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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 genertes positive externalities, the business tradition is rather strange. It
is so because though iinvestors, 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.
Trafitionally the agencies used to gather and analyze all sorts of pertinent financial and
non-fianacial 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 convienent way for investors to
judge quality and make investment decisions.
Rating agencies sell information and survive based on their ability to accumulate and
retain reputational capital. Howevwe, 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 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 willin to loose them.
How did Credit Rating evolve?
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 rolloverthe 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
investors. Furtherimpetus 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. Tis was much in variance with the mode of
fianancing 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.
MOODY’s
“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 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. tn
addition, long term ratings incorporate an assessment of the expected monetary loss
should a default occur.”
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.
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.
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 they or can they
predict losses due to ‘shocks’ or highly unexpected situations.
Fifth, Credit Ratings relate only to ‘Credit’ and thus for example has no relationship with
the risk preferences with the investors or attractiveness of equity. Hence, the perceptions
of different stake holders, thet is, creditors, lendors, shareholders, etc …… in responding
to ratings could be different.
Issuers:
• For the borrowing company, a rating assists in enhancing the 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 onder 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
easteblish its financial standing any time required.
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 determain the return on the investment they should
demand, given the relative degree of credit risk involved.
In absence of a credit rating system, the risk perception of a common investor vis-à-
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 evry perspective
investor the opportunity to undertake detailed risk evaluation. It is even rarer for such
a heterogenous group of investors to arrive at a meaningful and consistent conclusion
as to the relative credit quality of the instrument, specially when they do not possess
the requisite skills of credit evaluation.
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 analysed 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 seeks to eastablish 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.
By 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 analyse 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 inorder to be compensated for the additional risk that they bear.
By 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.
By 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 instrumens rated below a particular level.
Factors contributing to the success of the rating system:
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.
According to Moody’s-“ 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
Ability to reach a wide range of investors by means of press reports,
print or electronic publications and more investor friendly research
services.
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 atleast two analysts of whom one
could be the lead analyst and would serve as issuers primary comtact. The analysts
who have expertise in relevant business areas will be esponsible for carrying out the
rating assignment.
Before meeting with the issuer, the analytical team obtains and anaysis
information relating to the issuers financial statement, cash flow projections and
relevant information.
The analytical team then proceeds to have detailed meetings with the
company’s management. The Rating Agency and the Management dicuss topics such
as xompetitive position, strategies, financial policies, historical performance and
long-term fianacial and business outlook. Equal importance is placed on discussing
the issuers business risk profile and strategies, in addition to reviewing financial data.
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. Issuer’s response is presented
to the Rating Committee. If the inputs are convincing, the committee can revise the
initial rating decision.
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 qualtitive criteria in accordance with the industry practices.
Creditwatch: when a major deviation from the expected trends of the issuer’s
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 creditwatch till the exact impact of such unanticipated
developments is analysed and the decision is taken regarding the rating change. The
creditwatch listing may also specify ‘ positive’ or ‘negative’ outlooks. However being
placed under creditwatch does not necessarily mean that there would be a rating
change.
Soverign rating ceiling: International credit rating agencies, while rating an issue
outside the issuers country or domicile , imposes a ceiling equal to the sovereign
rating assignes 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 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 & Poor’s 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 presicted on the strength or amount of bank lines.”
The rating coverage in India is of recent origin, beginning 1988 when the first rating
agency, CRISIL-Credit Rating and Information Services was eastablished. 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 & Phelphs, 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 & Poor’s
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.
CARE: incorporated in the year 1992, it is promoted by IDBI and several other banks and
insurance companies. The dervices 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 mojor chunk of the world credit
rating market Standard & Poor’s and Moody’s.
According to the committee, a regulator will not be in positionto 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 th 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 CRA’s 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”. Detaild 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.
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 & Poor’s
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 rigour of analysis, transparency
and disclosure and has firmly eastablished its position as the provider of the “most
reliable opinion on risk.”
CRISIL has always set the highest standards in analytical rigour and transparency in the
ratings industry in India.
Investment and Risk Advisory: The Risk Advisory business provides integrated risk
management solutions and advice to Banks and Corporates by leveraging the
experience and skills of CRISIL in the areas of credit and market risk. Taking
cognisance 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 customised to meet client needs.
CRISIL through the years has continued to innovate and play the role of a 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.
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.
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.
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.
» 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 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 rigour.
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.
» 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 analysed 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 minuted.
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 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.
