A Study On Credit Rating Agency in India

PROJECT REPORT ON
CREDIT RATING AGENCY IN INDIA
SUBMITTED BY
OM DNYANESHWAR PRABHU
TYBMS SEMESTER – VI
2021-22
UNDER THE GUIDANCE OF PROF.
PROF. SAGAR GAIKWAD
SUBMITTED TO UNIVERSITY OF MUMBAI
VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY

(AFFILIATED TO UNIVERSITY OF MUMBAI) VIDYALANKAR
MARG, WADALA (E),
MUMBAI 400-037
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VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY
(Affiliated to Mumbai University)
Certificate
This is to certify that
Mr. Om Dnyaneshwar Prabhu of in Bachelor in

Management studies in financial Semester has vi
undertaken & completed the project work titled “A study on
credit agency in india” during the academic year 2021-22
under the guidance of Ms.Chitra More submitted on to this
college in fulfilment of the curriculum of Bachelor in
Management studies in financial University of Mumbai.
This is a Bonafede project work & the information
presented is True & original to the best of our knowledge
and belief.
PROJECT COURSE EXTERNAL PRINCIPAL

GUIDE CO-ORDINATOR EXAMINER
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ACKNOWLEDGMENT
I hereby acknowledge all those who directly or indirectly helped me in drafting of

this project report. It would not have been possible for me to complete the task
without their help and guidance.
First, I would like to thank to the principal Dr. Rohini Kelkar, the Vice-Principal
Mr. Vijay Gawde, and our Project in-charge Mr. Sagar Gaikwad who gave me the
opportunity to do this project work. They also conveyed the important instructions
from the university time to time. Secondly, I am very much obliged of Ms. Chitra
More for giving guidance for completing the project.
Last but not the least; I am thankful to the University of Mumbai for offering the
project in the syllabus. I must mention my hearty gratitude towards my family,
other faculties and friends who supported me to go ahead with the project.
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DECLARATION
Vidyalankar School of Information Technology

(Affiliated to University of Mumbai)
Vidyalankar Marg, Wadala (E),
Mumbai 400 037
I Om Dnyaneshwar Prabhu, student of T.Y.BMS (Bachelor in

Management studies). In financial Markets Semester VI, Vidyalankar
School of Information Technology, hereby declare that I have completed
the project on CSR activities of yes foundation – case study on “A
STUDY ON CREDIT RATING AGENCY IN INDIA” in academic
year 2021-22.
The information submitted is true and original to the best of my

knowledge.
Signature of student
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Om Dnyaneshwar Prabhu
TABLE OF CONTENT
CHAPTERS PARTICULARS PG. NO.

Certificate
Declaration
Acknowledgement
Chapter Introduction to Credit Rating Pg 6 - 15
1
1.1  Introduction Pg 6 - 7
1.2  Origin Pg 8 - 9
1.3  Objective Pg 9
1.4  Scope of Study Pg 10 - 11
1.5  Research Methodology Pg 12 - 13
1.6  Limitations Pg 14 - 15
Chap 2 Review of Literature Pg 16 - 23
 Case 1 Pg 16 - 22
 Case 2 Pg 22- 24
Chap 3 Rating Definations Pg 26 - 34
Chap 4 Rating Process and Framework Pg 39 - 60
Chap 5 Functions of Credit Rating Agency Pg 61 - 62
Chap 6 Rating Used by Bond Issuers Pg 63 - 64
Chap 7 Advantages & Credit Rating Pg 65 - 68
Chap 8 Data Analysis and Interpretation Pg 69 - 83
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Chap 9 Conclusion & Suggestion Pg 84 - Pg
86
 Annexure and Biblography Pg 87-91
CHAPTER – 1
1.1 - INTRODUCTION
The primary objective of rating is to provide

