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I am very thankful to everyone who all supported me, for I have completed my project effectively and moreover on time. This research project would not have been possible without the support of many people.

I take immense pleasure in thanking Mr. H.N.Tiwari , my mentor, for his able guidance and useful suggestions, which helped me in completing the project work, in time. He gave me moral support and guided me in different matters regarding the topic. He had been very kind and patient while suggesting me the outlines of this project. He has taken pain to go through the project and make necessary correction as and when needed. Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for their blessings, my friends for their help and wishes for the successful completion of this project.



1. Introduction 2. Objectives of credit rating agencies 3. Need for credit rating agencies 4. Nature of credit rating 5. Non rating related activities 6. Rating methodology 7. Process of credit rating 8. Uses of credit rating agencies 9. Criticism 10. List of credit rating agencies 11. Big Three credit rating agencies 12. Rating Symbols of Big Three Credit Rating Agencies 13.Credit rating agencies in India 14. Top Three Credit Rating Agencies in India 15. SEBI Regulations,1999 16. Conclusion


A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts.
Credit rating is an opinion on the future ability and legal obligation of the issuer to make timely

payments of 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. Rating, usually expressed in alphabetical or alpha-numeric symbols, is a simple and easily understandable tool for the investors. Credit rating is a specialized and technical work. It requires expertise in the related field. An investor may not be competent enough (in respect of time resources) to go for rating himself. There are many types of credit rating. Some of them are mentioned below :

TYPES OF CREDIT RATING Sovereign credit ratings A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account. Short-term rating A short-term rating is a probability factor of an individual going into default within a year. This is in contrast to long-term rating which is evaluated over a long timeframe. Nowadays, short-term ratings are commonly used. Corporate credit ratings The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation.


A Credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.

The value of such security ratings has been widely questioned after the 2007-09 financial crisis. In 2003 the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.

A company that issues credit scores for individual credit-worthiness is generally called a credit bureau (US) or consumer credit reporting agency (UK). Rating related products and activities CRAs in India rate a large number of financial products: 1. Bonds/ debentures- [the main product] 2. Commercial paper 3. Structured finance products 4. Bank loans 5. Fixed deposits and bank certificate of deposits 6. Mutual fund debt schemes 7. Initial Public Offers (IPOs)


Objectives of Credit rating agencies

The objectives of credit rating may be summarized as follows: The main objective is to provide superior and low cost information to investors for taking a decision regarding risk-return trade off, but it also helps to market participants in the following ways: Improves a healthy discipline on borrowers Lends greater credence to financial and other representations Facilitates formulation of public guidelines on institutional investment Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues Encourages greater information disclosure, better accounting standards, and improved financial information (helps in investors protection) May reduce interest costs for highly rated companies Acts as a marketing tool for the issuer

It lends credence to financial and other representations made by the issuer of debt instruments. It helps the investor to differentiate between debt instruments on the basis of their underlying credit quality. It provides the investors, a system of gradation to identify the ability of the issuers to make timely payment of interest and repayment of a particular debt security.

Thus, Credit rating agencies aim to provide investors with objective analyses and independent assessments of companies and countries that issue such securities. Credit ratings provide individual and institutional investors with information that assists them in determining whether issuers of debt obligations and fixed-income securities will be able to meet their obligations with respect to those securities.


Need for credit rating agencies

Credit rating is mandatory for the issuance of certain instruments in India. Public issue or right issue of debentures and bonds convertible/or not, must be credit rated. The guidelines issued by Securities and Exchange board of India(SEBI) provide that no company shall make a public issue or right issue of debt instruments (whether convertible or not),unless credit rating of not less than investment grade is obtained from not less than two registered credit rating agencies. According to Reserve Bank of India (RBI) Guidelines, a minimum rating of P2 from CRISIL or A2 from ICRA or PR2 from CARE is required for issuing commercial paper. Non-banking Finance Companies having net owned funds of more than Rs. 50 lakhs are required to get their Fixed Deposits Programme rated. The minimum rating required is FA from CRISIL or MA from ICRA or BBB from CARE. Besides this there are many other issues for which credit rating agencies are required. Some of these are: It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. Maintenance of investors confidence, since defaults shatter the confidence of investors in corporate instruments. Protect the interest of investors who cannot into merits of the debt instruments of a company. Motivate savers to invest in industry and trade. Determining disclosure requirements (such as for rated entities) Determining prospectus eligibility (for example, whether investment-grade-rated debt is eligible for expedited or automatic regulatory review before its offering)

Thus, a credit rating has, therefore, become a precondition for a debt offering in virtually every country with a debt market.


Nature of Credit Rating 1. Rating is based on information:

Any rating based entirely on published information has serious limitations and the success of a rating agency will depend, to a great extent, on its ability to access privileged information. Cooperation from the issuers as well as their willingness to share even confidential information are important pre-requisites. The rating agency must keep information of confidential nature possessed during the rating process, a secret.

2. Many factors affect rating:

Rating does not come out of a predetermined mathematical formula. Final rating is given taking into account the quality of management, corporate strategy, economic outlook and international environment. To ensure consistency and reliability a number of qualified professionals are involved in the rating process. The Rating Committee, which assigns the final rating, consists of specialized financial and credit analysts. Rating agencies also ensure that the rating process is free from any possible clash of interest.

