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Credit ratings came into being because of the huge debt issue by US railroad companies that
triggered the need for information about the creditworthiness of these companies. The first ever
rating was published in 1909 and since then the rating business has come a long way with credit
rating agencies actively providing independent opinions on the creditworthiness of the entities
spread across the world. In this study we explored the process followed by the various credit
ratings agencies for the determination of credit ratings. The rating process differs across the rating
agencies and the same entity may get a different rating from different rating agencies. The rating
agencies evaluate different parameters for different industries and the evaluation process also
depends on the type of rating (long term, short term, etc) being given. As a proxy to evaluate the
capability to payback the resources raised, these agencies also check whether the company can
sustain or improve its profitability in the future and whether the industry in which it works would be
favorable. We performed an analysis of the credit ratings in India and came up with some interesting
insights. For example, the number of ratings has been consistently decreasing over the years. The
present outstanding ratings list of CRISIL has only a few number of companies rated below the
investment grade. Have all companies been giving robust performance or have the probable lower
rated companies said good‐bye to credit ratings? We have also explored this aspect in the study. An
analysis of the credit ratings of banks and corporate sector companies in India has been performed.
We have derived the differentiating financial parameters across the AAA and AA rated banks. We
have also tried to derive a model using Discriminant (for financial factors) and Logit analysis (also
including non‐financial factors) which could help to predict whether a particular corporate sector
company would be categorized in the default category in the following year, which would become
important once banks come under the purview of Basel‐II norms and start following Internal Credit
Rating options. An international perspective has also been provided with a comparison of the
financial ratios of Indian and Korean banks. The very basic purpose of credit ratings is to predict the
probability of default. We performed a study of the defaults happening in India and found that the
default rate has been decreasing. A possible explanation can be the decreasing number of rated
companies or the current credit rating up‐cycle due to booming economy. We have identified some
recent developments which explain the decrease in the number of rated companies. We finally
present the problems that we have faced while pursuing this study.
INTRODUCTION
Debt instruments rated by CRAs include government bonds, corporate bonds, CDs, municipal
bonds, preferred stock, and collateralized securities, such as mortgage-backed securities and
collateralized debt obligations. Credit Rating Agencies assess the relative credit risk of specific debt
securities or structured finance instruments and borrowing entities (issuers of debt) and in some
cases the creditworthiness of governments and their securities.
Today, this involves rating of not just simple and complex debt instruments of commercial entities,
but also sovereign debt. Globally, a vast majority of this business is conducted by three credit rating
agencies (‘CRAs’) - Moody’s, Standard & Poor’s and Fitch. In India, the business of credit rating
was first started in 1987 by large financial institutions and creditors through CRISIL. In the last 30
years, seven CRAs have been established; with the most influential ones being owned by Moody’s,
Standard & Poor’s and Fitch.
CRAs have now become an essential part of the Indian financial system. They are regulated by the
Securities and Exchange Board of India (‘SEBI’) through the SEBI (Credit Rating Agencies)
Regulations, 1999 and circulars issued under it. However, in the last few years, the adequacy of this
regulatory framework has come into question. This report is aims to address this question. This
report examines the process and role of credit ratings in the financial system and analyses the
regulatory regime for CRAs in India. Thereafter, it highlights the main concerns regarding the
regulation of CRAs in India. Ultimately, this report collates international practice on the regulation
of CRAs, and makes recommendations to improve the regulation of CRAs in India.
Rating process
Credit ratings, issued by CRAs are publicly available assessments on whether instruments would be
able to perform in accordance with the terms of their issue.5 CRAs typically rate • debt securities; •
short term debt instruments, like commercial papers; • structured debt obligations; • loans; and •
fixed deposits.6 Companies seeking to raise debt (issuers) request a rating from the CRA. They then
sign a rating agreement, which provides the terms of the CRA’s engagement and gives the CRA
access to the issuer’s information. The CRA then assigns a ‘Rating Team’ to the company. This
team collects information from the company, and conducts meetings with its management. Based on
this, the team prepares a report of the risks associated with the company. This report is presented to a
separate ‘Rating Committee’ which makes the rating decision. The Rating Committee is composed
of a group of experts, who do not interact with the company directly. The rating decision is then
communicated to the company. If the company accepts the rating decision, it is published. The CRA
then periodically surveys the company and updates the rating decision through the period of the
rating agreement. However, if the company chooses to reject the rating decision, CRAs typically
provide for an appellate mechanism. If the rating is rejected after the appeal, such a rating is
classified as an unaccepted rating.7 All ratings, regardless of whether they are accepted or
unaccepted have to be disclosed by CRAs.8
Definition:
Credit Rating can be defined as the assessment of the ability of the borrower, to discharge their
financial obligations. It is an approximation of the creditworthiness of an individual, entity or
commercial instrument, considering various factors, representing the capability and willingness, to
pay financial commitments in time.