guidance to investors\creditors in determining a
credit risk associated with a debt instrument\
credit obligation. It does not amount to a
recommendation to buy, hold or sell an
instrument as it does not take into consideration
factors such as market prices, personal risks
preferences and other considerations which may
influence an investment decision. The rating process is itself based on certain
‘givens’. The agency, for instance, does not perform an audit. Instead, it is required
to rely on information provided by the issuer and collected by analysts from
different sources, including interactions in -person with various entities.
Consequently, the agency does not guarantee the completeness or accuracy of the
information on which the rating is based. To quote "In determining a rating, both
quantitative and qualitative analysis are employed. The judgment is qualitative in
nature and the role of the quantitative analysis is to help make the best possible
overall qualitative judgment because, ultimately, a rating is an opinion." Standard
& Poor’s Ratings, usually expressed in alphabetical or alphanumeric symbols, are a
simple and easily understood tool enabling the investor to differentiate between
debt instruments on the basis of their underlying credit quality. The credit rating is
thus a symbolic indicator of the current opinion of the relative capability of the
issuer to service its debt obligation in a timely fashion, with specific reference to
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the instrument being rated. It is focused on communicating to the investors, the
relative ranking of the default loss probability for a given fixed income investment,
in comparison with other rated instruments.
Credit Rating; as elucidated by the leading rating agencies of the world
"A 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, which
depending on the instrument, may be a
matter of days to 30 years or more. In
addition, long term ratings incorporate an
assessment of the expected monetary loss
should a default occur." Moody’s " Credit ratings help investors by providing an
easily recognizable, simple tool that couples a possibly unknown issuer with an
informative and meaningful symbol of credit quality." Standard & Poor’s
A rating is specific to a debt instrument and is intended as a grade, an analysis of

the credit risk associated with the particular instrument. It is based upon the
relative capability and willingness of the issuer of the instrument to service the
debt obligations (both principal and interest) as per the terms of the contract. Thus
a rating is neither a general purpose evaluation of the issuer, nor an overall
assessment of the credit risk likely to be involved in all the debts contracted or to
be contracted by such entity.
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1.2 - ORIGIN
In India, revenues of the three big rating agencies, CRISIL, ICRA and CARE have
shown an upward trend given the increase in the usage of ratings over time. In
India, CRISIL (Credit Rating and Information Services of India Ltd.) was setup in
1988 as the first rating agency followed by ICRA Ltd. (formerly known as
Investment Information & Credit Rating Agency of India Ltd.) in 1991, and Credit
Analysis and Research Ltd. (CARE) in 1993. All the three agencies have been
promoted by the All-India Financial Institutions.
The above table shows us the

upward and downward trends
for Credit ratings in India over
last 7 years.The rating agencies
have established their
creditability through their
independence, professionalism,
continuous research, consistent
efforts and confidentiality of Information. Duff and Phelps has tied up with two
Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Ltd. in 1999.
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1.3 - OBJECTIVES
The main objective is to provide superior and low cost info 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 investments,
 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,
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 Acts as a marketing tool
1.4 - IMPORTANCE OF CREDIT RATING
Credit ratings establish a link