3. Rating by more than one agency:

In the well developed capital markets, debt issues are, more often than not, rated by more than one agency. And it is only natural that ratings given by two or more agencies differ from each other e.g., a debt issue, may be rated AA+ by one agency and AA or AA- by another. It will indeed be unusual if one agency assigns a rating of AA while another gives a BBB.

4. Monitoring the already rated issues:

A rating is an opinion given on the basis of information available at particular point of time. Many factors may affect the debt servicing capabilities of the issuer. It is, therefore, essential that rating agencies monitor all outstanding debt issues rated by them as part of their investor service. The rating agencies should put issues under close credit watch and upgrade or downgrade the ratings as per the circumstances after intensive interaction with the issuers.

5. Publication of ratings:
In India, ratings are undertaken only at the request of the issuers and only those ratings which are accepted by the issuers are published. Thus, once a rating is accepted it is published and subsequent changes emerging out of the monitoring by the agency will be published even if such changes are not found acceptable by the issuers.

6. Right of appeal against assigned rating:

Where an issuer is not satisfied with the rating assigned, he may request for are view, furnishing additional information, if any, considered relevant. The rating agency will undertake a review and thereafter give its final decision. Unless the rating agency had over looked critical information at the first stage chances of the rating being changed on appeal are rare.

7. Rating of rating agencies:

Informed public opinion will be the touchstone on which the rating companies have to be assessed and the success of a rating agency is measured by the quality of the services offered, consistency and integrity.

8. Rating is for instrument and not for the issuer company:

The important thing to note is that rating is done always for a particular issue and not for a company or the Issuer. It is quite possible that two instruments issued by the same company carry different ratings, particularly if maturities are substantially different or one of the instruments is backed by additional credit reinforcements like guarantees. In many cases, shortterm obligations, like commercial paper (CP) carry the highest rating even as the risk profile changes for longer maturities.

9. Rating not applicable to equity shares:

By definition, credit rating is an opinion on the issuers capacity to service debt. In the case of equity there is no pre-determined servicing obligation, as equity is in the nature of venture capital. So, credit rating does not apply to equity shares.

10.Time taken in rating process:

The rating process is a fairly detailed exercise. It involves, among other things analysis of published financial information, visits to the issuers offices and works, intensive discussion with the senior executives of issuers, discussions with auditors, bankers, creditors etc. It also involves an in-depth study of the industry itself and a degree of environment scanning. All this takes time, a rating agency may take 6 to 8 weeks or more to arrive at a decision. For rating short-term instruments like commercial paper (CP), the time taken may vary from 3 to 4 weeks, as the focus will be more on short-term liquidity rather than on long-term fundamentals.


Non rating related activities

CRAs often undertake a variety of non rating related activities these include the following:

1. Economy and company research

Some Indian CRAs have set up research arms to compliment their rating activities. These arms carry out research on the economy, industries and specific companies, and make the same available to external subscribers for a fee. In addition, they disseminate opinions on the performance of the economy or specific industries, available through releases to the media. The research would also be used internally by the rating agencies for arriving at their rating opinions. SEBI permits CRAs to carry out this activity subject to relevant firewalls.

2. Risk consulting
With the application of Basel II regulations for banks, there is considerable demand for tools and products that will allow banks to compute their capital adequacy ratios under the revised guidelines. The risk consulting groups of credit rating agencies would leverage the agencies understanding of credit risk to develop and provide the tools and data that banks would require. The products in this area include tools for internal ratings, operational risk evaluation, and overall capital calculation.

3. Funds research
Some CRAs have diversified from mutual fund ratings into mutual fund research. The services that are available under this head include fund rankings, performance attribution tools (to help users understand the reasons for funds performance), desktop tools, and fixed income research.

4. Advisory services
CRAs offer various kinds of advisory services, usually through dedicated advisory arms. Most of this is in the nature of developing policy frameworks, bid process management, public private partnership consulting, and creating an enabling environment for business in India and globally.

5. Knowledge Process Outsourcing

Some Indian CRAs (CRISIL and ICRA) have KPO arms that leverage their analytical skills and other process and manpower capabilities. These arms provide services to the CRAs affiliates in developed markets, and also to other clients outside India.

Rating Methodology
Rating is a search for long-term fundamentals and the probabilities for changes in the fundamentals. Each agencys rating process usually includes fundamental analysis of public and private issuer-specific data, 'industry analysis, and presentations by the issuer's senior executives, statistical classification models, and judgment. Typically, the rating agency is privy to the issuer's short and long-range plans and budgets. The analytical framework followed for rating methodology is divided into two interdependent segments. The first segment deals with operational characteristics and the second one with the financial characteristics. Besides, quantitative and objective factors; qualitative aspects, like assessment of management capabilities play a very important role in arriving at the rating for an instrument. The relative importance of qualitative and quantitative components of the analysis varies with the type of issuer. Key areas considered in a rating include the following:

i) Business Risk To ascertain business risk, the rating agency considers Industry's
characteristics, performance and outlook, operating position (capacity, market share, distribution system, marketing network, etc.), technological aspects, business cycles, size and capital intensity. ii) Financial Risk To assess financial risk, the rating agency takes into account various aspects of its Financial Management (e.g. capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, interest coverage), projections with particular emphasis on the components of cash flow and claims thereon, accounting policies and practices with particular reference to practices of providing depreciation, income recognition, inventory valuation, offbalance sheet claims and liabilities, amortization of intangible assets, foreign currency transactions, etc. iii) Management Evaluation Management evaluation includes consideration of the background and history of the issuer, corporate strategy and philosophy, organizational structure, quality of management and management capabilities under stress, personnel policies etc. iv) Business Environmental Analysis This includes regulatory environment, operating environment, national economic outlook, areas of special significance to the company, pending litigation, tax status, possibility of default risk under a variety of scenarios. Each agency applies its own methodology in measuring creditworthiness and uses a specific rating scale to publish its ratings opinions. Typically, ratings are expressed as letter grades that range, for example, from AAA to D to communicate the agencys opinion of relative level of credit risk.

Process of Credit Rating

There are various steps and activities involved in assigning a credit rating, starting from the signing of the rating agreement, to the assignment of the rating and subsequent actions such as rating dissemination and surveillance. Policies and methodologies govern each step of this process. Each step in the process is subject to a strict timeline. The steps involved in the credit rating are: I. To gather sufficient information to evaluate the credit risk of the specific issues. The main sources of information to the credit rating agencies are: II. III. IV. Annual and interim reports and other publicity available data on each issuer. Prospectus, letter of order, etc., of particular securities. Industry, sectoral and economic data from industry groups, etc. Reports and data from Government agencies. Primary data collection

To analyse and come to a conclusion on the appropriate rating; To monitor the credit quality of the rated issuer or security over time, declining on the timely changes in ratings as company fundamentals change; and To keep investors and market place informed.

After the analysis of the information collected during the rating process, a detailed report containing various aspects such as the operating efficiencies, the industry scenario, financial health, cash flow adequacy, profitability, growth, management quality, etc., is prepared and presented to the rating committee. The rating is assigned by this committee. The composition of the committee members is from various sectors and the diverse background to ensure impartiality, objectivity and expertise. Information obtained fom the company which is otherwise not available publicly is treated confedential though used to analyse the credit quality of the issuer. The time taken for the exercise is usually two or three weeks depending upon the complexity and diversity of the issuers business. The issuer has the option of accepting the rating or not. If the rating is not accepted, then it is not disclosed. Once the rating is accepted it comes under surveillance and is made public. The upgrading or downgrading after the surveillance is also made public.when any major event takes place which has an impact on the credit quality or if there is a deviation from the expected trends, then the rating is put on a credit watch. The issuer is on a watch by the rating agency til the agency analyses the impact of the developments and reviews the rating.

Uses of ratings
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals, and universities.

A. Benefits to Investors
1. Safety of investments. Credit rating gives an idea in advance to the investors about the degree of financial strength of the issuer company. Based on rating he decides about the investment. Highly rated issues gives an assurance to the investors of safety of Investments and minimizes his risk. 2. Recognition of risk and returns . Credit rating symbols indicate both the returns expected and the risk attached to a particular issue. It becomes easier for the investor to understand the worth of the issuer company just by looking at the symbol because the issue is backed by the financial strength of the company. 3. Freedom of investment decisions. Investors need not seek advise from the stock brokers, merchant bankers or the portfolio managers before making investments. Investors today are free and independent to take investment decisions themselves. They base their decisions on rating symbols attached to a particular security. Each rating symbol assigned to a particular investment suggests the creditworthiness ofthe investment and indicates the degree of risk involved init. 4. Wider choice of investments. As it is mandatory to rate debt obligations for every issuer company, at any particular time, wide range of credit rated instruments are available formaking investment. Depending upon his own ability to bear risk, the investor can make choice of the securities in which investment is to be made. 5.Dependable credibility of issuer. Absence of any link between the rater and rated firm ensures dependable credibility of issuer and attracts investors. As rating agency has no vested interest in issue to be rated, and has no

business connections or links with the Board of Directors.In other words, it operates independent of the issuer company, the rating given by it is always accepted by the investors. 6.Easy understanding of investment proposals. Investors require no analytical knowledge on their part about the issuer company. Depending upon rating symbols assigned by the rating agencies they can proceed with decisions to make investment in any particular rated security of a company. 7. Relief from botheration to know company. Credit agencies relieve investors from botheration of knowing the details of the company, its history, nature of business, financial position, liquidity and profitability position, composition of management staff and Board of Directors etc. Credit rating by professional and specialised analysts reposes confidence in investors to rely upon the credit symbols for taking investment decisions. 8. Advantages of continuous monitoring. Credit rating agencies not only assign rating symbols but also continuously monitor them. The Rating agency downgrades or upgrades the rating symbols following the decline or improvement in the financial position respectively.

B. Benefits of Rating to the Company

A company who has got its credit instrument or security rated isbenefited in the following ways: 1. Easy to raise resources. A company with highly rated instrument finds it easy to raise resources from the public.Even though investors in different sections of the society understand the degree of risk and uncertainty attached to a particular security but they still get attracted towards the highly rated instruments. 2. Reduced cost of borrowing. Investors always like to make investments in such instrument, which ensure safety andeasy liquidity rather than high rate of return. A company can reduce the cost of borrowings by quoting lesser interest on those fixed deposits or debentures or bonds, which are highly rated. 3. Reduced cost of public issues.


