CREDIT RATING AGENCIES

Topics -1. Introduction

- Functions- Promotion of credit rating agencies- Top credit rating agencies

- Crisil : introduction, process, instruments, benefits

2. Role of Crisil- Icra: introduction, objectives,

process, rating scale

3 Code of conduct- General obligations- Importance- Drawbacks and recommendations

Credit Rating Agencies

Credit rating: A credit rating is an evaluation of the credit worthiness of a debtor , especially a business (company) or a government.

This evaluation is made by a credit rating agency. These are expressed in alphabetical or numerical symbols.

Credit Rating Agencies: A company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default.

The agencies have Brought revolutionary changes in Indian capital market by introducing various innovations.

Areas of operations: Consultancy, Research, Providing advices.

Who can promote a credit rating agency-

Any person belonging to-•Public financial institution •Scheduled commercial bank•Foreign bank operating in India with approval of RBI•Foreign credit rating agencies under Indian law (5 years experience)•Company or body corporate, having continuous net worth of minimum 100

crore (previous five years).

Functions Of Credit Rating Agency

Provides unbiased opinionProvides reliable informationProvides information at minimal costPromotes self discipline among corporate borrowersProvides base for investment decisions

Indian Credit Rating Industry

1. CARE ltd.

CRISIL ltd. ICRA ltd.

2. ONICRA credit rating agency

4. India Rating And Research Pvt. Ltd.

3. SMERA

1. CARE- (Credit Analysis And Research Ltd)

- Second largest credit rating agencies- Eminent and experienced professionals.Established : Mumbai in 1993. Care ratings cover : rating segments such as banks, sub-sovereigns and

Ipo gradings. Regional offices : Ahmedabad, Bangalore, Chennai, Hyderabad, Jaipur,

Kolkata, New Delhi, Pune.

2. ONICRA- Onida Individual Credit Rating Agency of India

Established : Haryana (1993). Leading credit and performance rating agencies.Provides ratings for : Risk assessment and analytical solutions to –

individuals, msmes and corporate.

3. SMERA- SME Rating Agency of India Ltd.

Founded in : 2005 by Small Industries Development Bank Of India (SIDBI) Set up for : Micro, small and medium enterprises (MSME). Ratings are integral part of the risk assessment process within the lending

and investing community. Instruments rated : IPO, NCDS, commercial papers, bonds, security receipts,

fixed deposits etc.

4. India Rating And Research Pvt. Ltd. - (formerly FITCH Ratings India Pvt.Ltd)

Established in : 1913 in NEWYORKSubsidiary : of a Fitch group . It is among the top credit rating agencies

in India Provides services to : corporate issuers, financial institutions

(Banks and insurance companies). Offices located at : Mumbai, Delhi, Chennai, Bangalore, Hyderabad and

Kolkata. Recognized by : The Securities And Exchange Board Of India, The Reserve Bank Of India and National Housing Bank.

CRISIL

CRISIL or Credit Rating Information Services Of India Limited

- global analytical company- largest and leading credit rating agency in India

(share greater than 80%)- offers services in manufacturing service and financial

sectors- majority shareholder is standard and poor's(S&P)- incorporated on january29, 1987 and started operations

from january1, 1988

- is promoted by ICICI ltd along with UTI and other financial institutions

INTRODUCED VARIOUS INNOVATIONS :

• Launching of CRISILCARD service in 1990

• Launching of the CRISIL 500 Equity Index, in partnership with National Stock Exchange of India Ltd (NSEIL)

• Setting up of India Index Services Ltd (IISL) in 1998

• Launching of the CRISIL Composite Performance Ranking (CRISIL CPR) in 2000

• Setting up of its subsidiary, Global Data Services of India Ltd in 2001

• Setting up of the Centre for Economic Research (to apply economic principles to live business situations) and CRISIL Market in the year 2002

• Launching of Small and Medium Enterprise (SME) in the year 2005

• Launching of Complexity Levels in the year 2008.

• Launching of Real Estate Star Ratings in 2010 and

• In 2014, CRISIL rated India’s first Commercial Mortgage Backed Securities and introduced Fund Management Capability Ratings for the mutual fund.