between risk and return.
They thus provide a
yardstick against which to
measure the risk inherent in
any instrument. An investor
uses the ratings to assess the
risk level and compares the
offered rate of return with his
expected rate of return (for the particular level of risk) to optimize his risk-return
trade-off. The risk perception of a common investor, in the absence of a credit
rating system, largely depends on his familiarity with the names of the promoters
or the collaborators. It is not feasible for the corporate issuer of a debt instrument
to offer every prospective investor the opportunity to undertake a detailed risk
evaluation. It is very uncommon for different classes of investors to arrive at some
uniform conclusion as to the relative quality of the instrument. Moreover they do
not possess the requisite skills of credit evaluation. Thus, the need for credit rating
in today’s world cannot be overemphasized. It is of great assistance to the investors
in making investment decisions. It also helps the issuers of the debt instruments to
price their issues correctly and to reach out to new investors. Regulators like
Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI)
use credit rating to determine eligibility criteria for some instruments. For example,
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the RBI has stipulated a minimum credit rating by an approved agency for issue of
commercial paper. In general, credit rating is expected to improve quality
consciousness in the market and establish over a period of time, a more meaningful
relationship between the quality of debt and the yield from it. Credit Rating is also
a valuable input in establishing business relationships of various types. However,
credit rating by a rating agency is not a recommendation to purchase or sale of a
security. Investors usually follow security ratings while making investments.
Ratings are considered to be an objective evaluation of the probability that a
borrower will default on a given security issue, by the investors. Whenever a
security issuer makes late payment, a default occurs. In case of bonds, non-
payment of either principal or interest or both may cause liquidation of a company.
In most of the cases, holders of bonds issued by a bankrupt company receive only a
portion of the amount invested by them. Thus, credit rating is a professional
opinion given after studying all available information at a particular point of time.
Such opinions may prove wrong in the context of subsequent events. Further, there
is no private contract between an investor and a rating agency and the investor is
free to accept or reject the opinion of the agency. Thus, a rating agency cannot be
held responsible for any losses suffered by the investor taking investment decision
on the basis of its rating. Thus, credit rating is an investor service and a rating
agency is expected to maintain the highest possible level of analytical competence
and integrity. In the long run, the credibility of rating agency has to be built, brick
by brick, on the quality of its services provided, continuous research undertaken
and consistent efforts made. The increasing levels of default resulting from easy
availability of finance, has led to the growing importance of the credit rating.
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1.5 – RESEARCH METHODOLOGY
The research design adopted for the study is one of the analytical cum casual
research process which has been elaborately discussed below:
The conclusive research provides information that helps the executive make a
rational decision. The most used type of conclusive research design is the
descriptive design. Such designs provide a description of a specific situation in
such a way as to help the researcher identify cause and effect relationships.There
are two types of data collection.
PRIMARY SOURCE OF DATA COLLECTION:
Primary sources of data refer to firsthand information which is collected to solve a

specific problem. The researcher takes up original investigation with the target
group to gather accurate information and data.
The data is collected through sampling method , 100 investors were sampled with
the help of questionnaire. The survey was conducted in Mumbai.
SECONDARY DATA COLLECTION METHOD:
The secondary data is readily available data from published or printed sources. The
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secondary data is generally used in the case of academic research and to a certain
extent in the case of social research. However, commercial research requires more
of primary data as compared to secondary data. Generally researcher first makes an
attempt to obtain information from secondary sources to solve the problem.
However, when the secondary data is sufficient and outdated, the researcher resorts
to primary data.
Information is gathered through secondary sources.

 Books
 Magazines
 Previous survey report
 Internet
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1.6 - LIMITATIONS OF CREDIT RATING
A Credit Rating is an assessment carried out from the limited standpoint of credit
risk evaluation. A Credit Rating from rating agency therefore constitutes a current
Opinion on the credit quality of a specific issue of debt, in terms of the issuer’s
ability and willingness to meet principal and interest payments on rated debt
instruments in a timely manner. Credit Ratings are arrived at based on information
obtained in the rating process. In addition to management meetings and
information provided by rated entities, the rated entity’s audited accounts,
regulatory filings, and information provided by trustees form an important source
of information. CRISIL does not verify and validate all the information that it uses
for its ratings. However, reasonable due diligence is carried out on all information
used to the extent feasible to ensure that a meaningful and accurate rating exercise
is done (for instance, financial accounts are extensively ‘adjusted’ to ensure that
they present a relevant picture of the financial position of an entity from a debt
servicing perspective, to the extent feasible).
Credit rating suffers from the following limitations:
1. Non-disclosure of significant information. Firm being rated may not provide

significant or material information, which is likely to affect the investor’s decision
as to investment, to the investigation team of the credit rating company. Thus any
decisions taken in the absence of such significant information may put investors at
a loss.
2. Static study. Rating is a static study of present and past historic data of the
company at one particular point of time. Numbers of factors including economic,
political, environment, and government policies have direct bearing on the working
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of a company. Any changes after the assignment of rating symbols may defeat the
very purpose of risk inductiveness of rating.
3. Rating is no certificate of soundness. Rating grades by the rating agencies are

only an opinion about the capability of the company to meets its interest
obligations. Rating symbols do not pinpoint towards quality of products or
management or staff etc. In other words rating does not give a certificate of the
complete soundness of the company. Users should form an independent view of
the rating symbol.
4. Rating may be biased. Personal bias of the investigating team might affect the
quality of the rating. The companies having lower grade rating do not advertise or
use the rating while raising funds from the public. In such a case the investors
cannot get the true information about the risk involved in the instrument.
5. Rating under unfavorable conditions. Rating grades are not always