Rating scales:
Long term instrument:
High investment grades:
AAA Debentures rated `AAA' 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 are likely to change, such changes as
can be envisaged are most unlikely to affect adversely the
fundamentally strong position of such issues.
Investment grades:
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
Debentures rated `C' are judged to have factors present that make
them vulnerable to default; timely payment of interest and principal
is possible only if favourable circumstances continue.
C
Substantial Risk Debentures rated `D' are in default and in arrears of interest 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 reorganisation or liquidation
D
In Default
Note:
1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to reflect
comparative standing within the category.
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").
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
Adequate Safety This rating indicates that the degree of safety regarding timely
payment of interest and principal is satisfactory. Changes in
circumstances can affect such issues more than those in the higher
rated categories.
FB
Inadequate Safety This rating indicates inadequate safety of timely payment of interest
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.
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.
3) The contents within parenthesis are a guide to the pronunciation of the rating symbols.
P-1 This rating indicates that the degree of safety regarding timely
payment on the instrument is very strong.
P-2 This rating indicates that the degree of safety regarding timely
payment on the instrument is strong; however, the relative degree of
safety is lower than that for instruments rated "P-1".
P-5
Secure Ratings:
AAAf The fund’s portfolio holdings provide very strong protection against
losses from credit defaults
Vulnerable Ratings:
BBf The fund’s portfolio holdings provide uncertain protection against
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
CRISIL Fund House Asset Management Companies rated Fund House Level 3 are
Level-3 judged to possess Average governance levels and process quality in
fund management practices
CRISIL Fund House Asset Management Companies rated Fund House Level 4 are
Level-4 judged to possess Below Average governance levels and process
quality in fund management practices.
CRISIL Fund House Asset Management Companies rated Fund House Level 5 are
Level-5 judged to possess Poor governance levels and process quality in
fund management practices
Cf The fund’s portfolio holdings have factors present which make them
vulnerable to credit defaults.
Speculative grades:
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
Note: 1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to
reflect comparative standing within the category.
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) 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.
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.
Bond Funds:
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
Portfolios of Maturity between 4.5 to 5.0 years
CRISIL Vb2 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 5.0 to 5.5 years
CRISIL Vb3+ Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 5.5 to 6.0 years
CRISIL Vb3 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity more than 6.0 years
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
CRISIL Vg2+ Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 9 to 10 years
CRISIL Vg2 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity between 10 to 12 years
CRISIL Vg3+ Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity 12 to 15 years
CRISIL Vg3 Scheme 's NAV volatility is comparable to the volatility of G-sec
Portfolios of Maturity more than 15 years
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.
• 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.
(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, fianancial 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 ans sector specific debt obligations such as instruments issued by
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 Ratingand 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
pproducts include 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 ICRA’s 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 Eastate Developers & Projects: (ICRA and The National Real Eastate
Development Council seek to make property buyers aware of the risks associated with
real eastate 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).
Plant visits are made to gain a better understanding of the issuer’s 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.
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 issuer’s 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.
ICRA considers all the relevant factors that have a bearing on the future cash generation
of the issuer’s. these factors include:
• Industry characteristics
• Competitive position of the issuer
• Operational efficiency
• Management quality
• 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 issuer’s cash flows to service obligations that determine the rating.
IrAAA : The highest-credit-quality rating assigned by ICRA. The rated entity carries the
lowest credit risk. Therating 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 creditworthiness of the rated
entity and not specific to any particular debt
instrument.
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 creditworthiness of the rated
entity and not specific to any particular
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 creditworthiness of the rated
entity and not specific to any particular
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 creditworthiness
of the rated entity and not specific to any particular debt instrument.
Note:
For the Rating categories IrAA through to IrC the sign of + (plus) or – (minus) may be
appended to the Rating
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:
LAA+ Highest safety. Risk factors are modest and may vary slightly. The protective
factors are strong and the prospect of timely payment
LAA
Of principal and interest as per terms under adverse circumstances , as may be
LAA- visualised, differs from LAAA only marginally.
LA+ Adequate safety. Risk factors are more variable and greater in periods of
economis stress. The protective factors are average and any adverse change in
LA
circumstances, as may be visualised may alter the fundamental strength and
LA- affect the timely payment of the principle and interst ad per the terms.
LBBB+ Moderate safety. Considerable variability in risk factors. The protective
factors are below average. Adverse changes in business/economic
LBBB
circumstances are likely to affect the timely payment of principle and interest
as per the terms,
LBBB-
Inadequate safety. The timely payment of interest and principle are more
LBB+
likely to be affected by present or prospective changesin the business or
LBB economic circumstances. The protective factors fluctuate in case of changes
in economy or business conditions.