Credit rating is instrument specific and is meant to grade various commercial instruments, with
respect to the credit risk and the obligator’s ability to make good the debt obligations, as per the
terms of the agreement. The different types of credit ratings are depicted in the figure below:
Steps Involved in Credit Rating
Request from issuer and analysis: The first step to credit rating is that the enterprise applies to the
rating agency for the rating of a particular instrument. Thereafter, an expert team interacts with the
firm’s those charged with governance and acquires relevant data. Factors which are considered
includes:
Historical performance
Financial Policies
Business Risk profile
Competitive Position, etc.
Rating Committee: Based on the information gathered and evaluation performance, the presentation
of the report is made by the expert’s team to the Rating Committee, in which the issuer is not
permitted to take part.
Communication to management and appeal: The decision of the rating is shared with the issuer
and if he/she does not agree with the decision, then an opportunity of being heard is given. The issuer
is required to provide material information, so as to appeal against the decision. The decision is
reviewed by the committee, but that does not make any change in the ratings.
Pronouncement of the rating: When the issuer agrees to the rating decision, the agency make a
public announcement, of the rating.
Monitoring of the assigned rating: The agency which rates the issue, overlooks the performance of
the issuer and the business environment in which it operates.
Rating Watch: On the basis of continuous critical observation undertaken by the rating agency, it
may place a rated security on Rating Watch.
Rating Coverage: Credit Ratings are not confined to particular debt instruments, but also covers
public utilities, transport, infrastructure, energy projects, Special Purpose Vehicles etc
Rating Scores: Rating scores are given by the credit rating agencies like CRISIL, ICRA, CARE,
FITCH.
Credit Rating is of great help, not just in investors protection but to the entire industry, as it directly
mobilizes savings of the individuals.
MEANING OF CREDIT RATING
Credit Rating Agencies rate the aforesaid debt instruments of companies. They do not rate the
companies, but their individual debt securities. Rating is an opinion regarding the timely repayment
of principal and interest thereon; It is expressed by assigning symbols, which have definite meaning.
A rating reflects default risk only, not the price risk associated with changes in the level or shape of
the yield curve. It is important to emphasize that credit ratings 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 of earning capital gains or
take into account the liquidity in the secondary market. Ratings also do not take into account the risk
of prepayment by the issuer, or interest rate risk or exchange rate risks. Although these are often
related to the credit risk, the rating essential is an opinion on the relative quality of the credit risk.It
has to be noted that there is no privities of contract between an investor and a rating agency and the
investor is not protected by the opinion of the rating agency. Ratings are not a guarantee against loss.
They are simply opinions, based on analysis of the risk of default. They are helpful in making
decisions based on particular preference of risk and return. A company, desirous of rating its debt
instrument, needs to approach a credit rating agency and pay a fee for this service. There is no
compulsion on the. corporate sector t .obtain' or publicize the credit rating except for certain
instruments.
ESSENTIALS OF A GOOD CREDIT RATING SYSTEM
Credit rating serves as a valuable input in the decision-making process of different market
participants in the capital market including the regulators. A good credit rating system is one which
serves the interests of all such market participants and the regulators in an effective way. So, in order
to fulfill this requirement and the rating system to function effectively existence of the following
ingredients is necessary.
Credible and Independently Derived Credit Ratings:
Ratings should be credible and the credibility arises only if the rating agency is independent of
issuer‘s business, holds high degree of professionalism and relevant expertise across the industry.
Further, the ratings will be credible if there exists impartiality of opinions, strict rules of
confidentiality relating to sensitive and confidential information of the issuer, timeliness of rating
reviews and announcement of changes, ability to reach a wide range of investors by means of press
reports, print and electronic publications and research services. In the words of Wilson(1994), ―
Every time a rating is assigned, the agency‘s name, integrity and credibility are on line and subject
to inspection by whole community (Gurusamy, 2004).