representative of the true image of a company. A company might be given low
grade because it was passing through unfavorable conditions when rated. Thus,
misleading conclusions may be drawn by the investor which hampers the
company’s interest.
6. Difference in rating grades. Same instrument may be rated differently by the two
rating agencies because of the personal judgment of the investigating staff on
qualitative aspects. This may further confuse the investors.
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CHAP 2 – Literature Overview
Case 1
The History of Lehman Brothers
Lehman Brothers had humble

origins, tracing its roots back to a
small general store that was
founded by German immigrant
Henry Lehman in Montgomery,
Alabama, in 1844. In 1850,
Henry Lehman and his
brothers, Emanuel and Mayer,
founded Lehman Brothers.
While the firm prospered over the following decades as the U.S. economy grew
into an international powerhouse, Lehman had to contend with plenty of challenges
over the years. Lehman survived them all – the railroad bankruptcies of the 1800s,
the Great Depression of the 1930s, two world wars, a capital shortage when it was
spun off by American Express in 1994, and the Long Term Capital Management
collapse and Russian debt default of 1998. However, despite its ability to survive
past disasters, the collapse of the U.S. housing market ultimately brought Lehman
Brothers to its knees, as its headlong rush into the subprime mortgage market
proved to be a disastrous step.
Below table gives and overview of its stated annual income data from FY2003 to 6
months FY 2008.
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The below table shows the break up of the revenue from its 3 main core business
of Capital Markets, Investment Banking and Investment Management.
The Prime Culprit
In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way,
Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage
and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers
without full documentation). Lehman's acquisitions at first seemed prescient;
record revenues from Lehman's real estate businesses enabled revenues in the
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capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than
other businesses in investment banking or asset management. The firm securitized
$146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported
record profits every year from 2005 to 2007. In 2007, the firm reported net income
of a record $4.2 billion on revenue of $19.3 billion.
Lehman's Colossal Miscalculation
In February 2007, the stock reached a record $86.18, giving Lehman a market
capitalization of close to $60 billion. However, by the first quarter of 2007, cracks
in the U.S. housing market were already becoming apparent as defaults on
subprime mortgages rose to a seven-year high. On March 14, 2007, a day after the
stock had its biggest one-day drop in five years on concerns that rising defaults
would affect Lehman's profitability, the firm reported record revenues and profit
for its fiscal first quarter. In the post-earnings conference call, Lehman's chief
financial officer (CFO) said that the risks posed by rising home delinquencies were
well contained and would have little impact on the firm's earnings. He also said
that he did not foresee problems in the subprime market spreading to the rest of the
housing market or hurting the U.S. economy.
Reasons of Failure
 Boom & burst in the housing market
 Speculation
 High risk mortgage loans &lending/burrowing practices
 Securitizing practices
 Inaccurate credit ratings
 Govt. policies
The Beginning of the End
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As the credit crisis erupted in August 2007 with the failure of two Bear Stearns
hedge funds, Lehman's stock fell sharply. During that month, the company
eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it
also closed offices of Alt-A lender Aurora in three states. Even as the correction in
the U.S. housing market gained momentum, Lehman continued to be a major
player in the mortgage market. In 2007, Lehman underwrote more mortgage-
backed securities than any other firm, accumulating an $85-billion portfolio, or
four times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock
rebounded, as global equity markets reached new highs and prices for fixed-
income assets staged a temporary rebound. However, the firm did not take the
opportunity to trim its massive mortgage portfolio, which in retrospect, would turn
out to be its last chance.
Hurtling Toward Failure
Lehman's high degree of leverage - the ratio of total assets to shareholders equity -
was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly
vulnerable to deteriorating market conditions. On March 17, 2008, following the
near-collapse of Bear Stearns - the second-largest underwriter of mortgage-backed
securities - Lehman shares fell as much as 48% on concern it would be the next
Wall Street firm to fail. Confidence in the company returned to some extent in
April, after it raised $4 billion through an issue of preferred stock that was
convertible into Lehman shares at a 32% premium to its price at the time.
However, the stock resumed its decline as hedge fund managers began questioning
the valuation of Lehman's mortgage portfolio.
On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss
since being spun off by American Express, and reported that it had raised another
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$6 billion from investors. The firm also said that it had boosted its liquidity pool to
an estimated $45 billion, decreased gross assets by $147 billion, reduced its
exposure to residential and commercial mortgages by 20%, and cut down leverage
from a factor of 32 to about 25.
Too Little, Too Late
However, these measures were perceived as being too little, too late. Over the
summer, Lehman's management made unsuccessful overtures to a number of
potential partners. The stock plunged 77% in the first week of September 2008,
amid plummeting equity markets worldwide, as investors questioned CEO Richard
Fuld's plan to keep the firm independent by selling part of its asset management
unit and spinning off commercial real estate assets. Hopes that the Korea
Development Bank would take a stake in Lehman were dashed on September 9, as
the state-owned South Korean bank put talks on hold.
The news was a deathblow to Lehman, leading to a 45% plunge in the stock and a
66% spike in credit-default swaps on the company's debt. The company's hedge
fund clients began pulling out, while its short-term creditors cut credit lines. On
September 10, Lehman pre-announced dismal fiscal third-quarter results that
underscored the fragility of its financial position. The firm reported a loss of $3.9
billion, including a write-down of $5.6 billion, and also announced a sweeping
strategic restructuring of its businesses. The same day, Moody's Investor Service
announced that it was reviewing Lehman's credit ratings, and also said that
Lehman would have to sell a majority stake to a strategic partner in order to avoid
a rating downgrade. These developments led to a 42% plunge in the stock on
September 11.
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With only $1 billion left in cash by the end of that week, Lehman was quickly
running out of time. Last-ditch efforts over the weekend of September 13 between
Lehman, Barclays PLC and Bank of America, aimed at facilitating a takeover of
Lehman, were unsuccessful. On Monday September 15, Lehman declared
bankruptcy, resulting in the stock plunging 93% from its previous close on
September 12.
Conclusion
Lehman's collapse roiled global financial markets for weeks, given the size of the
company and its status as a major player in the U.S. and internationally. Many
questioned the U.S. government's decision to let Lehman fail, as compared to its
tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in March
2008. Lehman's bankruptcy led to more than $46 billion of its market value being
wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch
by Bank of America in an emergency deal that was also announced on September
15.
Lehman Brothers was given a Credit Rating of AA by all top 3 credit rating
companies just 2 days before the Lehman collapse in Sept 2008. This shows that
inspite of all the detailed evaluation done by credit rating agencies, the ratings do
not reflect the real status of the company and can defraud investor of billions of
dollars.
Lehman Brothers case study shows that the ratings given by credit rating
companies is not full proof and are subjective at times given without doing proper
due diligence.
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CASE 2
AAA RATING FOR ICICI BANK LTD.
The rating agency has