LBB-
LB+
Risk prone. Risk factors indicate that obligations may not be met when
LB due.the protective factors are narrow.adverse changes in business and
economic conditions could result in inability or willingness to service debts
LB- on time as per the terms.
LC+
LC
Substantial risk. There are inherent elements of risk and timely servicing of
LC- debts or obligations could be possible only in case of continued existence of
favourable circumstances.
LD 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.
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+
Highsafety. The prospect of timely servicing of the interest and the principal
MAA
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 the
principal as per the terms is adequate. Howewer, the debt servicing maybe
MA affected by adverse changes in the business or economic conditions.
MA-
MB+ Inadequate safety. The timely payment of interest and principal are more
MB likely to be affected by future uncertainities.
MB-
MC+ Risk prone. Susceptibility to default is high. Adverse changes in the business
or economic conditions could result in inability or willingness to service debts
MC
on time and as per the terms.
MC-
MD
Default. Either already in default or expected to be in default in the near
future.
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 installment is
adequate, but any adverse change in the business or economic conditions may
A3 affect the fundamental strength.
A4+ Risk prone. The degree of safety is low. Likely to default in case of adverse
changes in business or economic conditions.
A4
ICRA’s claims paying ability ratings (CPR’s)for insurance companies are ICRA’s
opinion on the ability of the insurers concerned to honour policy holders claims and
obligations on time.in other words, a CPR is ICRA’s opinion on the financial strength of
the insurer, from a policy holders perspective.
iAA High claims paying ability. Risk factors are modest and may vary slightely.
Prospect of meeting policyholders obligations is high and differs from iAAA
only marginally.
Moderate claims paying ability. The protective factors are below averageand
iBBB
adverse changes in business and economic circumstances are likely to affect
the prospect of meeting policyholders obligations.
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 its financial stakeholders The variables, which are analysed 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.
Implies that in ICRA’s current opinion, the rated company has adopted and
follows such practices, conventions and codes as would provide its financial
CGR1
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.
Implies that in ICRAs current opinion, the rates compant has adopted and
follows such practices, conventions and codesn as would provide its
CGR2
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 company’s future financial
performance, credit rating or stock price.
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 adequate level of assurance on the quality of
CGR3 corporate governance. ICRA opinion, however, is not a certificate of
statutory compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
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
CGR4 corporate governance. ICRA opinion, however, is not a certificate of
statutory compliance or a comment on the rated company’s future financial
performance, credit rating or stock price.
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 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 company’s future financial
CGR5 performance, credit rating or stock price.
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 low 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 company’s future financial
CGR6 performance, credit rating or stock price.
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 the
Highest category on the composite parameters of stakeholders value
SVG1
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
SVG2
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
SVG3
comment on the rated company’s future financial performance, credit rating
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
SVG4
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
SVG5
or stock price.
Implies that in ICRAs current opinion, the rated company belongs to the
Highest category on the composite parameters of stakeholders value
creation and management, as also corporate governance practices. ICRA’s
opinion is , however, is not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating
or stock price.
SVG6
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 Ratingon its conventional Credit Rating
scale.the Project Finance rating(PFR) service is essentially a project risk assessment
exercisewhich may be useful to project enetity 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.
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 has 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 recognised 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 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 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.
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.
Valuation
CARE carries out enterprise valuations for company managements, prospective and
exisiting business partners or large investors. The Disinvestment Commission,
Government of India, has used CARE's services for valuing 20 state owned enterprises
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.
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.
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
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 analysed in the
light of the estimates made earlier and deviations are examined.
CARE puts the rating under Credit Watch, when any event or deviation from the
expected trend has occurred or is expected and additional information is necessary to take
rating action. The rating may be retained, upgraded or downgraded based on the changed
prospects for the issuer. A rating change is at the absolute discretion of CARE, without
concurrence of the client.
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 vary 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.
Issuer ratings:
CARE’s 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 requeat 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.
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.
Issuers with this rating are considered to be of the moderate safety for
CARE BBB timely servicing of debt obligations. Such issuers carry moderate credit
risk.
Issuers with this rating are considered to be of the inadquate safety for
CARE BB 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
servicing of debt obligations. Such issuers carry very high credit risk.
CARE B
Issuers with this rating are considered to be having very high likelihood of
default in the payment of interest and principal.
