FINANCIAL SERVICES

CREDIT RATING SERVICES

By Nadya Narsidani
Credit rating is a numerical representation of
the creditworthiness of an individual or a
business. The credit rating is a key aspect that
makes or breaks a loan application.
The credit rating/score acts as an indicator stating if the borrower has defaulted
on loan payments before and if he is worth trusting with the new loan.

A credit rating agency is a company that assigns credit ratings, which rate a
debtor's ability to pay back debt by making timely principal and interest
payments and the likelihood of default.

There are several credit rating agencies in India, such as CRISIL Ltd, India
Ratings and Research Pvt Ltd, ICRA Limited (The Investment Information and
Credit Rating Agency), CARE (Credit Analysis and Research Limited),
Infometrics Valuation and Rating Pvt Ltd. etc.
A credit rating agency (CRA) evaluates and assesses an individual’s or a company’s
creditworthiness. That is, these agencies consider a debtor’s income and credit lines
to analyse the debtor’s ability to repay the debt or if there is any credit risk
associated.

Securities and Exchange Board of India (SEBI) reserves the right to authorise and
regulate credit rating agencies according to SEBI Regulations, 1999 of the SEBI Act,
1992.

In short, Credit rating is a relative ranking arrived at by a systematic analysis of the

strengths and weaknesses of a company and debt instrument issued by the company,
based on financial statements, project analysis, creditworthiness factors and future
prospectus of the project and the company appraised at a point of time.
• Credit Rating is the evaluation of the creditworthiness of an instrument of a
company based on perceived overall risk of a company’s business and
financial profile as well as structural consideration.
• Credit rating establishes a link between risk and return. An investor or any
other interested person uses the rating to assess the risk level and compares the
offered rate of return with his expected rate of return.
• Typically, a credit rating tells a lender or investor the probability of the subject
being able to pay back a loan.

Objectives of Credit Rating

•To provide superior information to the investors at a low cost;

• To provide a sound basis for proper risk-return structure,
• To Subject borrowers to a healthy discipline, and
• To Assist in the framing of public policy guidelines on institutional investment.
 Uses of Credit Rating
➢ Investors: In absence of credit rating, an investor has to make investment based
on general available information about the company and its promoters and
properly analyzed opinions of a credit rating agency minimizes the risk.
➢ Issuers: Market places faith in the opinion of credit rating agencies. This
enables the issuers of high rated instruments to access the market even during
adverse conditions.
➢ Intermediaries: Credit Rating also helps intermediaries like merchant bankers,
brokers, etc. Credit Rating helps merchant bankers in pricing of the issues
whereas it helps the brokers in monitoring their risk exposure.
➢ Regulators: In India, the main regulator related to securities market is SEBI and
one of the important functions of SEBI is to protect the interest of investors in
securities market. SEBI ensures this by specifying requirement of a certain credit
rating for a particular instrument.
Rating Process
Methodology of Credit Rating

The process of credit rating begins with the prospective issuer approaching the
rating agency for evaluation. The experts in analyzing banks should be given a
free hand and they will collect data and informant and will investigate the business
strength and weaknesses in detail. The entire process of rating stands on the for of
confidentiality and hence even the most confidential business strategies, marketing
plans, future outlook etc., are revealed to the steam of analysis.

The rating is based on the investigation analysis, study and interpretation of

various factors. The world of investment is exposed to the continuous onslaught of
political, economic, social and other forces which does not permit any one to
understand sufficiently certainty. Hence a logical approach to systematic
evaluation is compulsory and within the framework of certain common features
the agencies employ different methodologies. The key factors generally considered
are listed below:
1. Business Analysis or Company Analysis
This includes an analysis of industry risk, market position of the company,
operating efficiency of the company and legal position of the company.
2. Economic Analysis
In order to evaluate an instrument an analyst must spend a considerable time in
investigating the various economic activities and also analyze the characteristics
peculiar to the industry, whose issue the analyst is concerned with. The analysis,
while doing the economic forecasting use surveys, various economic indicators and
indices.
3. Financial Analysis
This includes an analysis of accounting, quality, earnings, protection adequacy of
cash flows and financial flexibility.
4. Management Evaluation
Track record of the management planning and control system, depth of managerial
talent, succession plans, Evaluation of capacity to overcome adverse situations
Goals, philosophy and strategies.
5. Geographical Analysis
Location advantages and disadvantages
Backward area benefit to the company/division/unit
6. Fundamental Analysis
Fundamental analysis is essential for the assessment of finance companies. This
includes an analysis of liquidity management, profitability and financial position
and interest and tax sensitivity of the company.
Credit rating for financial service sector
•When rating debt instruments of financial institutions, banks, NBFCs in
addition to the financial analysis and management evaluation the
following factors are considered
•Regulatory and competitive environment
•Fundamental analysis
•Capital adequacy
•Asset quality
•Liquidity management
•Profitability and financial position
•Interest and tax sensitivity
Credit Rating Agencies in India

The concept of credit rating has been widely discussed and debated in India in
recent times. Since the setting up of the first credit rating agency. Credit Rating
and Information Services of India Ltd. (CRISIL) in India in 1987, there has been
a rapid growth of credit rating agencies in India. The major players in the Indian
market, apart from CRISIL include Investment Information and Credit Rating
Agency of India Ltd. (ICRA), promoted by IDBI in 1991 and Credit Analysis and
Research Ltd. (CARE), promoted by IFCI in 1994. Duff and Phelps has tied up
with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited
in 1996.
 Rating symbols/Grades
•Rating symbols are a symbolic expression of the opinion/assessment of the
credit rating agency regarding the investment, credit quality, grade of the debt,
obligation instrument.