reaffirmed the ‘AAA’
[Triple A] rating assigned to
the various outstanding debt
instruments of ICICI Bank
Ltd (IBL). Instruments
carrying this rating are
considered to be of the best
quality, carrying negligible
investment risk. Debt service
payments are protected by
stable cash flows with good margins. While the underlying assumptions may
change, such changes as can be visualized are most unlikely to impair the strong
position of such instrument. CARE has also reaffirmed the ‘PR1+’ [PR One Plus]
rating assigned to the Rs.30 bn Certificate of Deposit programme of IBL and Short
term Deposit programme aggregating Rs.76.58 bn. This rating indicates superior
capacity for repayment of short-term promissory obligations. The rating factors in
IBL’s strong market position, its proactive management, the measures taken by it
to diversify and reduce its loan portfolio risk as also to adapt to the changing
external environment, its resource raising strengths, strong technology
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infrastructure, its significant retail reach and satisfactory capital adequacy. IBL’s
importance in the Indian banking sector as also the significant ownership by
institutional investors are also factors that have a favourable impact on rating.
However, legacy of weak assets inherited from erstwhile ICICI remains a concern
and improving asset quality amidst a difficult economic scenario will remain a
challenge for the banks’ management. IBL was promoted in 1994, jointly by ICICI
(75% equity stake) and SCICI Ltd. (25%). In March 2000, In March 2001, IBL
acquired Bank of Madura (BoM), a south based old private sector bank, in an all-
stock deal to improve its retail reach. As on March 31, 2002, IBL operated through
500 outlets and over 1000 ATMs. On March 30, 2002, ICICI Ltd and two of its
wholly owned retail finance subsidiaries, viz., ICICI Personal Financial Services
Limited and ICICI Capital Services Limited were merged with IBL in an all-stock
deal. The merger created India’s first universal bank and the second largest
commercial bank in the country in terms of assets, after State Bank of India. The
merged entity would combine the advantage of low cost of funds of IBL with the
extensive corporate relationships and large retail lending network of erstwhile
ICICI. The merged entity would be able to offer the entire range of financial
products and services to its customers. IBL’s asset base as on March 31, 2002 was
Rs.1041 bn including the large asset base taken over from erstwhile ICICI. The
asset base declined marginally to Rs.996.8 bn as on September 30, 2002. During
the six months ended September 2002, IBL generated a total income of Rs.56.75
bn and earned a profit of Rs.5.90 bn, before tax and extraordinary items. The bank
also earned Rs.11.91 bn on the sale of ICICI’s stake in IBL (held by a trust) and
has made additional accelerated provision of Rs.16.86 bn against the legacy
portfolio. IBL’s capital adequacy also improved marginally to 12.32% (including
Tier I 8.05%) as on September 30, 2002. The legacy of stressed assets inherited
from ICICI continues to be a cause of concern. However, the additional
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provisioning made at the time of merger as also the recent legal changes in the
foreclosure laws are expected to help IBL in tackling this problem. IBL’s success
in managing this weak assets portfolio without making large sacrifices that would
affect its profitability and solvency would be a key rating sensitivity. Most of
IBL’s incremental lending is to the retail sector, across all product categories like
auto loans, home loans, personal loans, commercial vehicle finance etc. IBL’s
ability to maintain high asset quality while targeting high growth in the retail
portfolio, in a very competitive environment is another key rating sensitivity.
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Conclusion
Bank /Financial Institutional rating, in common with most financial analysis, is