CARE C
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 payment 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.
CARE C
(FD)/(CD)/(SO) Such instruments are of lowest category. They are either in default or
likely to be in default soon.
CARE D
(FD)/(CD)/(SO)
PR-5
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 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.
Loans with this rating are considered to be of the quality, adequate safety
CARE A(L) for timely servicing of loan obligations. Such loans carry low credit risk.
Loans with this rating are considered to be of moderate safety for timely
servicing of loan obligations. Such loans carry moderate credit risk.
CARE BBB(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 BB(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 B(L) Loans with this rating are considered to having very high likelihood of
default in the payment of interest and principal.
Loans with this rating are of the lowest category. They are either in
CARE C (L) default or are likely to be in default soon.
CARE D(L)
Short term loans:.
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
PL 4 risk as compared to loans rated higher.
Loans with this rating would have inadequate capacity for timely payment
PL 5 of short-term loan obligations and carry very high credit risk. Such loans
are susceptible to default.
.
1-Good
2-Satisfactory
3-Low Risk
4-High Risk
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.
CARE 3 (CIS) Such schemes are considered to have adequate strengths for achieving
their objectives and meeting the obligations to investors. They are
considered to be investment grade
Such schemes are considered weak and are unlikely to achieve their
objectives and meet their obligations to investors. They have either failed
or are likely to do so in the near future.
CARE 5 (CIS)
CRISIL:
CRISILS framework for assessing credit quality covers the four broad areas of Business
risk, Financial risk, Management risk and Project risk.
Business risk:
Business risk analysis covers the business fundamentals of the rated companies, the
characteristics of the industry in which it operates, its competitive and market position in
the industry and operational efficiencies.
The analysis begins with the fundamental assessment of the company’s environment in
terms of the industry in which it operates, the risks attached to that industry and the
government policies affecting that industry. The evaluation extends to an assessment of
the companys market position and its operational efficiencies.
(3) Market Position: An anlysis of the rated companys market position provides
insights into its current strengths in the market place and its ability to sustain
its competitive advantage. CRISIL undertakes a detailed analysis of both the
degree of competition in each market segment and the competitive dynamics
amongst different players to evaluate the rated entitiesmarket position. Entry
barriers to the industry and the capacity expansions of existing players are
analysed to understand the dynamics of demand and supply. CRISIL also
analyses regional demand-supply balances as some products exhibit diverse
characteristics in different markets.
An analysis of the companys products categories on the basis of their
size, features, price rangs and consumer segments gives
Crisil an insight into the company’s positioning strategy. The market postion of
companies in dynamic industries such as software, drugs, pharmaceuticals and
consumer durables is analysed in terms of their track record and their ability ti
innovate and launch products and achieve commercial success.
(4) Operating Efficiency: operating efficiency is a critical parameter in
evaluating a company’s business risk. The risk factors considered while
evaluating operational efficency vary from industry to industry. Some of the
key factors common across industries are:
(i) Technology
(ii) Access to resources
(iii) Human resources
(iv) Capacity utilization and flexibility
(v) Level of integration
(vi) Research and development
(1) Accounting Quality: the financial ratios and statements used by CRISIL to
analyse a companys financial performance are derived from the audited
financial statements. Consequently, CRISIL commences its financial risk
analysis by assessing the company’s accounting quality. Some of the ey areas
analysed include:
(i) overstatement/ understatement of profits
(ii) qualifications made by autditors.
(iii) Method of income recognition and depreciation
(iv) Inventory valuation policies.
(v) Off-balance sheet items/contingent liabilities.
The managements past success in introducing new products and its ability to manage
chamge in the external environment such as regulatory or technological changes is
also analysed. A high-risk appetite manifested in high leveraging or a propensity to
take up projects that are larger than the existing operations is viewed negatively by
CRISIL.
Succession is another key area concern in case the company’s operation are
dependent on a single promoter or manager. Corporate governance principals
followed by the management in it sdaily operations and transparency in management
actions are also evaluated.
Implementation risks such as time and cost 0ver- runs and technology risks and the
impact of these on the projects viability, and funding risks in terms of the projects
capital structure and funding arrangements are also evaluated.
The projects market risks in relation to the companys existing product line and the
companys trach record in implementing such projects are given adequalte importance
in assigning the rating.
Care:
CARE also follows the same criteria for rating the manufacturing companies, with
some changes. The only difference between the two is that CARE does not take into
consideration the project risk but on the other hand conducts the economy and
industry risk analysis.
