not disclosed and complete
confidentiality is maintained on them.
65
If the issuer does not find the rating acceptable, it has the right to
appeal for review. Such reviews are usually taken up only if the issuer provides
certain fresh inputs. During a review, the issuers response is presented to the
Rating Committee. if the inputs and/or fresh clarifications are impressive, the
Rating Committee would revise the initial rating decision.
As pat of mandatory surveillance process, ICRA monitors the

accepted ratings over the tenure of the rating instrument. The ratings are
generally reviewed once every year, unless the circumstances of the case
warrant an earlier review. The rating outstanding may be retained or
revised(that is, upgraded or downgraded) on surveillance.
The rating methodology:
ICRA considers all the relevant factors that have a bearing on the future cash
generation of the issuers. These factors include:
Industry characteristics
Competitive position of the issuer
Operational efficiency
Management quality
66
Commitment to new projects and other associate companies
Funding policies of the issue
A detailed analysis of the pat financial statements is made to assess the

performance under the real world business dynamics. Estimates of future
earnings under various sensitivity scenarios are drawn up and evaluated against
the claims and obligations that require servicing over the tenure of the
instrument being rated. Primarily, it is the relative comfort level of the issuers
cash flows to service obligations that determine the rating.
ICRAs Issuer Ratings

ICRAs Issuer Rating Scale- for assessing the general
creditworthiness of the rated entities relation to their senior unsecured
obligations. ICRAs Issuer ratings are not specific to any particular debt
Instrument issued by the rated entities.
IrAAA : The highest-credit-quality rating assigned by ICRA. The rated entity

carries the lowest credit risk. The rating is only an opinion on the general
creditworthiness of the rated entity and not specific to any particular debt
instrument.
IrAA: The high-credit-quality rating assigned by ICRA. The rated entity

carries low credit risk. The rating is only an opinion on the general
Instrument.
67
IrA: The adequate-credit-quality rating assigned by ICRA. The rated entity
carries average credit risk. The rating is only an opinion on the general
creditworthiness of the rated entity and not specific to any particular
Debt instrument.
IrBBB: The moderate-credit-quality rating assigned by ICRA. The rated entity

carries higher than average credit risk. The rating is only an opinion on the
general creditworthiness of the rated entity and not specific
to any particular debt instrument.
IrBB: The inadequate-credit-quality rating assigned by ICRA. The rated entity

carries high credit risk. The rating is only an opinion on the general
debt instrument.
IrB: The risk-prone-credit-quality rating assigned by ICRA. The rated entity

carries very high credit risk. The rating is only an opinion on the general
debt instrument.
IrC: The lowest-credit-quality rating assigned by ICRA. The rated entity

carries extremely high credit risk. The rating is only an opinion on the general
instrument.
Note:
For the Rating categories IrAA through to IrC the sign of + (plus) or (minus)
may be appended to the Rating
68
symbols to indicate their relative position within the Rating categories
concerned. Thus the Rating of IrAA+ is
one notch higher than IrAA, while IrAA- is one notch lower than IrAA.
IC
Rating scale:
Long term (including debentures, bond preference share)
Highest safety. Indicates fundamentally strong position. Risk factors

are negligible. There mat be circumstances adversely affecting the
LAAA
degree of safety but such circumstances, as may be visualized, are
not likely to affect the timely payment of principal and interest as
per terms.
LAA+
69
Highest safety. Risk factors are modest and may vary slightly. The
LAA
protective factors are strong and the prospect of timely payment
Of principal and interest as per terms under adverse circumstances, as
LAA-
may be visualized, differs from LAAA only marginally.
LA+
Adequate safety. Risk factors are more variable and greater in periods
LA of economies stress. The protective factors are average and any
adverse change in circumstances, as may be visualized may alter
LA-
the fundamental strength and affect the timely payment of the principle
and interest ad per the terms.
LBBB+ Moderate safety. Considerable variability in risk factors. The
LBBB Protective factors are below average. Adverse changes in business/
LBBB- economic circumstances are likely to affect the timely payment of
principle and interest as per the terms,
LBB+
70
LBB Inadequate safety. The timely payment of interest and principle are
LBB- more likely to be affected by present or prospective changes in the
Business or economic circumstances. The protective factors fluctuate
in case of changes in economy or business conditions.
LB+
Risk prone. Risk factors indicate that obligations may not be met
LB
When due. The protective factors are narrow. adverse changes in business
LB- and economic conditions could result in inability or willingness to
service debts on time as per the terms.
LC+
Substantial risk. There are inherent elements of risk and timely
LC servicing of debts or obligations could be possible only in case
of continued existence of favorable circumstances.
LC-
LD
71
Default. Extremely speculative. Either already in default in
payment of interest and/ or principal as per terms or expected
to default. Recovery is likely only on liquidation or re-organisation.
72
Medium term (including certificated of deposit and fixed
deposit programmes)
MAAA Highest safety. The prospect of timely servicing of the interest