Credit rating process of CRISILISSUER CRISIL

Request for Rating

Signs rating agreementProvides information and rating fees

Management interactions With the rating terms

Accepts the rating Or Appeal

Rating team assigned. Team collects Information, conducts preliminary

analysis

Team conducts site visitsAnd performs analysis

Analysis presented to rating committee

Rating assigned and communicated to issuer

Rating disseminated and carried in www.crisil.com

All ratings kept under continuous surveillancethroughout validity

CRISIL’s Credit Rating Scales These are categorized into following types :• Long Term Scale• Short Term Scale• Long Term Structured Finance Scale• Short Term Structured Finance Scale• Fixed Deposit Scale• Corporate Credit Scale

(B) Rating Scale for Short Term Instruments

• CRISIL A1• CRISIL A2• CRISIL A3• CRISIL A4• CRISIL D

(A) Rating scale for Long Term Instruments

• CRISIL AAA• CRISIL AA• CRISIL A• CRISIL BBB• CRISIL BB• CRISIL B• CRISIL C• CRISIL D

(C) Rating scale for Long Term Structured Finance Instruments

• CRISIL AAA (SO)• CRISIL AA (SO)• CRISIL A (SO)• CRISIL BBB (SO)• CRISIL BBB (SO)• CRISIL BB (SO)• CRISIL B (SO)• CRISIL C (SO)• CRISIL D (SO)

(D) Rating Scale for Short Term Structured Finance Instruments• CRISIL A1 (SO)• CRISIL A2 (SO)• CRISIL A3 (SO)• CRISIL A4 (SO)• CRISIL D (SO)

(F) Corporate Credit Rating Scale • CCR AAA• CCR AA• CCR A• CCR BBB• CCR BB• CCR B• CCR C• CCR D• CCR SD

(E) Rating Scale for Fixed Deposits

• FAAA• FAA• FA• FB• FC• FD• NM

Benefits of CRISILTo MSME (ministry of small and medium enterprises)-

• Availability of cheaper and faster credit• Banks give preference to CRISIL reports over other agencies• Govt agencies use it as additional document• Rating services at discounted rates to individuals of these

institutions• Financial institutions offer interest rate benefits to high rated entities

To banks-•Internal appraisal process reduced•Customers of bank enjoy concession in rating fee with MOU in place•CRISIL reports will help credit managers at branch in making internal credit proposal and for taking financing decisions

ROLE OF CRISIL• CRISIL RATING SERVICES• ADVISORY SERVICES• RESEARCH SERVICES

ECONOMY RESEARCH INDUSTRY RESEARCH COMPANY REPORTS

• CRISIL RISK SOLUTIONS

ICRA• ICRA Limited was set up in 1991 by financial

institution , commercial banks and financial companies.

• it is an independent and professional investment information and credit rating agency.

• The international credit rating agency MOODY`S investor services is ICRA’s largest shareholder.

OBJECTIVES

• Guidance• Transparency• Improve efficiency

ICRA’S RATING PROCESS

• Issuer requests for a rating • Issuer signs rating agreement and pays the rating fee• Issuer provides information • Analysts process the information and meet the

management/bankers/auditor• Rating report prepared by analysts• Rating committee assigns rating • Communication of rating to the issuer• Decision of the issuer

ICRA’S RATING SCALES

• LONG TERM RATING SCALE• MEDIUM TERM RATING SCALE• SHORT TERM RATING SCALE• LONG TERM STRUCTURED INSTRUMENTS

A. DEBT INSTRUMENT RATING

• LONG TERM RATING SCALE- It includes all bonds, NCDs and other debt instruments with original maturity exceeding one year.o [ICRA]AAA - Highest degree of safetyo [ICRA]AA - High degree of safetyo [ICRA]A - Adequate degree of safetyo [ICRA]BBB - Moderate degree of safetyo [ICRA]BB - Moderate risk of defaulto [ICRA]B - High risk of defaulto [ICRA]C - Very high risk of defaulto [ICRA]D - Default or expected to be in default soon

2. ICRA’S MEDIUM TERM RATING SCALE (ONLY FOR PUBLIC DEPOSITS)

• MAAA - Highest credit quality rating• MAA - High credit quality rating• MA - Adequate credit quality rating• MB - Inadequate credit quality rating• MC - Risk prone credit quality • MD - Lowest credit quality rating