A company with highly rated instruments has to make least efforts in raising funds through public. It can reduce its expenditure on press and publicity. Rating facilitates best pricing and timing of issues. 4. Rating builds up image. Companies with highly rated instrument enjoy better goodwill and corporate image in the eyes of customers, shareholders, investors and creditors.Customers feel confident of the quality of goods manufactured, shareholders are sure of high returns,investors feel secured of their investments and creditors are assured of timely payments of interest and principal. 5. Rating facilitates growth. Rating motivates the promoters to undertake expansion of their operations or diversify their production activities thus leading to the growth of the company in future. Moreover highly rated companies find it easy to raise funds from public through new issues orthrough credit from banks and FIs to finance theirexpansion activities. 6. Recognition to unknown companies. Credit rating provides recognition to relatively unknown companies going for public issues through wide investor base. While entering into market, investors rely more on the rating grades than on name recognition.

C. Benefits to Intermediaries
1. Highly credit rated instruments does not requires brokers to convince their clients to select a particular investment proposal. 2. High Rated instruments speak themselves about the financial soundness and the strength of the instrument rated by the credit rating agency. 3. It also facilitate pricing and underwriting as Investment banks and other intermediaries active in the fixed income markets may find credit ratings useful in the planning, pricing and placement of securities. 4. Credit ratings can also help intermediaries monitor their risk exposure, either on behalf of clients or for their own accounts. 5. The time, cost, energy and manpower saved for convincing clients can be utilized in expanding the clientele and intensifying the business activities.


D. Business Counter-parties
The credit rating helps business counter-parties in establishing business relationships particularly for opening letters of credit, awarding contracts,entering into collaboration agreements, etc. The independent risk evaluation of SMEs by an unbiased third party lends credibility to them and opens doors for them while dealing with MNCs and corporates. One can submit credit rating for tenders and make oneself more credible to get bigger orders. It also provides easier access to other sources of finance such as private equity. Better ratings have helped the SMEs retain customers and suppliers, and negotiate better terms with them.

E. Regulators
Regulators can, with the help of credit ratings,determine eligibility criteria and entry barriers for new securities, monitor financial soundness of organizations and promote efficiency in debt securities market. This increases transparency of the financial system leading to a healthy development of the market. In the United States, the Securities and Exchange Commission (SEC) permits investment banks and broker-dealers to use credit ratings from "Nationally Recognized Statistical Rating Organizations" (NRSRO) for calculating their net capital reserve requirements. Likewise, insurance regulators use credit ratings to ascertain the strength of the reserves held by insurance companies. CRAs are de facto regulators of financial markets. A high quality credit rating (investment grade) will allow for unproblematic access to the most liquid capital markets whereas a low quality rating (speculative grade) assigns a junk bond status and will in effect exclude a bond from the most liquid markets.

Thus, in this way rating serves as a useful tool for different constituents of the capital market. For different classes of persons, different benefits accrue from the use of rated instruments.


Credit rating agencies have been subject to the following criticisms: Credit rating agencies do not downgrade companies promptly enough. For example, Enron's rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company's problems for months. This has led to suggestions that, rather than rely on CRA ratings in financial regulation, financial regulators should instead require banks, broker-dealers and insurance firms (among others) to use credit spreads when calculating the risk in their portfolio. Large corporate rating agencies have been criticized for having too familiar a relationship with company management, possibly opening themselves to undue influence or the vulnerability of being misled. These agencies meet frequently in person with the management of many companies, and advise on actions the company should take to maintain a certain rating. Furthermore, because information about ratings changes from the larger CRAs can spread so quickly (by word of mouth, email, etc.), the larger CRAs charge debt issuers, rather than investors, for their ratings. This has led to accusations that these CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. These accusations are not entirely consistent: on one hand, the larger CRAs are accused of being too cozy with the companies they rate, and on the other hand they are accused of being too focused on a company's "bottom line" and unwilling to listen to a company's explanations for its actions. While often accused of being too close to company management of their existing clients, CRAs have also been accused of engaging in heavy-handed "blackmail" tactics in order to solicit business from new clients, and lowering ratings for those firms. The lowering of a credit score by a CRA can create a vicious cycle, as not only interest rates for that company would go up, but other contracts with financial institutions may be affected adversely, causing an increase in expenses and ensuing decrease in credit worthiness. In some cases, large loans to companies contain a clause that makes the loan due in full if the companies' credit rating is lowered beyond a certain point. The purpose of these "ratings triggers" is to ensure that the bank is able to lay claim to a weak company's assets before the company declares bankruptcy and a receiver is appointed to divide up the claims against the company. Agencies are sometimes accused of being oligopolists because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). Of the large agencies, only Moody's is a separate, publicly held corporation that discloses its financial results without dilution by non-ratings businesses, and its high profit margins (which at times