and the principal as per the terms is the best
MAA+
MAA High safety. The prospect of timely servicing of the interest and the
Principal as per the terms is high but not as high as MAAA rating.
MAA-
MA+
Adequate safety. The prospect of timely payment of the interest and
MA The principal as per the terms is adequate. However, the debt
servicing maybe affected by adverse changes in the business or
MA-
Economic conditions.
73
Inadequate safety. The timely payment of interest and principal
MB+ are more likely to be affected by future uncertainties.
MB
MB-
Risk prone. Susceptibility to default is high. Adverse changes in the
business or economic conditions could result in inability or

MC+
Willingness to service debts on time and as per the terms.

MC
MC-
Default. Either already in default or expected to be in default in the near

future.
MD
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Short term (including commercial paper)
A1+ Highest safety. The prospect of timely payment of debt or the obligation
is the best
A1
A2+
High safety. The relative safety is marginally lower than in A1

A2
Rating.
A3+ Adequate safety. The prospect of timely payment of interest and
A3 installment is adequate, but any adverse change in the business or
Economic conditions may affect the fundamental strength.
A4+ Risk prone. The degree of safety is low. Likely to default in case of
A4 adverse changes in business or economic conditions.
A5 Default. Either already in default of expected of default in the near future.
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Claims paying ability (of insurance companies):
ICRAs claims paying ability ratings (CPRs) for insurance companies are
ICRAs opinion on the ability of the insurers concerned to honor policy
holders claims and obligations on time. In other words, a CPR is ICRAs
opinion on the financial strength of the insurer, from a policy holders
perspective.
Following deregulation, a paradigm shift is expected in the domestic

insurance sector as newer players and products enter the market. Given this
scenario, ICRA expects its CPRs to be an important input, influencing the
consumers choice of insurance companies and products. ICRAs rating
process involves analysis of an insurers business fundamentals and its
competitive position and focuses mainly on the insurers franchise value, its
management, organizational structure/ ownership and underwriting and
investment strategies. Besides, the analysis includes an assessment of the
insurance companys profitability, liquidity, operating and financial leverage,
capital adequacy and asset/liability management method.
76
iAAA Highest claims paying ability. Indicates fundamentally strong
position. Prospect of meeting policyholders obligations is the best.
High claims paying ability. Risk factors are modest and may vary
iAA
slightly. Prospect of meeting policyholders obligations is high and
differs from iAAA only marginally.
iA
Adequate claims paying ability. Prospect of meeting Policy
Holders obligation is adequate. The risk factors are more variable
and greater in periods of economic stress and any adverse
changes in business/economic circumstances as may be visualized,
may alter the fundamental strength.
Moderate claims paying ability. The protective factors are below

iBBB
Average and adverse changes in business and economic circumstances
are likely to affect the prospect of meeting policyholders obligations.
Inadequate claims paying ability. The protective factors fluctuate in

iBB
case of changes in business or economic conditions and prospects of
meeting policyholders obligations are more likely to be affected
by such changes.
iB Weak claims paying ability. Risk factors indicate that
77
Policyholders obligations may not be met when due. Adverse
changes in business or economic conditions could result in
inability or unwillingness to receive policyholders obligations.
iC
Lowest claims paying ability. Indicates fundamentally poor position.
Such companies may often be in default on policyholders obligations
and may be or are likely to be placed under supervision of
insurance regulators.
Corporate governance rating scales:
ICRA's Corporate Governance Rating (CGR) is meant to indicate the relative