fertile ground for the growth of jungles of clichés and thickets of impenetrable
jargon. Banks being rated almost invariably claim to address the issues, to focus on
niche markets or franchises, to target their strategic objectives and to empower
their executives with aggressive management structures. Readers of rating reports
are invited to compare scenarios, to juggle with parameters, synergies and
symbioses, to contemplate future(sic) prospects .The rating does not address the
risk of loss due to risks other than credit risk, unless such risk is specifically
mentioned. It is not engaged in the offer or sale of any security. A report providing
a rating is neither a prospectus nor a substitute for the information assembled,
verified, and presented to investors by the issuer and its agents in connection with
the sale of the securities. It does not provide investment advice of any sort. Ratings
are not a recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security for a
particular investor, or the tax-exempt nature or taxability of payments made in
respect to any security.
CHAPTER 3
RATING DEFINITIONS
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Long term rating scales
High Investment Grades
Debentures rated ÀAA' are judged to offer highest safety of

AAA
timely payment of interest and principal. Though the
(Triple A)
circumstances providing this degree of safety is likely to change,
Highest
such changes as can be envisaged are most unlikely to affect
Safety
adversely the fundamentally strong position of such issues.
AA Debentures rated 'AA' are judged to offer high safety of timely

(Double A) payment of interest and principal. They differ in safety from
High Safety ÀAA' issues only marginally.
Investment Grades
Debentures rated À' are judged to offer adequate safety of

A
timely payment of interest and principal; however, changes in
Adequate
circumstances can adversely affect such issues more than those in
Safety
the higher rated categories.
Debentures rated `BBB' are judged to offer sufficient safety of

BBB
timely payment of interest and principal for the present; however,
(Triple B)
changing circumstances are more likely to lead to a weakened
Moderate
capacity to pay interest and repay principal than for debentures in
Safety
higher rated categories.
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
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susceptible to default than other speculative grade debentures in
Inadequate the immediate future, the uncertainties that the issuer faces could
Safety lead to inadequate capacity to make timely interest and principal
payments
Debentures rated `B' are judged to have greater susceptibility to