have been greater than 50 percent of gross margin) can be construed as consistent with the type of returns one might expect in an industry which has high barriers to entry. It has also been suggested that the credit agencies are conflicted in assigning sovereign credit ratings since they have a political incentive to show they do not need stricter regulation by being overly critical in their assessment of governments they regulate. Rating agencies have come under criticism for a narrow-minded view of government default from investors' perspective. A government that does not run a sustainable budget might be forced to print money to meet credit payments, this will then inflate the economy and devalue the currency. USA is for example thought to be unlikely to default on their payments since they have the printing power of the dollar, which a country like Greece does not have for its currency, the Euro. Owing to time and cost constraints, credit ratings are unable to capture all characteristics for an issuer and issue. Credit ratings are not recommendations to buy or sell or hold a specific rated security nor are they offered as guarantees or protections against default. They are opinions only and not the guarantee. Specific credit rating opinions are not intended to measure many of the other factors that fixed income investors must consider in relation to risk- such as liquidity risk, prepayment risk, interest rate risk, risk of secondary market loss, or exchange loss risk. The rating is specific to the instrument and is not the rating of the issuer. The information collected by the rating agency may be subject to personal bias of the rating team. However, rating agencies try their best to provide an unbiased opinion of the credit quality of the company and/or instrument. If not, they will not be trusted. There are cases, where different ratings are provided by various rating agencies for the same instrument. These differences may be due to many reasons. This will create confusion in the minds of the investor. Thus, these are some of the demerits from which credit rating agencies suffer. In December 2004, the International Organization of Securities Commissions (IOSCO) published a Code of Conduct[30] for CRAs that, among other things, is designed to address the types of conflicts of interest that CRAs face. All of the major CRAs have agreed to sign on to this Code of Conduct and it has been praised by regulators ranging from the European Commission to the U.S. Securities and Exchange Commission.


List of credit rating agencies

Agencies that assign credit ratings for corporations include: A. M. Best (U.S.) Baycorp Advantage (Australia) Capital Intelligence (Cyprus) Capital Standards Rating (Kuwait) Dagong Global (People's Republic of China) Dominion Bond Rating Service (Canada) Egan-Jones Rating Company (U.S.) Fitch Ratings (Dual-headquartered U.S./UK) CIBIL (India) ONICRA (India) Moody's Investors Service (U.S.) Muros Ratings[37] (Russia alternative rating agency) Rapid Ratings International (U.S.) Standard & Poor's (U.S.) Weiss Ratings (U.S.) Japan Credit Rating Agency, Ltd. (Japan) CRISIL (India)

There are no notable European CRAs, except for Fitch, 80% of which is owned by FIMALAC, a French firm.

Big Three (credit rating agencies)

The Big Three credit rating agencies are Standard & Poor's, Moody's Investor Service, and Fitch Ratings. Moodys and S&P each control about 40 percent of the market. Third-ranked Fitch Ratings, which has about a 14 percent market share, sometimes is used as an alternative to one of the other majors. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3.


Standard & Poor's (U.S.)

Standard & Poor's (S&P) is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. Its head office is located on 55 Water Street in Lower Manhattan, New York City. As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private corporations. Standard & Poors credit ratings express the agencys opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. It issues both short-term and long-term credit ratings.

Long-term credit ratings

The company rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, the company may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Short-term issue credit ratings


The company rates specific issues on a scale from A-1 to D. Within the A-1 category it can be designated with a plus sign (+). This indicates that the issuer's commitment to meet its obligation is very strong. Country risk and currency of repayment of the obligor to meet the issue obligation are factored into the credit analysis and reflected in the issue rating. It publishes a large number of stock market indices, covering every region of the world, market capitalization level and type of investment (e.g., indices for REITs and preferred stocks)


Downgrade of U.S. long-term credit rating

On August 5, 2011, following enactment of the Budget Control Act of 2011, S&P lowered the US's sovereign long-term credit rating from AAA to AA+, slamming the nations political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

The press release sent with the decision said, in part: The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon." The United States Department of the Treasury, which had first called S&P's attention to its $2 trillion error in calculating the ten-year deficit reduction under the Budget Control Act, commented, "The magnitude of this mistake and the haste with which S&P changed its principal rationale for action when presented with this error raise fundamental questions about the credibility and integrity of S&Ps ratings action."The following day, S&P acknowledged in writing the USD$2 trillion error in its calculations, saying the error "had no impact on the rating decision" and adding:

In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).


Moody's Investors Service (U.S.)

Moody's Corporation (NYSE: MCO) is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. Moody's Investors Service is a leading provider of credit ratings, research, and risk analysis. Moody's commitment and expertise contributes to transparent and integrated financial markets, protecting the integrity of credit. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. Moodys Analytics helps capital markets and credit risk management professionals worldwide address an evolving marketplace with confidence. It is one of the Big Three credit rating agencies and has a 40% share of the world market, as does its main rival, Standard & Poor's; Fitch Ratings has a smaller share. Moody's was founded in 1909 by John Moody. The top institutional owner and only shareholder holding more than 5% of all shares of Moody's is Warren Buffett's company Berkshire Hathaway, holding a share of ~13%. MOODY'S RATING METHODOLOGY Moody's analyzes all relevant risk factors and viewpoints in arriving at a rating opinion. Several analytical principles guide the process, including:


1. Focus on the long term - Moody's analytical focus is on fundamental factors that will drive an issuer's long-term ability to meet debt payments, such as major economic downturns, a radical change in management strategy, or major regulatory developments. The ratings are not intended to ratchet up and down with business or supply-demand cycles or to reflect shortterm market movements. 2. Emphasis on stability and predictability of cash flow - One of Moody's main analytical concentrations is on understanding the drivers of cash flow generation and, in particular, the predictability and sustainability of cash flow. Moody's will conduct financial analysis to determine an issuer's cash flow resilience in the event of an economic downturn. Specific risk factors likely to be weighed in a given rating will vary considerably by sector.