level to which an organisation accepts and follows the codes and guidelines of
corporate governance practices. Corporate Governance practices prevalent in a
company reflect the distribution of rights and responsibilities among different
participants in the organisation such as the Board, management, shareholders
and other financial stakeholders and the rules and procedures laid down and
followed for making decisions on corporate affairs. The emphasis of ICRA
rating is on corporate's business practices and quality of disclosure standards
that addresses the requirements of the regulators and is fair and transparent for
78
its financial stakeholders The variables, which are analyzed for arriving at the
rating, are the shareholding structure, executive management processes, board
structure and processes, stakeholder relationship, transparency and disclosures
and financial discipline. Each of these variables is evaluated with respect to a
set of attributes and a composite score is computed using a proprietary model
developed by ICRA. The rating process also looks at compliance with statutory
regulations as laid down in Clause 49 of the Listing Agreement. The focus,
however, is on substance over form and compliance with regulations is only
the starting point. The ICRA opinion, is , however not a certificate of statutory
compliance or a comment on company's future financial performance, credit
rating or stock price.
CGR1 Implies that in ICRAs current opinion, the rated company has adopted
and follows such practices, conventions and codes as would provide
its financial stakeholders the highest assurance on quality of
corporate governance. ICRA opinion, howewer, is not a certificate
of statutory compliance or a comment on the rated companys
future financial performance, credit rating or stock price.
CGR2 Implies that in ICRAs current opinion, the rates compant has adopted
and follows such practices, conventions and codes as would provide
79
its financial stakeholders a high level of assurance on the quality
of corporate governance. ICRA opinion, howewer, is not a certificate
of statutory compliance or a comment on the rated companys
future financial performance, credit rating or stock price.
Implies that in ICRAs current opinion, the rated company has
CGR3 adopted the and follows such practices, conventions and codes as
would provide its financial stakeholders adequate level of assurance
on the quality of corporate governance. ICRA opinion, however, is
not a certificate of statutory compliance or a comment on the
rated companys future financial performance, credit rating or stock

price.
CGR4
Implies that in ICRAs current opinion, the rated company has adopted
the and follows such practices, conventions and codes as would
provide its financial stakeholders moderate level of assurance
on the quality of corporate governance. ICRA opinion, however, is
80
not a certificate of statutory compliance or a comment on the
Rated companys future financial performance, credit rating or stock

price.

CGR5
adoptedthe and follows such practices, conventions and codes as
would provide its financial stakeholders inadequate level of
Assurance on the quality of corporate governance. ICRA opinion,
however, is not a certificate of statutory compliance or a comment
on the rated companys future financial performance, credit rating
Or stock price.
adopted the and follows such practices, conventions and codes
as would provide its financial stakeholders low level of assurance
on the quality of corporate governance. ICRA opinion, however,
81
CGR6 is not a certificate of statutory compliance or a comment on the
rated companys future financial performance, credit rating or
stock price.
82
ICRAs stakeholders value and governance ratings:
The emphasis of ICRAs Stakeholder Value and Governance (SVG) rating is on

value creation and value management for all stakeholders of a company,
besides the companys corporate governance practice. The SVG rating
considers the companys actual performance and the accrual of the benefits of
such performance among all its stakeholders, apart from the quality of the
companys corporate governance practices. It is the combines assessment of
stakeholder value creation and management and the quality of corporate
governance practices that determines the SVG rating.
ICRAs CGR and SVG ratings help the rated corporate entity in raising funds,
listing on stock exchange, dealing with third parties like creditors providing
comfort to regulators, improving image/credibility, improving valuation and
bettering corporate governance practices through benchmarking.
Implies that in ICRAs current opinion, the rated company belongs to
SVG1 The Highest category on the composite parameters of stakeholders

value creation and management, as also corporate governance
practices. ICRAs opinion is, however, is not a certificate of statutory
compliance or a comment on the rated companys future financial
performance, credit rating or stock price.

the Highest category on the composite parameters of stakeholders
83
SVG2 practices. ICRAs opinion is , however, is not a certificate of statutory


84
SVG5 Implies that in ICRAs current opinion, the rated company belongs to
practices. ICRAs opinion is, however, is not a certificate of statutory
SVG6 Implies that in ICRAs current opinion, the rated company belongs to
practices. ICRAs opinion is , however, is not a certificate of statutory
Project finance ratings:
The envisages demand for private sector investments in infrastructure projects,