The Meaning and Use of Ratings should be Clear, including the Level of Risk Inherent in the
Rating:
Rating agencies should be transparent about the meaning and limitations of their ratings. Further the
rating agencies should use ―warning signals whenever possible, such as credit rating watch and
rating outlook, in order to make the ratings more important to investors. Thus, rating users might
understand that ratings can change suddenly based on market or industry-specific events.
Disclosure Requirements:
One of the essential requirements of a good rating system is to make the adequate corporate
disclosures and to publish all the essential information required by the investors.
Investor Education:
Along with the task of rating a particular instrument, the rating agencies should also ensure that
such information should not only reach the investors, but they should enable investors to make
meaningful interpretations also. The investors should also be aware of the limitations of credit
rating. Regulation should require the rating firms to provide publicly detailed explanations about the
nature of their opinions and pertinent information used in the rating process in order to enhance the
investor knowledge.
Transparency and Soundness of Credit Rating Analysis:
There should be transparency in ratings process, including criteria and methodologies for assigning
and updating ratings, which would give investors critical information they need to make informed
decisions, to compare ratings, and to form their own opinions on the soundness of an agency‘s
analytics.
Existence of Active Debt Market: An active primary and secondary debt market is crucial for
rating agencies to continue to provide their services.
- Rating helps investor to compare the issues by providing them a short and clear guide.
- Fair, honest and impartial rating motivates the public to invest their savings in company
debentures, deposits, etc.
To Issuers:
The benefit of credit rating for issuers stems from the faith placed by the market on the opinions of
credit rating and widespread use of ratings as a guide for investment decision (Arora, 2003). Credit
rating facilitates the borrower company or the issuer of securities to mobilize savings from a wider
section of interested investing public at a lower cost for the highly rated company and helps a lesser
known company to have easy access to the capital market (Verma, 2000).
1. Rating provides access to international pool of capital as it creates a tendency amongst the rated
corporate units to maintain higher corporate standards and to remain healthy in the business
environment. This creates better image of the business class of the country as a whole in the
international market.
2. Rating reduces the cost of borrowing for the companies as companies with high rating can quote
lesser interest rate on fixed deposits or debentures or bonds. The investors with low risk preferences
would like to invest in such safe securities.
3. The wider access to investor base and investing instruments increase the financial flexibility of the
company.
4. Rating leads the companies to self-discipline as it 23 | P a g e encourages them to come out with
more disclosures about their accounting system, financial reporting and management pattern.
Further, in order to maintain the standard of rating attained, the companies try to improve their
existing practices to match the competitive standards.
6. The rating leads the companies to assess their own performance. It provides motivation to the
companies for growth as the promoters of the companies feel confident in their own efforts and are
encouraged to undertake expansion of their operations or new projects.
7. Companies with rated instruments avail of the rating as a marketing tool to create better image in
dealings with their customers, lenders and creditors.
8. Credit rating provides recognition to some unknown or new issuers as investors invest their
money after considering the rating grade given to them rather than just by their names. So, a
relatively new issuer with good credit rating can have a strong standing in the financial market.
To Investors
A rating is one of the inputs that is used by investors to make an investment decision. Rating
exercise adds to the structure and system of trading market as the debt securities can be classified 24
| P a g e according to the ratings so that the investors can weigh the ratings vis-à-vis advantages of
securities (Khan and Akbar, 1993). Various benefits available to the investors from credit rating
include:
1. Credit rating gives superior information about the rated product and that too at low cost, which
the investor, otherwise, would not be able to get so easily. Thus, the investor can easily recognize
the risk involved and the expected advantage in the instrument by looking at the symbols. This helps
the investors to take calculated risk. With the help of credit rating the investors can take quick
decisions about the investment to be made in any particular security of the company.
2. Credit rating reduces the dependence of investors on advice of financial intermediaries, the stock
brokers, merchant bankers, the portfolio managers or financial consultants about the good
investment proposals. As the rating symbol assigned to a particular instrument suggests the credit
worthiness of the instrument and indicates the degree of risk involved in it. Thus, investors can make
independent investment decisions.