Moody's lowers outlook of Indian banks


Global rating agency Moodys Investors Service on Wednesday downgraded the outlook on Indias Rs.64 trillion banking sector to negative from stable, saying a slowing domestic economy and chaos in global markets could lead to more bad loans, impact banks ability to raise money and profitability, but bankers, a domestic rater as well as the government uniformly dubbed the action unwarranted and uncalled for as the banking system is adequately capitalized and strongly regulated. The outlook is applicable for the next 12-18 months. The announcement was made in Singapore, in the early hours of trading in Indian markets. The Bankex, BSEs banking index, dropped 2.62% on Wednesday to close at 11,020.96 even as the benchmark equity index, the Sensex, lost 1.18%. Since January, the Bankex has lost 17.82% against a 15.45% fall in the Sensex. Other sector stocks like ICICI Bank, HDFC Bank and Axis Bank also fell between 1.4 per cent and 2.5 per cent. Moody's decision, which will make overseas borrowings for Indian banks costlier, triggered intense selling in stock markets, including the state-owned SBI which had planned to raise about $500 million . Downgrading its outlook, Moody's said slowing economic growth could dent the asset quality and profitability of the Indian banking sector. Moody's rates 15 commercial banks in India, which together account for about 66% of the system's total assets as of March 2011. "With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY'12 and FY'13," Moody's said. The rating agency however said that there was a possibility of the ratings for the individual banks changing. Earlier in September, another rating agency Standard & Poor's had downgraded country's largest lender SBI's rating to D+ from C- on account of worsening asset quality. This had also evoked sharp criticism from the government. Brushing aside Moody's projection, Financial Services Secretary DK Mittal said, "We are not concerned. We are not affected by the downgrade. Looking at how the global banks are faring, we are much stronger and the ratings have no significance." Critical of the decision of Moody's, State Bank of India (SBI) CMD Pratip Chaudhuri said state of Indian banks is much better as compared to global lenders.



An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings and Fitch Solutions are part of the Fitch Group. Dual-headquartered in New York and London with 51 offices worldwide, Fitch Ratings positions itself as a global rating agency dedicated to providing value beyond the rating through independent and prospective credit opinions, research and data. The company's ratings are used as a guide to investors as to which investments are most likely going to yield a return. It is based on factors such as how small an economic shift would be necessary to affect the standing of the bond, and how much, and what kind of debt is held by the company. The firm was founded by John Knowles Fitch on December 24, 1913 in New York City as the Fitch Publishing Company. It merged with London-based IBCA Limited in December 1997. In 2000 Fitch acquired both Chicago-based Duff & Phelps Credit Rating Co. (April) and Thomson Financial BankWatch (December). Fitch Ratings is the smallest of the "big three" NRSROs, covering a more limited share of the market than S&P and Moody's, though it has grown with acquisitions and frequently positions itself as a "tie-breaker" when the other two agencies have ratings similar, but not equal, in scale. FITCH RATING METHODOLOGY Fitch Ratings make use of both qualitative and quantitative analyses to assess the business and financial risks of fixed-income issuers. Because short- and long-term ratings are based on a company's fundamental credit characteristics, a correlation exists between them. Analysis typically involves at least five years of operating history and financial data as well as company and rating agency forecasts of future performance. To achieve a clearer perspective on relative

performance, a company's performance is compared with that of others in its peer group. In addition, a sensitivity analysis is performed through several "what if" scenarios to assess a company's capacity to cope with changes in its operating environment. A key rating factor is financial flexibility, which depends, in large part, on the company's ability to generate cash from operations.


Lloyds Banking and Royal Bank of Scotland, two of Britains government-backed lenders, had their credit ratings cut by Fitch Ratings, which said the UK is less likely to provide support in future. Lloydss and RBSs long-term issue default ratings were lowered two steps to A from AA-, the ratings company said in a statement on Thursday. Fitch reduced its support rating floors which measure the likelihood of government supportfor systemically important British banks to A from AA- and A+. Lenders are under pressure from regulators to raise capital thats been depleted by writedowns of Greek and other European peripheral sovereign debt. RBS and Lloyds shares were down 3.8% and 2.5% respectively, underperforming a 0.8% decline in the FTSE 100 share index. Fitch follows Moodys Investors Service, which downgraded 12 British lenders, including RBS and Lloyds on 7 October, and also cited a lessening of government support.


Rating Symbols of Big Three Credit Rating Agencies

Moody's S&P Fitch

Long-term Short-term Long-term Short-term Long-term Short-term Aaa Aa1 Aa2 P-1 Aa3 A1 A2 A3 P-2 Baa1 Baa2 P-3 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 BBBBB+ BB BBB B+ Not prime B BCCC+ CCC CCC[28] C CCC C B+ B BSubstantial risks Extremely speculative In default with little Highly speculative BBB+ BBB A-3 BBBBB+ BB BBB Non-investment grade speculative AAA+ A-1 A AA-2 BBB+ BBB F3 Lower medium grade A AF2 AAA+ F1 Upper medium grade AAA AA+ A-1+ AA AA AAA AA+ F1+ High grade Prime

CC Ca C C / / D / DDD DD D /

prospect for recovery

In default


The credit rating agencies in India offer varied services like mutual consulting services, which comprises of operation up gradation, risk management. In India, at present, there are four credit Rating Agencies: i) Credit Rating and Information Services of India Limited (CRISIL), Associate of Standards & Poors ii) Investment Information and Credit Rating Agency of India Limited (ICRA) , Associate of Moodys Investors Service iii) Credit Analysis and Research Limited (CARE). iv) Duff Phelps Credit Rating Pvt. Ltd. (DCR India) v)Onicra Credit Rating Agency of India Limited: Is an established player in the individual credit assessment and scoring services space in the Indian market.