B default; while currently interest and principal payments are met,
High Risk adverse business or economic conditions would lead to lack of
ability or willingness to pay interest or principal.
C Debentures rated `C' are judged to have factors present that make
Substantial them vulnerable to default; timely payment of interest and
Risk principal is possible only if favorable circumstances continue.
Debentures rated `D' are in default and in arrears of interest or

D principal payments or are expected to default on maturity. Such
In Default debentures are extremely speculative and returns from these
debentures may be realized only on reorganization or liquidation.
1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings
from AA to D to reflect comparative standing within the
category.2) The contents within parenthesis are a guide to the
Note: pronunciation of the rating symbols.3) 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").
Fixed Deposit Rating Scales
FAAA This rating indicates that degree of safety regarding timely
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("F Triple
A") Highest payment of interest and principal is very strong.
Safety
FAA This rating indicates that the degree of safety regarding timely
("F Double payment of interest and principal is strong. However, the relative
A") High degree of safety is not as high as for fixed deposits with "FAAA"
Safety rating.
This rating indicates inadequate safety of timely payment of

FA interest and principal. Such issues are less susceptible to default
Adequate than fixed deposits rated below this category, but the
Safety uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments.
This rating indicates inadequate safety of timely payment of

FB interest and principal. Such issues are less susceptible to default
Inadequate than fixed deposits rated below this category, but the
Safety uncertainties that the issuer faces could lead to inadequate
capacity to make timely interest and principal payments.
This rating indicates that the degree of safety regarding timely

payment of interest and principal is doubtful. Such issues have
FC
factors at present that make them vulnerable to default; adverse
High Risk
business or economic conditions would lead to lack of ability or
willingness to pay interest or principal.
FD This rating indicates that the issue is either in default or is

Default expected to be in default upon maturity.
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1) The rating agency may apply "+" (plus) or "-" (minus) signs
for ratings from FAA to FC to indicate the relative position
Note: within the rating category of the company raising fixed deposits.
2) The contents within parenthesis are a guide to the
pronunciation of the rating symbols.
Rating For Short-Term Instruments (Commercial Paper)
P-1 This rating indicates that the degree of safety regarding timely
payment on the instrument is very strong.
payment on the instrument is strong; however, the relative
degree of safety is lower than that for instruments rated "P-1".
payment on the instrument is adequate; however, the instrument
is more vulnerable to the adverse effects of changing
circumstances than an instrument rated in the two higher
categories.
payment on the instrument is minimal and it is likely to be
adversely affected by short-term adversity or less favorable
conditions.
P-5 This rating indicates that the instrument is expected to be in

default on maturity or is in default.
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Note : CRISIL may apply "+" (plus) sign for ratings from P-1 to P-3
to reflect a comparatively higher standing within the category
Rating Scales For Structured Obligations (so)
AAA(so) This rating indicates highest degree of certainty regarding

(Triple A timely payment of financial obligations on the instrument. Any
SO) adverse changes in circumstances are most unlikely to affect the
payments on the instrument.
AA(so) This rating indicates high degree of certainty regarding timely

(Double A payment of financial obligations on the instrument. This
SO) instrument differs in safety from ÀAA' instruments only
marginally.
A(so) This rating indicates adequate degree of certainty regarding

timely payment of financial obligations on the instrument.
Changes in circumstances can adversely affect such instruments
more than those in the higher rated categories.
BBB(so) This rating indicates a moderate degree of certainty regarding

(Triple B timely payment of financial obligations on the instrument.
SO) However, changing circumstances are more likely to lead to a
weakened capacity to meet financial obligations than for
instruments in higher rated categories.
BB(so) This rating indicates inadequate degree of certainty regarding