3. Highly rated securities/instruments of the company give an assurance to the investors of safety of
the instrument, thus, this safeguard the investors against bankruptcy as highly rated securities are
considered as safe ones.
4. Credit rating is done by the highly qualified analysts of the agencies, who recognize all the
quantitative and qualitative variables of the company before assigning the rating. Thus, credit rating
gives the clue of credibility of the issuer company. It relieves the investors from botheration of
knowing about fundamentals of a company, as such rating saves time and energy of investors.
5. As investors need not to see into the fundamentals of the companies, so with the help of rating
they can compare many instruments of various companies at a time and they can make choice
depending upon their own risk profile and diversification plan.
6. Investors can make the correct investment decisions after considering or evaluating the rating of
instruments, without just relying on the criteria of ‗name recognition‘. As the well-known or a
prominent group‘s companies often go sick and investors‘ funds deposited with them are rendered
unsafe.
7. After rating the instruments, the rating agencies are involved in the ongoing surveillance of the
instrument being rated. The rating agencies downgrade or upgrade the instruments after considering
the subsequent financial strength of the company whose instrument is rated by it. This ongoing
surveillance gives a great benefit to the investors as they can change their investment decision
accordingly.
8. Credit rating encourages the investors to invest in securities or instruments of companies as rating
gives them clear cut idea about the financial strength of the company without putting any extra
efforts. Thus, rating induces/encourages habit of saving among investors
9. The investing community is also benefited from the allied services provided by credit rating
agencies such as research in the form of industry reports, corporate reports, seminars and open
access to the analysis of agencies.
Thus, credit rating helps the investors in numerous ways by safeguarding their interests. According
to US Credit Rating Agency Standard and Poor‘s, ―Credit ratings help investors by providing an
easily recognizable, simple tool that couples a possibly unknown issuer with an informative and
meaningful symbol of credit quality.
To Brokers and Financial Intermediaries
The brokers and other financial intermediaries also gain benefits from credit rating as through rated
instruments these parties need to make less efforts in studying the company‘s credit position to
convince their clients to select a particular investment proposal. The time, cost and energy of brokers
and financial intermediaries is saved.
To Regulators
Credit rating is also helpful to regulators as Rated securities bring improvement in capital market
and reflect upon its efficient 27 | P a g e functioning. With the help of the symbols assigned to the
rated company the regulators can differentiate between good and bad companies without incurring
any financial burden. Thus, this helps them to take timely action against defaulted companies. The
credit rating and the related detailed analysis by the Credit Rating Agencies help in disseminating
information to all, and thus, impart transparency in the system, which is very helpful to small
investors, who otherwise may not have access to such information and who in turn may rely on
regulators for such transparency. Thus, this task of regulators of providing transparency to investors
is done by Credit Rating Agencies thereby making the regulators‘ task less onerous. Regulators rely
on credit rating for various other purposes also (Arora, 2003).
To Investors
1. Credit rating is given on the basis of past and present performance of the company and once the
rating is assigned 28 | P a g e to any instrument it is rarely revised. Thus, this rating exercise is a
static process and not beneficial for investors who rely on rating for their future investment decision.
2. Credit rating is an indication and no full proof reliability of assessment as Issuer Company might
conceal material information from the investigating team of the credit rating agency. In such cases,
quality of rating suffers and renders the rating unreliable.
3. Owing to time and cost constraints, credit rating agencies are not able to capture all the
characteristics of an issuer and issue. This may lead to biased rating.
4. Rating is done for a particular instrument of the company and not the company as a whole.
Therefore, rating is no guarantee for the soundness of the company. But many investors do not know
this fact and they take high rating as a certificate of soundness of the company and other instruments
of the company, and therefore, they lose their money sometimes.
5. The issuer companies have a choice to accept or not to accept rating; and only favourable ratings
are accepted by the companies and made public. This misleads the investors if the rating given by
one agency is not acceptable by the company, they may go to other agencies to get their instruments
rated. This is called ‗Rating shopping‘. In order to compete for clients, agencies will be tempted to
hand out 29 | P a g e more favourable ratings and to compete for lower fees for by lowering their
research and analysis cost (Jutur, 2005).
6. The issuers are paymasters, thus, independence of ratings becomes questionable and the issuers
may influence the rating decision according to their own needs.