particularly in the energy and road sectors, suggests considerable potential for
adequately structured project finance transactions. Growth in such transactions
would also be driven by the inability of many potential project sponsors to
85
implement such capital intensive and highly leveraged projects on their
balance sheet without having their own credit risk profile materially impacted.
Project financing usually involves seething up of a special purpose
vehicle(SPV) , bound by a contractual matrix to various project participants,
which raises debt and services it from its own cash flows, without recourse
from its sponsors. ICRAs rating approach emphasizes the importance carefully
assessing the risks that characterize such transactions and suitably structuring
the projects to mitigate the risks.
It may be noted that if a project entity proposes to issue a debt instrument that
requires a Credit Rating, ICRA would assign the Credit Rating on its
conventional Credit Rating scale. The Project Finance rating(PFR) service is
essentially a project risk assessment exercise which may be useful to project
entity and its lenders or investors.
ICRA would also provide a detailed assessment report on the project without
assigning a formal PFR if lenders or project entities require only that.
The rating methodology involves an assessment of three broad areas:
(1) sponsor strength

(2) project risks
(3) cash flow adequacy
86
The ratings given are as follows:
PFR1 Projects classifies as PFR1 have adequate attributes of investment

grade credit. The protective factors are satisfactory.
Projects classifies as PFR1 have adequate attributes of investment

PFR2 grade credit. The protective factors are satisfactory.

PFR3

PFR4
87
88
CARE
Credit Research
And
Analysis
CARE- Credit Research and Analysis

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a
credit rating, information and advisory services company promoted by
Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of
India (UTI) and other leading banks and financial services companies. In all
CARE have 14 shareholders.
CARE assigned its first rating in November 1993, and upto March 31, 2006,
had completed 3175 rating assignments for an aggregate value of about Rs
5231 billion. CARE's ratings are recognized by the Government of India and
all regulatory authorities including the Reserve Bank of India (RBI), and the
Securities and Exchange Board of India (SEBI). CARE has been granted
registration by SEBI under the Securities & Exchange Board of India (Credit
Rating Agencies) Regulations, 1999.
The rating coverage has extended beyond industrial companies, to include

public utilities, financial institutions, infrastructure projects, special purpose
vehicles, state governments and municipal bodies. CARE's clients include
some of the largest private sector manufacturing and financial services
companies as well financial institutions of India. CARE is well equipped to
89
rate all types of debt instruments like Commercial Paper, Fixed Deposit,
Bonds, Debentures and Structured Obligations.
CARE's Information and Advisory services group prepares credit reports on

specific requests from banks or business partners, conducts sector studies and
provides advisory services in the areas of financial restructuring, valuation and
credit appraisal systems. CARE was retained by the Disinvestment
Commission, Government of India, for assistance in equity valuation of a
number of state owned companies and for suggesting divestment strategies for
these companies.
The following is the scope of activities foe CARE:

Credit Reports
CARE offers credit reports on companies based on published information and
CARE's in-house data base. These confidential credit reports are useful to
entities considering financing options, joint ventures, acquisitions and
collaborations with Indian companies
.
Sector Studies
CARE from time to time conducts studies on select sectors of the Indian
economy, particularly those which were largely government controlled and
funded till recently, but have been thrown open for private investment.
Studies on the Indian Power Sector, Fertilizer Industry and Municipal Finances
have been completed. These studies examine the legal framework and the rules
and regulations under which these sectors function. They also discuss the
opportunities for private sector investment, the risks and returns on these
investments and the financing options.
CARE has also prepared reports on twelve of the larger states of the Indian
90
Union, which account for the bulk of foreign direct investment into India.
These reports have been used by investors setting up infrastructure projects in
India and by domestic and international banks to determine the strength of
guarantees and other credit enhancements provided by the state governments
for these projects.
CARE also regularly prepares reports on important segments of the Indian
economy. These reports are used by industry participants, financial
intermediaries and also by analysts in CARE for their rating reports.
Project Advisory Services

For financing its infrastructure, India is increasingly relying on private sector
participation. CARE uses the expertise gained in evaluating the credit risk of
projects in areas such as roads, ports, power and telecom to advise investors
and banks about the regulatory framework, the specific project risks and the
ways of risk mitigation. CARE has helped independent power producers in
India understand the functioning of the principal power purchasers, the State
Electricity Boards and evaluate options for mitigating purchaser risk. CARE
has also worked closely with project sponsors to structure their debt securities
based on estimates of cash flows.
Financial restructuring
The business risk faced by Indian companies increased following the
liberalisation of Indian economy in 1991. To compete in the changed
environment, companies have had to reassess their capital structures. CARE
uses its knowledge about various industry sectors to advise companies about
the optimal capital structure and the financial restructuring options.
91
Valuation
CARE carries out enterprise valuations for company managements,
prospective and existing business partners or large investors. The
Disinvestment Commission, Government of India, has used CARE's services
for valuing 20 state owned enterprises
Credit Appraisal Systems