• Economy and Industry Risk Analysis:
CARE’S analysis of industry risks focuses on the prospects of the industry
and the competitive factors affecting the industry. The economic/industry
environment is assessed to determine the degree of operating risks faced by the
company in a given business. Investment plans are the major players in the
industry, demand supply factors, price trends , changes in technology,
international/domestic competitive factors in the industry, entry barriers, capital
intensity, business cysles etc… are the key ingredients of the industry risk. CARE
also takes into account economy iwde factors which have a bearing on the
industry under consideration. The strategic nature of the industry in the prevailing
policy environment, regulatory oversight governing industries etc… are also
analysed.
CARE also conducts the Business risks analysis, the fianacial risks anaysis and
the management evaluation which is similar to CRISIL.
CRISIL:
The objective of CRISILs analysis is to form an opinion on the types of risks that may
affect the relative ability of banks and financial institutionsto service the interests and
principal payments on the rated instruments in a timely manner.
The exercise incorporated the review of the overall economy, th financial sector and the
banking industry. CRISIL also analyses the changing regulatory environment and
increased competition arising out of liberlisation. Over the past decade, the Indian
economy had been liberalized and the financial sector, deregulated. Both the opening up
of the economy and the gradual lowering of the tariff barriershas exposed the corporate
sector to risk of foreign competition.some of the risks have manifested in certain sectors
where the domestic industry has been rendered uncompetitive.
The financial sector is going through a phase of trandformation and convergence and
there has been increasing blurring of boundaries between the role of banks and financial
institutions, which is likely to set up competitive pressures in future. This transformation
is evident on both assets and liability side. On the asset side, banks are shifting from their
historical business model of providing finance to corporates to aggressively focus on
financing retail assets such as housing, automobiles and commercial vehicles. This is
driven both by weak demand from corporates as well as the paucity of clients with good
creditquality. On the liability side, the transformation is from a passive retail strategy to a
very active retail thrust to attract the retail customers and increase the deposit base. The
entry of the new private sector banks and marketing strategy adopted by them has
precipitated this transformation.Apart from this transformation, banks are also going
through the phase of convergence wherein almost all the banks are offering the entire
gamut of products and services on the asset and liability side to both retail as well as
wholesale customers.
An entry- specific analysis of the risk profile is don’t through the qualitative cum
quantitative approach following a structures methodology called the CRAMEL model.
Apart from this, CRISIL also evaluates the market position of the bank/FI being rated and
its strategy in the emerging competitive scenario.
The following is the criteria based on which CRISIL rates the banks and financial
institutions:
CRISIL fators in the size of an entity in the financial sector and looks at its positioning in
the industry. A larger size enables the entity to with stand systematic shocks ans
determines the extent of system support that can be expected for the entity. Diversity in
the product portfolio, business lines and customer base are also positively factored in by
CRISIL.
Capital adequacy: An entitys capital provides it with the necessary cusion to with stand
credit risks and other risks in its business. While assigning a rating, CRISIL analysis the
capital adequacy level and its sustainability in the medium to long term. This assessment
is significantly influenced to relative profitability, the entity’s risk profile and its asset
quality. This analysis encompasses the following factors:
(1) Size of the capital: the absolute size of capital imparts flexibility to the banks
or FI to withstand shocks and thus, an entity with higher absolute capital is
viewed favourably.
(2) Quality of capital: the proportion of core capital is the primary indicator of the
quality of a bank or FI’s capital. CRISIL also analysis other issues,like the
presence of hidden reserves and the percentage of the investment portfolio
that is marked to the market.
(3) Sustainability of capital ratios and flexibility:a bank or FI’s ability to support
the increased asset base through earnings is an important parameter in
assessing the sustainability of its capital adequacy. Such an entity is viewed
favourably.
(4) Growth plans:CRISIL factors the rated bank or FI’s future growth plans while
analyzing its capital adequacy. Its capital adequacy would be regarded as
unsustainable if the entity pursues a high growth strategy.
Asset quality:A bank or FI’s asset quality is a measure of its ability to manage credit
risks. Besides studying the banks credit appraisal mechanisms, portfolio monitoring
procedures and problem asset resolution strategies, CRISIL analyses asset quality on
the basis of the following parameters:
(1) Geographical diversity and diversity across industries: Geographical diversity
of asset base and diversity across industries, alonwith single risk concentration
limits, are important inputs in determining the asset quality of banks and FI’s.