Guidelines for Credit rating agencies in India:

The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 offers various guidelines with regard to the registration and functioning of the credit rating agencies in India. The registration procedure includes application for the establishment of a credit rating agency, matching the eligibility criteria and providing all the details required. They have to undergo the strict examination procedure with regard to the details furnished by them. They are required to prepare internal procedures, abidance with circulars. They are offered guidelines regarding the credit rating procedure, by the Act. The credit rating agencies are provided with compliance officers. They are required to show their accounting records.

Top Three Credit Rating Agencies in India CRISIL

Credit Rating and Information Services of India Ltd. (CRISIL) a global analytical company providing ratings, research, and risk and policy advisory services. CRISIL was set up in 1987, jointly by ICICI Ltd, UTI,GIC,ADB,HDFC Ltd, However, in 2005, Standard and Poor Inc. Of U.S. acquired 51% equity shares in CRISIL and since then it is working as the subsidiary of the former. In November 1993,CRISIL went public with its maiden issue of shares. CRISIL is the largest credit rating agency in India. CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed business leader, with the largest number of rated entities and rating products: CRISIL's rating experience covers more than 45,676 entities, including 23,500 small and medium enterprises (SMEs). Nearly half of its ratings on the instruments are being used. CRISIL's market share is around 75%. It has launched innovative products for credit risks assessment viz., counter party ratings and bank loan ratings. CRISIL rates debentures, fixed deposits, commercial papers, preference shares and structured obligations. Of the total value of instruments rated, debentures accounted for 3 1.196, fixed deposits for 42.3%and commercial paper 6.6%. Rating Process CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigor. CRISIL's analysis on each credit is carried out by a team of at least two analysts. The analysis is based on information obtained from the issuer, and on an understanding of the business environment in which the issuer operates. The analysis is then presented to a rating committee comprising members who have the professional competence to meaningfully assess the credit, and have no interest in the entity being rated. The rating committee determines the rating to be assigned.


From the initial meeting with the management to the assignment of the rating, the rating process normally takes three to four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter timeframes, to meet urgent requirements. The process of rating starts with a rating request from the issuer, and the signing of a rating agreement. CRISIL employs a multilayered, decision-making process in assigning a rating. A detailed flow chart of CRISIL's rating process is as below:

Methodology CRISIL evaluation is carried out by professionally qualified persons and includes data collection, analysis and meeting with key personnel in the company to discuss strategies, plans and other issues that may effect ,evaluation of the company. CRISIL ratings are based on a robust and clearly articulated analytical framework, which ensures comprehensiveness, standardization, comparability, and effective communication of the ratings assigned and of every timely rating action.


ICRA: Investment Information and Credit Rating Agency of India Ltd. Now it is known as ICRA Limited. According to ICRA, Ratings are opinions on the relative capability of timely servicing of corporate debt and obligations. These are not recommendations to buy or sell neither the accuracy nor the completeness of the information is guaranteed. ICRA was set up by Industrial Finance Corporation of India on 16th January, 1991. It is a public limited company with an authorized share capital of 101 crores and share listed on Bombay stock exchange and National stock exchange. The initial paid off capital of Rs. 3.50 crores is subscribed by IFCI, UTI, LIC, GIC, SBI and 17 other banks. ICRA started its operation from 15th March, 1991. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is the second largest credit rating agency in India after CRISIL. Beside Ratings, ICRA Group offers Consulting services, IT based services, Information services and Outsourcing services through its subsidiaries.

Rating Process ICRA's Rating process is initiated on receipt of a formal request (or mandate) from the prospective issuer. A Rating team, which usually consists of two analysts with the expertise and skills required to evaluate the business of the issuer, is involved with the Rating assignment. An issuer is provided a list of information requirements and the broad framework for discussions. These requirements are worked out on the basis of ICRA's understanding of the issuer's business, and broadly cover all aspects that may have a bearing on the Rating. ICRA also draws on secondary sources of information, including its own Research Division, while working on the Rating assignment. The Rating involves assessment of a number of qualitative factors with a

view to estimating the future earnings of the issuer. This requires extensive interactions with the issuer's management, specifically on subjects relating to plans, outlook, competitive position, and funding policies. In the case of manufacturing companies, 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 cost of production. These visits also help in assessing the progress of projects under implementation. After completing the analysis, a Rating Report is prepared, which is then presented to the ICRA Rating Committee. A presentation on the issuer's business and management is also made by the Rating Team. The Rating Committee is the final authority for assigning Ratings. The assigned Rating, along with the key issues, is communicated to the issuer's top management for acceptance. Non-accepted Ratings are not disclosed and complete confidentiality is maintained on them unless such disclosure is required under any laws/regulations. If the issuer does not find the Rating acceptable, it has a right to appeal for a review. Such reviews are usually taken up if the issuer provides certain fresh inputs. During a review, the issuer's response is presented to the Rating Committee. If the inputs and/or fresh clarifications so warrant, the Rating Committee would revise the initial Rating decision. As part of a mandatory surveillance process, ICRA monitors all accepted Ratings over the tenure of the Rated instruments. The Ratings are generally reviewed once every year, unless the circumstances of the case warrant an earlier review. The Rating outstanding may be retained or revised (that is, upgraded or downgraded) on surveillance.