CRISIL rating symbols: The rating symbols of CRISIL with respect debentures,
fixed deposits, short term instruments(CPs), credit assessment, structured
obligations, bond funds, bank loans, collective investment schemes, Indian
states, real estate developers are as follows.
Rating symbols for Debentures
•High Investment Grade:
•AAA-(Triple A ) Highest security- Offer the highest safety against payment
of interest and principal
•AA(Double A) High Safety - Offer high safety against payment of interest
and principal.
•A- Adequate safety- Offer adequate safety against payment of interest
and principal. In adverse conditions might affect such issues.
•BBB(Triple B)- Moderate safety- Offer sufficient safety against payment
of interest and principal. Circumstances may lead to weakened
capacity to pay interest and principal.
•Speculative grades
•BB(Double B)- Inadequate safety- These instruments carry inadequate safety of
timely payment of interest and principal.
•B (High risk)- Instruments rated B have greater risk of default.
•C (Substantial risk)- Risk of default. Repayment can only be expected in
favorable conditions.
•D (Default) Such instruments are extremely speculative and default risk is
highest.
Rating symbols for Fixed deposits
•FAAA( F triple A)- Highest safety
•FAA( F- double A)- High safety
•FA- Adequate safety
•FB- Inadequate safety
•FC- High Risk
•FD- Default
Ratings for bond funds
•AAAf – Very Strong Protection against losses
•AAf - Strong Protection against losses
•Af- Adequate Protection against losses
•BBBf- Moderate Protection against losses
•BBf - Inadequate Protection against losses
•Cf – vulnerable to credit defaults.
Bank Loan Ratings
•BLR-1: strong likelihood of repayment of interest and principal on bank loan
•BLR-2: good likelihood of repayment of interest and principal on bank loan
•BLR-3: satisfactory likelihood of repayment of interest and principal on bank
loan
•BLR-4: moderate likelihood of repayment of interest and principal on bank loan
•BLR-5: sub standard , vulnerable to loss
•BLR-6: High likelihood of loss
CRISIL Limited:

Credit Rating Information Services of India Limited (CRISIL), one of the oldest
credit rating agencies. CRISIL is an Indian consulting firm offering ratings,
analysis, risk and policy advice and is a branch of S&P Global, an American
corporation. It was India’s first credit rating body, founded in 1987 by ICICI & UTI
by the incoming share capital of SBI, LIC and United India Insurance Company. In
April 2005, US-based credit score firm S&P bought the bulk of the company’s
shares. The agency stepped on to infrastructure rating in 2016. CRISIL has been
operational in countries such as the USA, UK, Poland, Hong Kong, China, and
Argentina in addition to India.
Operations of CRISIL

•CRISIL ‘s analysis and solution help the creditors, borrowers, lenders, and
authorities to find the correct financial decision.
•It enables consumers to assess the risk as well as produce more revenue by
determining the accurate service, product and pricing decisions
•It also facilitates economic development in rising markets by influencing public
infrastructure policies in such areas
•The CRISIL insists incompetence, transparency, working together and honesty.
•CRISIL ‘s mission is to include critical views, prosecutable knowledge, as well as
a positive solution.
India Ratings and Research Pvt Ltd:

India Ratings and Research, a wholly-owned subsidiary of Fitch Group, provides

accurate and timely credit opinions on the country’s credit market. The firm covers
corporate issuers, financial institutions, managed funds, urban local bodies, project
finance companies, and structured finance companies. The headquarters is in
Mumbai and the other branch offices are in Ahmedabad, Delhi, Chennai,
Bengaluru, Hyderabad, Pune, and Kolkata.
ICRA Limited:

The Investment Information and Credit Rating Agency (ICRA), a joint venture of
Moody’s and Indian Financial and Banking Service Organisation was established in
1991. The organisation is known for assigning corporate governance rating,
performance rating, mutual funds ranking, and more.

CARE:

Credit Analysis and Research Limited (CARE) is a credit rating agency that is
operational since April 1993. The agency provides a credit rating that helps
corporates to raise funds for their investment requirements. Investors can make
decisions based on credit risk and risk-return expectations. In addition to the head
office in Mumbai, the firm has regional offices in New Delhi, Pune, Kolkata,
Chandigarh, Jaipur, Ahmedabad, Bengaluru, Chennai, Coimbatore, and Hyderabad.