CARE helps banks and non banking finance companies to set up or modify
their credit appraisal systems.
Rating services:
CARE's Credit Rating is an opinion on the relative ability and willingness of

an issuer to make timely payments on specific debt or related obligations over
the life of the instrument. CARE rates rupee denominated debt of Indian
companies and Indian subsidiaries of multinational companies.
CARE undertakes credit rating of all types of debt and related obligations.
These include all types of medium and long term debt securities such as
debentures, bonds and convertible bonds and all types of short term debt and
deposit obligations such as commercial paper, inter-corporate deposits, fixed
deposits and certificates of deposit.
CARE also rates quasi-debt obligations such as the ability of insurance

companies to meet policyholders obligations. CARE's preference share ratings
measure the relative ability of a company to meet its dividend and redemption
commitments.
92
CARE has a strong structured finance team and has been instrumental in
developing rating methodologies for innovative asset backed securities in the
Indian capital market. The term 'structured financing' refers to securities where
the servicing of debt and related obligations is backed by some sort of financial
assets and/ or credit support from a third party to the transaction. The securities
are termed 'structured' because through specific choices relating to the type and
amount of assets and particular structural features, these securities may be
structured to achieve a desired rating level. CARE assigns the suffix (SO) to
denote that the rating has been achieved by suitably structuring the transaction
to enhance the credit quality of the securities and not on the basis of the credit
quality of the issuer alone.
Rating process:
The rating process takes about three to four weeks, depending on the
complexity of the assignment and the flow of information from the client.
Rating decisions are made by the Rating Committee.
Requests for rating 1. Assigns rating team

Submits information and 2. The team analyses the
detailed schedules information.
Interacts with the team, 3. The team interacts with
responds to queries raised and clients, undertakes site visits,
provides any additional data and analyses data submitted by
necessary for the analysis the client
4. Internal committee previews
93
analysis.
5. RATING COMMITTEE
awards rating to client
Accepts rating * , ** 6. Notification in press
7. Periodic Surveillance
* : Client may ask for a review of the rating assigned and
furnish additional information for the purpose.
** : Client has option not to accept the final rating in which
case, CARE will not publish the rating or monitor it.
The rating process for structured financing differs from the traditional rating
process. Issuers of structured financings aim to structure appropriate credit
protections to achieve a 'desired' credit rating. The role of CARE is to arrive at
the level of credit enhancements required to achieve the desired rating
Frequency of rating actions:

The rating assigned is communicated to the client along with a detailed
rationale. Only ratings accepted by the clients are published and then
monitored on a continuous basis over the life of the instrument. CARE has a
comprehensive in-house data base which facilitates surveillance of the various
industries and companies operating in these industries.
Each rating is reviewed formally at least once a year, when analysts meet the
issuer's 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 analyzed in the light of the estimates made earlier and
deviations are examined.
94
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.
Rating methodology:
CARE undertakes rating exercise based on information provided by the
company, in-house database and data from other sources that CARE considers
reliable. CARE does not undertake unsolicited ratings. The primary focus of
the rating exercise is to assess future cash generation capability and their
adequacy to meet debt obligations in adverse conditions. The analysis therefore
attempts to determine the long-term fundamentals and the probabilities of
change in these fundamentals, which could affect the credit-worthiness of the
borrower. The analytical framework of CARE's rating methodology is divided
into two interdependent segments. The first deals with the operational
characteristics and the second with the financial characteristics. Besides
quantitative factors, qualitative aspects like assessment of management
capabilities play a very important role in arriving at the rating for an
instrument. The relative importance of qualitative and quantitative components
of the analysis varies with the type of issuer. Rating determination is a matter
of experienced and holistic judgement, based on the relevant quantitative and
qualitative factors affecting the credit quality of the issuer.
95
What ratings do not measure?
It is important to emphasize the limitations of credit ratings. They are not
recommendations to invest. They do not take into account many aspects which
influence an investment decision. They do not, for example, evaluate the
reasonableness of the issue price, possibilities for capital gains or take into
account the liquidity in the secondary market. Ratings also do not take into
account the risk of prepayment by issuer. Although these are often related to
the credit risk, the rating essentially is an opinion on the relative quality of the
credit risk.
Issuer ratings:
CAREs Issuer Ratings (CIR) is issuer specific assessment of credit risk. CIR
is similar to long term instrument ratings except for the fact that they are
specific to an issuer and not specific to any of the issuers instruments. Issuer
rating factors in expected performance of the entity over an intermediate time
horizon of around three years and reflects the overall debt management
capability of the entity as regards to its senior unsecured debt obligations. Once
accepted, the ratings will be subject to periodic reviews. The rating company
will have to provide a rating request to CARE giving a notice of period of one
year for withdrawal of an accepted rating. The rating will mainly be applicable
to organized type of business enterprises, that is, public and private ltd.
Companies.
CARE AAA Issuers with this rating are considered to be of the best credit quality,
offering highest safety of timely servicing of debt obligations. Such
issuers carry minimal credit risk.
96
CARE AA Issuers with this rating are considered to be of the high credit quality for
timely servicing of debt obligations. Such issuers carry very low credit
risk.
CARE A Issuers with this rating are considered to be of the adequate credit
quality for timely servicing of debt obligations. Such issuers carry low
credit risk.
CARE BBB Issuers with this rating are considered to be of the moderate safety for
timely servicing of debt obligations. Such issuers carry moderate credit
risk.
CARE BB Issuers with this rating are considered to be of the inadequate safety for
timely servicing of debt obligations. Such issuers carry high credit risk.
Issuers with this rating are considered to be of the low safety for timely
CARE B servicing of debt obligations. Such issuers carry very high credit risk.
Issuers with this rating are considered to be having very high likelihood
of default in the payment of interest and principal.
CARE C
97
Issuers with this rating are of the lowest category. They are either in
default or likely to be in default soon
CARE D
Rating scale:
Rating symbols for long and medium term instruments
CARE AAA Instruments carrying this rating are considered to be of the best quality,
(FD)/(CD)/(SO) carrying negligible investment risk. Debt service payments are protected
by stable cash flows with good margin. While the underlying
assumptions may change, such changes can be visualized are most
unlikely to impair the strong position of such instruments.
Instruments carrying this rating are to be judged of high quality by all

CARE AA standards. They are also classified as high investment grades. They are
(FD)/(CD)/(SO) rated lower than CARE AAA securities because of somewhat lower
margins of protection. Cjanges in assumptions may have greater impact
or the long-term risks may be somewhat larger. Overall, the difference
with CARE AAA rated securities is somewhat marginal.
Instruments with this rating are considered upper medium grade

instrumentsand have many favorable investment attributes. Safety for
CARE AA principal and interest are considered adequate. Assumptions that do not
(FD)/(CD)/(SO) materialize may have a greater impact as compared to instruments rated
98
higher.
CARE BBB Such instruments are considered to be of investment grade. They

(FD)/(CD)/(SO) indicate sufficient safety for payment of interest and principal, at the
time of rating. Howewer, adverse changes in assumptions are most
likely to weaken the debt servicing capability compared to higher rated
instruments .
CARE BB Such instruments are considered to be speculative, with inadequate

(FD)/(CD)/(SO) protection for interest and principal payments.
CARE B Instruments with such rating are generally classified susceptible to

(FD)/(CD)/(SO) default. While interest and principal payments are being met, adverse
changes in business conditions are likely to lead to default.
CARE C Such instruments carry high investment risks with the likelihood of
(FD)/(CD)/(SO) default in the payment of interest and principal.
CARE D Such instruments are of lowest category. They are either in default or
(FD)/(CD)/(SO) likely to be in default soon.
(FD)- Fixed Deposit
(CD)- Certificate of Deposit.
(SO)- Structured Obligations
Rating symbols for short term instruments:
99
PR-1 Instruments would have superior capacity for the repayment of short
term promissory obligations. Issuers of such instruments will normally
be characterized by leading market positions in established industries,
high rates of return on funds employed etc.
PR-2 Instruments would have strong capacity for repayment of short term
promissory obligations. Issuers would have most of the characteristics
as for those with PR-1 instruments.
PR-3 Instruments have an adequate capacity for repayment of short- term

promissory obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection.
PR-4 Instruments have minimal degree of safety regarding timely payment of

short term promissory obligations and the safety is likely to be adversely
affected by short term adversity or less favourable conditions.
PR-5 The instrument is in default or is likely to be in default on maturity.
Long Term Loans: CLR is an opinion on the ability and willingness of a