3. ICRA’S SHORT TERM RATING SCALE

• [ICRA]A1 - Very strong degree of safety • [ICRA]A2 - Strong degree of safety• [ICRA]A3 - Moderate degree of safety • [ICRA]A4 - Minimal degree of safety • [ICRA]D - Default

B. ISSUER RATING

1. ICRA’S ISSUER RATING SCALE- LONG TERM IrAAA - Highest credit rating IrAA - High credit rating IrA - Adequate credit rating IrBBB - Moderate credit rating IrBB - Inadequate credit rating IrB - Risk prone credit rating IrC - Lowest credit rating IrD - Default

2. ISSUER RATING SCALE

• IrA1 - Very strong credit rating • IrA2 - Strong credit rating • IrA3 - Moderate credit rating• IrA4 - Low credit rating• IrD - Default

C. STRUCTURED FINANCE RATING

1. LONG TERM STRUCTURED FINANCE INSTRUMENTS • [ICRA]AAA(SO) – Highest degree of safety• [ICRA]AA(SO) - High degree of safety• [ICRA]A(SO) - Adequate degree of

safety• [ICRA]BBB(SO) - Moderate degree of

safety • [ICRA]BB(SO) - Moderate degree of

default• [ICRA]B(SO) - High risk of default• [ICRA]C(SO) - Very likelihood of default• [ICRA]D(SO) - Default

2. SHORT TERM STRUCTURED FINANCE INSTRUMENTS

• [ICRA]A1(SO) - Very strong degree of safety

• [ICRA]A2(SO) – Strong degree of safety• [ICRA]A3(SO) – Moderate degree of

safety• [ICRA]A4(SO) – Minimal degree of

safety• [ICRA]D(SO) - Default

D. MUTUAL FUND CREDIT RISK RATING

1. ICRA’S LONG TERM DEBT FUND CREDIT RISK RATING SCALE [ICRA]AAAmfs – Highest degree of

safety [ICRA]AAmfs - High degree of safety [ICRA]Amfs - Adequate degree of

safety [ICRA]BBBmfs - Moderate degree of

safety [ICRA]BBmfs - Moderate risk of

default [ICRA]Bmfs - High risk of default [ICRA]Cmfs - High risk of default

2. ICRA’S SHORT TERM DEBT FUND CREDIT RISK RATING SCALE

• [ICRA]A1mfs – Very strong degree of safety• [ICRA]A2mfs - Strong degree of safety • [ICRA]A3mfs - Moderate degree of safety • [ICRA]A4mfs - Minimal degree of safety

RATING FOR CLAIM PAYING ABILITY OF INSURANCE COMPANIES

Iaaa- Highest claims for paying ability Iaa - High claims paying ability Ia - Adequate claims paying ability Ibbb- Moderate claims paying ability Ibb- Inadequate claims paying ability Ib- Weak claims paying ability Ic- Lowest claims paying ability

SEBI (Credit Rating Agencies ) Regulations were issued in 1990 and then amended in 2003. Following are some of the regulations:

A credit rating agency shall-• make all efforts to protect the interest of investors.• observe high standards of integrity, dignity and fairness.• fulfill its obligations in prompt, ethical and professional manner.

CREDIT RATING AGENCIES AND CODE OF CONDUCT

• disclose its rating methodology to clients, users and public.• have in place a rating process that reflects consistent and

international rating standards.• keep track of all important changes relating to client

company.• not indulge in any unfair competition nor shall it wean away

the clients of any other rating agency on assurance of higher rating.

• not make any untrue statement, suppress any material fact or make any misrepresentation.

• Agreement with the client• Monitoring of Rating• Review of Rating• Internal procedures to be Framed • Disclosure of Rating Definitions and Rationale• Maintenance of Books of Accounts Records, etc.• Confidentiality• Rating process

OTHER GENERAL OBLIGATIONS

IMPORTANCE OF CREDIT RATING AGENCIES

• Disseminate information regarding rating free of cost to the interested investors on their websites as well as in print.

• Investors are free to contact these agencies and seek more information, if required.

• No common website• Conflict of interest• Compensation paid to analyst is not revealed• Different rating symbols• No standard process of analysis• High level of subjectivity

DRAWBACKS OF CREDIT RATING

SEBI’s recommendations in regard to the credit rating agencies are:• Operational Audits• Cross-verification of analysis• Standardized Rating symbols• Awareness among general public• Constitute different appeals committee

RECOMMENDATIONS