Regional banks with limited operations and branch network have lesser
flexibility to diversify their advances portfolio than banks with a national
presence and are thus susceptible to adverse economic conditions in a
particular region.
(2) Client profile or corporate asset portfolio: CRISIL analysis the profile of
clients in the asset portfolio to make a judgement on portfolio quality. The
ability of a bank or FI to attract bettr credit quality clients is an important
indicator of future credit quality.also, a bank or FI’s ability to attract and
retain good quality clients by providing value-added services would enhance
asset quality in future.
(3) Quality of non-industrial lending: CRISI:L analysis the quality of non-
industrial portfolio in arriving at a judgement of the overall asset quality of a
bank.the credit quality of the asset portfolio is also indicated by the segment
wise non-performing asset levels of the portfolio, revealing the performance
of the bank in each segment. In recent times, both the banks and FI’s are
focusing on retail customer loans particularly housing and vehicle loans.
CRISIL aso looks at the quality of retail customer growth levels, underwriting
standardsand the recovery mechanisms.
(4) NPA(non-productive asset)levels: The gross NPA levels help to benchmark
the banks or FI’s ability to manage its asset portfolio on a relative scale. Net
NPA levels are an indicator of the balance-sheet strength of the bank, the
proportion of earning assets held by it and the potential credit loss. The
proportion of earning assets and the potential credit loss would have a bearing
on the banks future earnings capability.
(5) Movement of provision and write-offs:average positioning including write
offs, over a five year timframe is an indicator of the level of cleaning up done
by a bank over a period of time. This average positioning level and its
movement is an indicator of the portfolios credit risk and the expected future
write-offs and provisioning, which would further affect the bank’s earnings
capability.
(6) Growth in advances: CRISIL closely analyses the pattern and the nature of
such growth, studying entities with higher growth rates more carefully to look
into the nature of the growth, the reasons for it and the implications on the
asset quality. An entity that has grown by attracting good quality clients from
its competitors would be viewed more favourably than one that has grown just
by increasing its geographical presence or diluting credit criteria.
Earnings potential: CRISIL analyses a banks/FI’s earnings on the basis of the level,
diversity and stability in earnings.
(1) Level of earnings: the levelof earnings as measured by the return on total
assets(ROTA) provides the bank or FI a cushion for its debt servicing and also
increases its ability to cover its asset risk. ROTA is a function of interest
spreads, expense levels, provisioning levels and the non-interest income
earned by the bank. The size of the net profit is also factored in while rating
the entities earnings.
(2) Diversity of income sources: Diversity of income sources is an important
input in analyzing the stability of earnings. CRISIL reviews the compostion of
interest revenue streams while analyzing the earnings position of a bank or FI.
It also analyses the composition of the i=non-interest income while evaluating
the earnings which includes income from trading activities, which tend to be
volatile. A closer analysis of the composition of revenue treams helps in
formaing an opinion on the sustainability of the earnings.
(3) Efficiency measures: CRISIL looks at the level and the trend of operating
expenses and degree of automation in the bank/FI. CRISIL looks at salary
expenses and total non-interest expenses as a proportion of total income and
average assets.
Liquidity/asset liability management: CRISIL assess the asset liability maturity
profile of the rated entity to form an opinion on the liquidity risk as well as the
interest rate risk.
Liquidity risk: CRISIL views mos of the public sector banks favourably on this
patameter due to the stable accretion to deposited and the liquidity support available
to them. An FI’s liquidity position is a function of its management’s policy of main
taining treasury portfolios to meet asset and liability side liquidity demands.
Howewer, on account of their significance to the domestic financial sector FI’s enjoy
a high degree of financial flexibility that reduces liquidity risks to fairly low levels.
The specific liquidity parameters analysed by CRISIL are:
(1) Liquid assets/ Total assets: to arrive at this ratio, CRISIL looks at the
percentage of sovereign investments in an entitys books to its total assets.this
can also be roughly derived from the credit deposit ratio.
(2) Proportion of small deposit: CRISIL looks at the proportion of deposit below
rs. 150 million to the banks total deposit base. These small sized retail
deposits tend to be inherently more stable.
(3) Interest rate risk: The rating factors are in the volatility to the bank or FI’s
earnings to interest rate changes. CRISIL analyses the entity’s asset liability
maturity profile to judge the level of interest rate risk.