7. Further, credit rating agencies are not accountable for the ratings given by them. If they do not
work with high integrity and devotion, their ratings may mislead the investors. Further, the issuer
company‘s image may also be on stake due to this.
8. There is a possibility of confusion due to existence of many credit rating agencies, which rate the
same instrument differently. This difference in rating may be due to no common rigid formula for
rating with all agencies. Therefore, subjective bias in the area, viz. management quality, asset
quality, auditor‘s quality, accounting accuracy, etc. may arise in credit ratings (Azahgaiah, 2004).
9. In western countries, the rating agencies undertake voluntary rating even if the issuer company
does not approach them. This unsolicited rating is primarily intended towards protection of the
interest of the common investors. However, this aspect is lacking in India (Azahgaiah, 2004).
11.Sometimes rating agencies in order to attract business lure a corporate with a prospective high
rating. Subsequently, after 2-3 months, the rating is downgraded and the issuer does not have any
choice but to accept it (Goel, 1998).
12.Validity of rating ends with the maturity of a debt instrument and it no longer subsequently
benefits the issuer company, because a rating is valid for the life time of the debt instrument being
rated. Therefore, for a short period its validity amuses the investors but over a long period it cannot
escape uncertainty and doubts (Verma, 2000).
of the issuer
CRISIL Rating Methodology
CRISIL assesses all the factors that could affect credit worthiness of the borrowing company and
then assigns rating to debt instruments. The key factors considered for rating assessment are:
2. Financial Analysis : Under financial analysis, all relevant aspects connected with the
business and financial position of the company is assessed. The profitability, solvency and
liquidity ratios are taken into consideration. Thus, CRISIL considers Growth rate of PAT,
PAT/OI, PBIT/Net Worth, Earnings on Capital Employed, PBDITA/TI, Current Ratio, Quick
Ratio, Debt to Equity Ratio, Interest Coverage Ratio, Pre-tax Coverage Ratio, Earnings on
Assets to Capital Employed, etc.
While assigning ratings ICRA considers all relevant factors that have a bearing on the future
cash generation of the issuer. A detailed analysis of the past financial statements is made and
estimates of future earnings under various scenarios are drawn up, over the tenure of the
instrument being rated. The other factors considered are:
3. Financial Risk Analysis: Under this, ICRA considers various accounting policies, debt
servicing track record, cash flow position, profitability position and capital structure of the
issuer. The ratios considered specifically for the purpose include Profit after Tax
/Total Income, Profit Before Depreciation Interest and Tax/Total Income, Earnings Before
Depreciation Interest and Tax/ Interest and Fixed Charges, Return on Capital Employed, Return
on Net Worth, Total Debt/ Net Worth, Current Ratio, Quick Ratio, etc.
7. Funding Policies of the Issuer: The funding policies of the issuer are also evaluated to
get the deep knowledge of the sources of funds of the issuer company and the uses to which
these funds have been put into.
CARE also takes into account various quantitative as well as qualitative factors while assigning
rating which include:
1. Economy and Industry Risk: The factors assessed by CARE include the effect of
economic cycle on industry, business cycles, tariff structure, basis of competition, environmental
as well as political factors concerning the issuer’s business.
2. Business Risk (Competitor's Assessment): Factors considered under this are size of
company and market share, supply of raw material and marketing arrangements, bargaining
power of issuers, suppliers as well as customers, and location advantages and disadvantages
available to the business of the issuer.
3. Financial Risk: It includes analysis of financial management, capital structure, cash
flow adequacy and profitability as well as liquidity position of the company. The financial risk is
evaluated by CARE by considering various ratios including, Profit after Tax/Total Income, Profit
before Depreciation Interest and Tax/ Total Income, Return on Capital Employed, Return on Net
Worth, Debt-Equity Ratio, Interest Coverage Ratio, Overall Gearing Ratio, Current Ratio, Quick
Ratio and Average Collection Period.
1. Past Years’ Rating Methodology: While assigning ratings FITCH takes into account last
few years‟ rating methodology on the basis of which rating was done.
2. Past Years’ Financial Data : The ratios considered by FITCH while evaluating the past
years financial data include, Profit Before Depreciation Interest and Tax/ Total Income,
Profit after Tax/Total Income, Return on Capital Employed, Return on Net Worth, Operating
Profit/Profit after Tax, working capital turnover ratio, average Collection Period, Debt-Equity
Ratio, Interest Coverage Ratio, Current Ratio and Quick Ratio.