Methodology The factors that ICRA takes into consideration for rating depend on the nature of borrowing entity. The inherent protective factors, marketing strategies, competitive edge, competence and effectiveness of management, human resource development policies and practices, hedging of risks, trends in cash flows and potential liquidity, financial flexibility, asset quality and past record of servicing of debt as well as government policies affecting the industry are examined.


Credit Analysis and Research Ltd. (CARE)

CARE is a leading credit rating company headquartered in Mumbai, India, promoted by leading Banks and Financial Institutions (FIs). The three largest shareholders of CARE are IDBI Bank, Canara Bank and State Bank of India. CARE commenced its operations in October 1993 and announced its first rating in November 1993. CAREs ratings are recognized by Government of India and all regulatory authorities in India including Reserve Bank of India (RBI), and Securities and Exchange Board of India (SEBI).

The other share holders include Federal Bank Ltd., IL&FS Ltd., Vysya Bank Ltd., ITC Classic Finance Ltd., Kodak Mahindra Finance Ltd, etc. CARE is a full service rating company offering a wide range of rating and grading services which includes rating debt instruments/enterprise ratings of Corporate, Banks, Financial Institutions (FIs), Public Sector Undertakings (PSUs), State Government Bodies, Municipal Corporations, Non-banking Finance Companies (NBFCs), SMEs, Micro finance Institutions, Structured Finance Securitization Transactions etc.


Rating Process The rating process takes about two to three weeks, depending on the complexity of the assignment and the flow of information from the client. Ratings are assigned by the Rating Committee.

Methodology CARE has prescribed a format for obtaining requisite information required for rating the instruments. These are different formats for manufacturing company, and for financial services company. The formats collects information relating to key factors business analysis, financial analysis, management evaluation, regulatory and competitive environment, and fundamental analysis.

A credit rating agency shall make all efforts to protect the interest of investors. A credit rating in the conduct of its business, shall observed high degree of integrity, dignity & fairness in the conduct of its business. A credit rating agency shall fulfill its obligation in a prompt, ethical & professional manner. A credit rating agency shall at all times exercise due diligence, ensure proper care & exercise independent professional judgment in order to achieve & maintain objectivity. A credit rating agency shall have a reasonable & adequate basis for performing rating evaluations, with the support of appropriate & in depth rating researches. A credit rating agency shall, wherever necessary, disclose to the clients, possible sources of conflict of duties & interest, which could impair its ability to make fair, objectives & unbiased ratings. A credit rating agency shall not make any exaggerated statement, whether oral or written, to the client either about its qualification or its services or its achievement with regard to the services rendered to other client. A credit rating agency shall not make any untrue statement, suppress any material fact or make any misrepresentations in any documents, reports, papers or information furnished to the board, stock exchange or public at large. A credit rating agency shall ensure that the board is promptly informed about any action, legal proceeding etc. initiated against it alleging any material breach or noncompliance by it, of any law, rules, regulations &directions of the board or of any other regulatory body. A credit rating agency shall ensure that there is no misuse of any privileged information including prior knowledge of rating decision or changes. A credit rating agency or any of his employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media. A credit rating agency shall not offer fee-based services to the rated entities, beyond credit ratings & research. All credit rating agencies (CRAs) have to get an internal audit done every six months. Every credit rating agency shall, during the lifetime of securities rated by it, continuously monitor the rating of such securities.

The term Credit Rating refers to evaluation of debt instruments. Debt instruments include both long-term instruments like bonds and debentures, and short-term obligations like Commercial Paper. Apart from these, fixed deposits, certificates of deposits, inter-corporate deposits, structured obligations, etc. are also rated. Now Securities and exchange Board of India (SEBI) has decided to enforce mandatory rating of all debt instruments irrespective of their maturity. Rating serves as a useful tool for different constituents of the capital market namely investors, issuers of debt instruments, financial intermediaries, business enterprises, regulators, etc. High degree of correlation has been observed between bond quality ratings and actual defaults. The ratings assigned to bond issue directly affects its yield. Issuers of high-risk securities have to pay higher rates of return than issuers of low risk securities. A number of difficulties arise in the quality rating assigned to an issue. Primarily the issuers ability to pay, the strength of the security owner's claim, the economic significance and size of the issuer are taken into consideration in determination of rating. In making their ratings, CRAs analyze public and nonpublic financial and accounting data as well as information about economic and political factors that may affect the ability and willingness of a government or firms to meet their obligations in a timely manner. . However, CRAs lack transparency and do not provide clear information about their methodologies.


BIBLIOGRAPHY A book by R.P. Rustagi on Investment Management for B.Com(H) 3rd yr