ICRA:
An ICRA's financial sector debt ratings include the major entities, one of which is, the
Banks and Financial Institutions. ICRA's ratings factor the entire gamut of risks that can
possibly affect the operations of a finance company - operating risks, financial risks and
management risks. The key determinants of operational risk include volatility in revenues
and expenses, regulatory risks, risk of administrative expenses going out of hand, and
deterioration in asset quality. The financial risk is driven by capital adequacy, asset
liability management, solvency, financial flexibility and also the accounting quality. The
management risks include management quality and efficacy of systems.
Risk management:
IMaCS is one of the leading solution providers in the area of Risk Management. ICRA
believes that better risk measurement leads to better risk management. Better risk
measurement helps risk managers understand fully the nature and magnitude of their
exposures, which improves the risk adjusted return on capital. A major part of ICRA’s
work focuses on translating these risk concepts into practical tools that can be integrated
into business processes. ICRA works closely with clients to ensure that our experience is
translated into tangible results.
Specifically, ICRA offers the following services in the banking and financial services
sector:
(1) Implementing credit risk management system: IMaCS has designed and
developed a Credit Risk Management software, IMaCS Risk Scorer that
comprehensively addresses business and regulatory issues with respect to risk
management. The solution helps banks in complying with the requirements of
the accord. The solution provides risk scoring of obligors, regulatory and
economic capital calculators and portfolio analysis. The solution is web-
enabled and browser based with the user interface developed using ASP.NET.
CARE:
CARE’s ratings are an opinion on the relative ability and the willingness of an issuer
to make timely payments on the specific debt obligations over the life of the
instrument. CARE has developes a comprehensive methodology for credit rating of
debt instruments issued by the banks.
Some of the factors considered in CARE’s rating analysis are described below:
(1) Quantitive factors
(2) Qualitative factors
Thus it can be seen as to how the three major credit rating agencies rate the
banking and the financial institutions.
CRISIL:
The broad analytical framework used by CRISIL to rate financial companies is the same
as that is used for banks and financial institutions. In addition, CRISIL also addresses
certain issues that are specific to finance companies.
The industry can be broadly classified into Non Bnaking Finance Companies(NBFC’s)
and Housing Finance Companies(HFC’s). typically NBFC’s finance vehicles( cars,
commercial vehicles and two- wheelers), consumer durables, plant and machinery.
NBFC’s are registered with the RBI and HFC’s with the National Housing Bank(NHB).
The NBFC’s exhibited high growth rates in the first half of 1990’s esoecially in the
corporate finance portfolio even though many of them lacked the credit appraisal,
monitoring and recovery skills required for the same. When subsequent recessionand
tight liquidity conditions saw several companies defaulting, it affected the solvency of
several NBFC’s as well.the high profile collapse of a large NBFC, which ushered in
tighter prudential norms and regulatory changes, led to a period of rationalization and
consolidation, with several small players existing in the business.
The NBFC’s industry is dominated by handful of players today. These include MNc
players, captive finance companies and a few large stand-alone companies. Banks ,
especially, private sector banks, have also increased their presence in the retail finance
sector.
On the other hand, HfC industry has been more stable and has traditionally been
dominated by the Housing Development Finance Corporation(HDFC). Of late thr private
sector banks have become more aggressive in this arena because of the segments good
asset quality experience which has intensified the competition.
The consolidation of the industry has resulted in some trends, which CRISIL believes are
structurally positive for the finance companies. These are:
(i) Strengthening of credit appraisal and monitoring systems: industry players
have increased their focus on controlling asset quality costs and expanse
levels to maintain overall profitability. Such efforts have significantly
strengthened the industry’s credit origination and monitoring systems and
consequently the performance of contracts.
(ii) Increasing relaiance on capital markets for meeting resource
requirement:the industries funding profile has shifted in the favour of
capital market instruments. Indian players have reduced their reliance on
bank funding and fixed deposits.
(iii) Increased use of securitization: securitization is gaining popularity with
the finance companies having strengths in origination.securitisatin began
in early 1990’s and even today is the most dominant asset class securitized
continues to be retail assets.
CRISIL has evolved the rating criteria that are specific to the business characteristics
of NBFC’s and HFC’s. these include:
(1) Market position: The aspects assessed by CRISIL are the company’s brand
equity, service standard’s, track records,customer relationship, product
portfolio, companys distribution network etc…. he housing finance segment is
grown at over 30% a year in recent times on the back of low interest rates,
stable property prices, demand supply gaps and governemtn initiatives in the
form of greater tax benefits on housing loans.the key determinant og HFC’s
market position is availability and the cost of funds. CRISIL believes that the
finance companies have a weaker market position in this segment than the
banks and financial institutions, which have the size and cost of funds
advantage.