borrower to make timely payments on specific loan obligations, over its life.
CLR is aimed at providing an additional input in the decision making process
of banks, financial institutions, and non-bank financial services companies. in
addition, the ratings assist lenders in making quick credit decisions,
determining the risk premium to be charged and in portfolio monitoring.
Borrowers benefit from wider access to potential lenders and reduced cost of
100
borrowing. The rating process is initiated either by a bank or institution, with
the consent of the borrower or by the borrowing entity itself. The ratings are
kept confidential from third parties
CARE AAA(L) Loans with this rating are considered to be of the best credit quality,
offering highest safety for timely servicing of loan obligations. Such
loans carry minimal credit risk.
CARE AA(L) Loans with this rating are considered to be of the high safety for timely
servicing of loan obligations. Such loans carry very low credit risk.
CARE A(L) Loans with this rating are considered to be of the quality, adequate
safety for timely servicing of loan obligations. Such loans carry low
credit risk.
CARE BBB(L) Loans with this rating are considered to be of moderate safety for timely
servicing of loan obligations. Such loans carry moderate credit risk.
CARE BB(L) Loans with this rating are considered to be of inadequate safety for
timely servicing of loan obligations. Such loans carry high credit risk.
CARE B(L) Loans with this rating are considered to be of low safety for timely
servicing of loan obligations. Such loans are susceptible to default.
CARE C (L) Loans with this rating are considered to having very high likelihood of
101
default in the payment of interest and principal.
CARE D(L) Loans with this rating are of the lowest category. They are either in
default or are likely to be in default soon.
Pl 1 Loans with this rating would have strong capacity for timely payment
of short-term loan obligations and carry lowest credit risk. Within this
category, loans with relatively better credit characteristics are assigned
PL1+ rating.
PL 2 Loans with this rating would have adequate capacity for timely
payment of short-term loan obligations and carry higher credit risk as
compared to loans rated higher.
PL 3
Loans with this rating would have moderate capacity for timely
repayment of short term loan obligations at the time of rating and carry
higher credit risk as compared to loans rated higher.
PL 4 Loans with this rating would have inadequate capacity for timely
payment of short-term loan obligations and carry very high credit risk.
Such loans are susceptible to default.
102
PL 5
The loan is in default or is likely to be in default on maturity.
Short term loans:.

Performance rating of parallel marketers:
These ratings are on a scale of 1 to 4 as notified by Govt. of
India.
1-Good
2-Satisfactory
3-Low Risk
4-High Risk
Collective investment schemes:
103
CARE 1 (CIS) Schemes carrying this rating are considered to be very strong, with high
likelihood of achieving their objectives and meeting the obligations to
investors.
CARE 2 (CIS) Schemes carrying this rating are considered to be strong, with adequate
likelihood of achieving their objectives and meeting the obligations to
investors. They are rated lower than CARE 1 (CIS) rated schemes
because of relatively higher risk.
Such schemes are considered to have adequate strengths for achieving
CARE 3 (CIS)
their objectives and meeting the obligations to investors. They are
considered to be investment grade
Schemes carrying this rating are considered to have inadequate

CARE 4 (CIS)
capability to achieve their objectives and meet the obligations to
investors. They are considered to be speculative grade
Such schemes are considered weak and are unlikely to achieve their
CARE 5 (CIS) objectives and meet their obligations to investors. They have either
failed or are likely to do so in the near future.
104
105
In India, in 1998, SEBI constituted a committee to look into draft regulation
for CRAs. The committee held the view that in keeping with the international
practice, SEBI Act 1992 should be amended to bring CRAs outside the
purview of SEBI for variety of reasons.
According to the committee, a regulator will not be in position to objectively

judge the appropriateness of one rating over the other. The competency and the
credibility of a rating and CRA should by the market, based on the historical
record, and not by a regulator.
The committee suggested that instead of regulation, SEBI should recognize