3. Forecast of Future Performance: It means how much the business will be able to earn in
future which will be helpful in repayment of principal amount borrowed and interest thereof.
4. Comparison of Company’s Performance with the Competitors: Under this the agency
compares the performance of the company being rated with that of the competitors in the field to
properly assess the relative standing of the company.
Rating Process
The rating process is a fairly detailed exercise that starts with a rating request from the issuer, the
signing of a rating agreement and continues up to the surveillance of rating. It involves among
other things, analysis of published financial information, visits to issuer’s offices and work
places, and intensive discussions with issuer’s auditors, bankers, creditors, etc. The rating
process of various rating agencies is explained below:
The process of rating starts with a rating request from the issuer, and the signing of a rating
agreement. CRISIL’s rating process normally takes three to four weeks. However, rating can be
arrived at shorter timeframes to meet urgent requirements. The CRISIL rating process includes
the following steps:
1. Request for Rating: The rating process starts with the issuer’s request for rating.
Then the rating agreement is signed between the client and the rating agency. The rating agency
assigns a rating team for the purpose, and the client provides the relevant information to the
rating team along with the rating fees.
2. Analysis of Information: The rating team conducts the preliminary analysis of the
information provided by the client. The team also conducts the site visits for the purpose of
analysis.
3. Meeting: Then the meetings between the rating team and management of the issuer are
conducted and the rating team does the final analysis of the information after clarification of any
doubts in the management meeting.
4. Assignment of Rating: The rating team presents its analysis to the rating committee
which assigns the rating to the given instrument and communicates the same to the issuer. The
rating is then accepted by the issuer or the issuer may appeal the rating agency to further refine
the rating.
6. Continuous Surveillance: All ratings are kept under continuous surveillance throughout
its validity by the rating agency.
ICRA Rating Process
The Rating involves assessment of a number of qualitative factors with a view to estimating the
future earnings of the issuer. This requires extensive interactions with the issuer’s
management, specifically on subjects relating to plans, outlook, competitive position, and
funding policies. Thus, the following steps are included in the ICRA rating process:
1. Formal Request for Rating: ICRA’s rating process is initiated on receipt of a formal
request (or mandate) from the prospective issuer.
2. Setting of Rating Team and Analysis of Information: A Rating team, which usually
consists of two analysts with the expertise and skills required to evaluate the business of the
issuer, is involved with the rating assignment. An issuer is provided a list of information
requirements and the broad framework for discussions. Then the Rating team analyzes that
information.
3. Interaction with the Management of the Issuer: Then there are extensive interactions
between Rating Team and the issuer’s management, specifically on subjects relating to plans,
outlook, competitive position, and funding policies. In some cases where the agency finds it
necessary, the site visits may be done by the rating team for proper analysis of information
4. Preparation of Rating Report: After completing the analysis, a Rating Report is prepared by
the Rating Team, which is then presented to the ICRA R a t i n g Committee. A presentation on
the issuer’s business and management is also made by the Rating Team.
6. Review of Ratings: If the issuer does not find the Rating acceptable, it has a right to
appeal for a review. Such reviews are usually taken up if the issuer provides certain fresh
inputs. During a review, the issuer’s response is presented to the Rating Committee.
CARE rating process largely depends on the flow of information from client. Rating decisions
are made by rating committee. The CARE rating process includes the following steps:
1. Request for Rating and Assignment of Rating Team: The client requests the agency for
rating and after signing of agreement between both a rating team is assigned for the purpose by
the rating agency.
3. Interaction with the Client: After the analysis of data by the rating team, the team
interacts with the client, and the client responds to the queries raised by the team and provides
the additional data as required by the team. Further, the team undertakes the site visits and
analyzes the additional data submitted by the client.
4. Assignment of Rating: The internal committee of rating agency reviews the analysis and
then the Rating committee assigns rating to the client. The rating so assigned is communicated
to the client. The client may then accept the rating or it may ask for review of rating in
which case the client has to furnish additional information for the purpose.
5. Publishing of Rating: In case the client accepts the rating then the rating agency will
give the notification about such rating in the press, otherwise CARE will not publish the rating.
6. Review of Rating: Each rating is then reviewed formally at least once a year when the
analyst of rating agency meets the issuer’s management.