(3) Asset quality: In analyzing the asset quality, CRISIL reviews a companys
credit risk management strengths, portfolio quality, underwriting standards,
aprovel authorities, collection procedured,amangement information
systemsetc… the quantitive analyses encompasses asset diversity in terms of
asset classes and geographic distribution, delinquency trends, NPA levels,
write off and recovery levels.
(4) Capital adequacy: CRISIL’s analysis of a companys capital adequacy
incorporates the absolute quantum and the quality of capital, risk adjusted
capital levels and its management capitalization philosophy. It also views the
leveraging ability of a housing loan portfolio to be higher than that of a
commercial vehicle, construction equipment or a corporate finance
portfolio. .CRISIL considers the capital position of most finance companies to
be weakon accpunt of the small capital base and weak recapitalization
prospects. CRISIL also factors in the growth outlook of the companys asset
abse and its ability to generate capital internally or by accessing capital
markets. CRISIL’s ratings for some large finance companies contitnue to be in
high safety categories despiteof the significant change in their operating
environment and profitability. CRISIL believes that finance companies
securitizing their assets retail significant risks with themselves.hence, an
assessment of capital levels of a particular finance company includes a study
od all its outstanding securitization transactions.
(5) Resource raising ability: Since funds are a finance companys raw material,
its ability to generate them is essential for its operating model.CRISIL’s
analysis of a finance companies resource peofile incorporates the cost of
resources, diversity of the resource profile and the appropriateness of the
funding strategy in the light of asste types being financed. CRISIL notes that
the resurce raising ability of a finance company is constrained compare to
banks due to the lack of extensive branch network and inability to provide
cheque issuing facilities. The resource raising ability of the smaller NBFC’s
and the HFC’s is a constraining factor in their ratings.
(7) Liquidity/ asset liability management: In the recent past several NBFC’s
faced a liquidity crunch as a result of asset quality problems. Systematic
illiquidity and negative shifts in sentiment towarde companies and sectors also
tend to suck out liquidity. CRISIL evaluates a finance companies contingent
liquidity plans to take care of such eventualities. It also assesses the maturity
profile of assets and liabilities to form an opinion on the companys liquidity
and interest rate risks.
ICRA:
ICRA has broken down a finance companies fund based operations into its bare
essentials and can be explaines as follows:
(i) Sourcing funds at the lowest possible cost
(ii) Packaging it for its customers at an appropriate price
(iii) Effecting the collecions over the tenure of the contract as envisaged
(iv) Starting the cycle all over again.
(b) Regulatory risks: Since the financial sector is fairly regulated in India
a finance companys operations are governed by the changes in
regulation that occur from time to time some of which can be udden
and unpleasant. Also a recent deregulationof interest rates for the
NBFC sector is likely to have far reaching effects on several
companies. The effect of these changes in regulation on the industry
and the individual companies while assigning its ratings are also
evaluated by ICRA
Some of the factors considered in the rating analysis are described below:
(1) Quantitive factors
(2) Qualitative factors
The quantitative factors are similar to the CRISIL’s criteria of rating. These include:
(1) Capital adequacy
(2)Asset quality
(3) Resources
(4) Liquidity
(5) Earnings quality.
The qualitative factors which form a part of the rating criterial is as follows:
(1) Ownership: Ownership pattern and track record of the promorters or the
group companies is examined. Strong promorters are more likely to provide
support to the company in times of crises.
(2) Management quality: The compostion of the board, credentials of the CEO
and the organizational structure of the company, the starategic objectives and
initiatives of the company, its ability to identify opportunities and track down
in maangeing stress situations, adequacy of information systems used by the
management etc …… are evaluated. CARE focuses on modern practices and
systems, degree of computerization, capabilities of senior management,
personal policies and the extent of delegation of powers.
(5) Accounting quality: Rating relies heavily on audited data. Policies for
income recognition, provisioning and valuation of investments are examined.
Suitable adjust,ments to reported figures are made for consistency of
evaluation and meaningful interpretation.
(6) Size and market presence: The fund base and the branch network of the
company may have a bearing on the company’s competitive position. While
both large nad small companies have successfully co-existed in India in the
rapidly changing competitive environment, the niche strategy of smaller
compaies against the scale advantages of larger players/banks would be
carefully examined to understand the business model of each company.