certain agencies for particular purposes only, allowing ratings by CRAs
recognized by it for inclusion in the public rights issue offer documents. In
consultation with the government, in July 1999, SEBI issued a notification
bringing the CRAs under the regulatory ambit in exercise of powers conferred
on it by Section 30 read with Section 11 of the SEBI Act 1992.
The Act now requires all CRAS to be registered with SEBI. Since then all the
CRAs have been registered with SEBI. SEBI Act now defines credit rating
agency, rating and securities. Detailed of who could promote a CRA and
their eligibility criteria has been specified. The Act also mentions about
agreements with clients, method of monitoring of ratings, procedures for
review of ratings, disclosure of ratings and submission of details to SEBI and
stock exchanges. Restrictions have now been placed on CRAs from rating
securities issued by promoters or companies connected with promoters, that is,
companies in which directors of CRAs are interested as directors
106
107
Of all the modern service institutions, stock exchanges are the most
crucial facilitators of entrepreneurial progress of the Country. Stock
exchange is the institution where the buying and the selling of
securities takes place to maximum extent.
To protect the investors of the stock exchange, the securities and

exchange board of India (SEBI) was established by the govt. of
India. In the year 1988 Credit rating agencies were setup to enhance
the reliability of the investors to make the investment in the
securities of various companies.
Today all the leading companies, issuing the debt securities are
putting the credit ratings on the application forms to highlight the
reliability of the companies financial stability in the mind of the
investors. Credit rating also acts as the advertising media to attract
the investors to buy the securities of the company.
TO CONCLUDE, the credit ratings act as a helping hand to the

investors of the stock exchange dealing in debt securities.
108
109

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Project

Rating agencies, by making information widely available at a low cost have

Rating agencies sell information and survive based on their ability to

How did Credit Rating evolve?

The role of financial markets in a market economy is that of an efficient

A rating is specific to debt instrument and is intended as a grade, an analysis of

The primary objective of rating is to provide guidance to the

What is Credit Rating?

Credit rating is an unbiased, objective and an independent opinion as to an

STANDARD & POORs

Credit Rating helps the investors by providing an easily recognizable, simple

A rating does not amount to recommendation to buy, sell or hold an instrument,

What Credit Rating isnt?

It would be useful to explain what credit rating does not connote.

Second, it is not recommendation to buy, hold or sell. It is an opinion, perhaps

Fourth, ratings are not guarantees against losses.onder no conditions do them

The process of rating is independent, external review of the management, its

For the borrowing company, a rating assists in enhancing the marketability of

For institutional investors who usually operate order strict investment

A Rating also benefits an organization to differentiate itself in the market and

As ratings serve as an objective guide to the risk involved in a particular

Credit rating also facilitated comparison of relative value between competing

For the investor, the rating is an information service, communicating the

In absence of a credit rating system, the risk perception of a common investor

A rating provided by a professional credit rating agency is of significance not

Regulatory authorities worldwide have promoted the use of credit rating by

(1) Creditable and independent structures and procedures:

According to Moodys-the rating agency must do all it can to preserve its

(2) Reliance on the market mechanism:

Reliance on the capital market for resource allocation generates a strong

(3) Corporate disclosure and credit education:

However, it is not sufficient for the information to reach the

(4) Creation of active debt market:

(1) Rating Agreement and Assignment of The Analytical Team:

(2) Management meeting:

The analytical team then proceeds to have detailed meetings with

(3) Rating Committee:

Some important issues in credit rating:

Sovereign rating ceiling: International credit rating agencies, while rating an

Ownership as a rating consideration: Ownership by a strong concern may

CRISIL: It was promoted by the financial institution, ICICI, nationalized and

ICRA limited: IT was promoted by IFCI and 21 other shareholders comprising

What crisil does?

CRISILs association with Standard & Poors, a division of The McGraw-Hill

The following are the main functional areas of CRISIL:

(2) Policy, Regulatory and Transaction Advisory:

CRISIL Infrastructure Advisory:

Our Infrastructure Advisory enhances CRISIL's franchise in the areas of

Gas Information & Solutions:

(4) Crisil research: CRISIL Research is India's largest independent integrated

(5) Financial news: CRISILs MARKETWIRE is CRISIL's cutting-edge financial

Credit rating at crisil:

Crisil provides rating and risk assessment services to manufacturing services,

CRISIL rates all rupee denominated debt obligations. Its comprehensive

Credit rating process:

The rating committee comprises members who have the professional

1. Multi-member rating teams

CRISIL ensures confidentiality of the information obtained for the rating

CRISIL shall designate an appropriately qualified and experienced

Any CRISIL Ratings employee who comes to know about any

Quality of rating process in India (crisil)

All rating decisions in CRISIL Ratings shall be based on well-documented

Only information that is relevant or likely to be relevant for arriving at an

When information sufficient to arrive at a rating is collected and analyzed