1. Rating Agreement Signed: The rating agreement is signed between the rating agency and
the entity wanting to get its instrument rated.
2. Review of Publicly Available Information: FITCH’s analysis and rating decisions are
based on information received from sources known to it and believed by FITCH to be relevant to
the analysis and rating decision. This includes publicly available information on the issuer, such
as company financial and operational statistics, reports filed with regulatory agencies, and
industry and economic reports. In addition, the rating process may incorporate data and insight
gathered by analysts in the course of their interaction with other entities across their sector of
expertise.
3. Questions Sent to Issuer: In addition to review of publicly available information the
rating agency needs to ask certain special questions from the issuer in order to get out the
information (that is not available otherwise) about the instrument. The issuers are required to
reply within the stipulated period and that too before the management meeting.
4. Management Meeting: After having received the replies from the issuers, the rating
agency conducts the meeting with the management to discuss the relevance of information
collected about particular instrument.
5. Further Analysis: After having discussions in the management meeting the rating agency
goes for further detailed analysis about the product or instrument to be rated.
6. Credit Committee Presentation and Draft Report: The credit committee (which if formed
specifically for the purpose) gives the presentation of its analysis and a draft report is prepared
for the same.
7. Rating Committee Review and Discussion: After getting the draft report from the credit
committee, the rating committee reviews it. The rating committee considers the relevant
quantitative and qualitative issues, as defined in FITCH’s established criteria and
methodologies, to arrive at the rating that most appropriately reflects both the current
situation and prospective performance. Then the rating decision is communicated to the company
and the company accepts that rating.
8. Preparation of Final Rating Report and Press Release: Once the rating is communicated
to the company, it passes comments on the rating decision and after that a final rating report is
prepared and rating is communicated to the public through a press release and full rating report is
made available to the subscribers.
9. Ongoing Dialogues and Application of Rating to the New Issues: After the completion of the
rating process, the rating assigned is continuously reviewed by the agency and the agency
continues its dialogue with the company for further rating of new issues.
Factors to be considered in credit rating
Credit rating is done on the basis of an analysis of financial statements, visits to the factory and
office, holding of discussions with auditors, bankers, creditors etc., rendering of services by
experts and detailed desk work are involved in considering various factors related to credit
rating.
A credit rating agency accepts for analysis only reliable information collected from dependable
sources. The key factors considered in credit rating are-
1. Business Analysis
2. Financial analysis
3. Management evaluation
5. Fundamental analysis.
1. Business analysis
Business analysis involves a scrutiny of various risks involved in the operations of the company.
This includes industry risk, market position of the company, operating efficiency of the company
and legal position of the company.
1. Industry risk relates to nature of competition, success factors, demand and supply position,
structure of industry, Government policy etc.
2. Market position of the company relates to market share, competitive advantages, sales and
distribution network, product and customer diversity,. etc.
3. Operating efficiency of the company relates to location advantages, labour co-operation, cost
efficiency and operating margins.
4. Legal position is considered on the basis of terms of prospectus, details of the trustees and
their responsibilities, systems for timely payment and protection against forgery, etc.
2. Financial analysis
The rating agency examines accounting quality, earning protection, adequacy of cash flows and
financial flexibility.
Accounting quality
Accounting quality is judged by analyzing methods of depreciation, income recognition,
treatment of bad debts, contingent liabilities, inventory valuation, etc.
Earning protection
Factors such as sources of future earning, profitability ratios, earnings in relation to fixed
income charges, earnings per share etc., are considered while analyzing earning
protection of the company.
Financial flexibility
Financial flexibility can be assessed by examining capital financing plans, ability to raise
funds, assets redeployment potential, etc.
3. Management evaluation
Management evaluation includes the evaluation of
5. Fundamental analysis
Under fundamental analysis, the rating agency examines the following:
Liquidity Management
Liquidity management can be assessed in terms of capital, structure, debt leverage, long
term solvency, matching of cash inflows to outflows and ratio analysis of the company. It
will also study the quality of assets in terms of credit risk management, receivables to
current assets, systems of monitoring the sector credit, risk of individual and management
of problem credits.
Profitability and financial position
The company’s profitability and financial position is analyzed by considering historic
profits, spread on funds employment, revenues on non-fund based services, accretion to
reserves, profit margins, etc.