(Double B timely payment of financial obligations on the instruments.
SO) Such instruments are less susceptible to default than
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instruments rated below this category.
B(so) This rating indicates high risk and greater susceptibility to

default. Any adverse business or economic conditions would
lead to lack of capability or willingness to meet financial
obligations on time.
C(so) This rating indicates that the degree of certainty regarding

timely payment of financial obligations is doubtful unless
circumstances are favorable.
D(so) This rating indicates that the obligor is in default or expected to

default.
Note : 1) CRISIL may apply "+" (plus) or "-" (minus) signs for
ratings from AA to C to reflect comparative standing within the
category.
2) The contents within parenthesis are a guide to the
pronunciation of the rating symbols.
Foreign Structured Obligations (Fso) Rating Scales
The credit rating agency has developed a

framework for rating the debt obligations
of Indian corporates supported by credit
enhancements extended by entities based
outside the country. The issues
considered inter alia include the credit
worthiness of the offshore entity, the
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nature and structure of the credit enhancement mechanism to ensure timely
payments on rated debt obligations an regulatory issues as regards the transfer risk.
The credit rating would notch up the standalone credit ratings of these Indian
issuers depending on all these factors.
CRISIL ratings of Foreign Structured Obligations (fso) factor the credit

enhancement extended by an entity based outside the country. The ratings indicate
the degree of certainty regarding timely payment of financial obligations on the
instrument. These ratings have been assigned in the current regulatory framework
as regards the transfer risk and any change therein could impact the ratings.
The credit enhancements could be in the form of guarantees, letters of credit, asset
backing or other suitable structures. Due to the current regulatory controls on
inward remittances, CRISIL would require suitable liquidity mechanisms to be in
place for ensuring timely payment on due dates.
Foreign Structured Obligations ratings are based on the same scale (AAA through
D) as CRISIL ratings for long-term instruments. Foreign Structured Obligations
ratings symbols are defined below:
High Investment Grades
AAA(fso) Highest Safety - This rating indicates highest degree of

(Triple certainty regarding timely payment of financial obligations on
A)* the instrument. Any adverse changes in circumstances are
most unlikely to affect the payments on the instrument.
AA(fso) Highest Safety - This rating indicates high degree of certainty

(Double regarding timely payment of financial obligations on the
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A)* instrument. This instrument differs in safety, from "AAA(fso)"
instruments only marginally.
Investment Grades
A(fso) * Adequate Safety -This rating indicates adequate degree of

certainty regarding timely payment of financial obligations on
the instrument. Changes in circumstances can adversely affect
such instruments. Changes in circumstances can adversely
affect such instruments more than those in the higher rated
categories.
BBB(fso) Moderate Safety - This rating indicates a moderate degree of

(Triple B) certainty regarding timely payment of financial obligations on
* the instrument. However, changing circumstances are more
likely to lead to a weakened capacity to meet financial
obligations than for instruments in higher rated categories.
Speculative Grades
BB(fso) Inadequate Safety - This rating indicates inadequate degree of

(Double B) certainty regarding timely payment of financial obligation on
* the instrument. Such instruments are less susceptible to default
than instruments rated below this category.
B(fso) High Risk - This rating indicates high risk and greater
susceptibility to default. Any adverse business or economic
conditions would lead to lack of capability or willingness to
meet financial obligations on time.
C(fso) Substantial Risk - This rating indicates that the degree of
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certainty regarding timely payment of financial obligations is
doubtful unless circumstances are favorable.
D(fso) Default - This rating indicates that the obligation is in default

or expected to default.
Note: The contents within Parenthesis are a guide to the pronunciation of the rating
symbols.
Credit Rating Scale for Financial Strength Ratings (FSR)
Ratings are broadly divided into two categories - Secure and Vulnerable.
Rating categories from "AAA" to "BBB" are classified as 'secure' ratings
and are used to indicate insurance companies whose financial capacity to
meet policyholder obligations is sound. Rating categories from "BB" to
"D" are classified as vulnerable ratings and are used to indicate insurance
companies whose financial capacity to meet policyholder obligations is
vulnerable to adverse economic and underwriting conditions.
The opinion does not take into account timeliness of payment or the
likelihood of the use of a defense such as fraud to deny claims. For insurance
companies with cross-border or multi-national operations, including those
conducted by branch offices or subsidiaries, ratings do not take into account
any potential that may exist for foreign exchange restrictions to prevent
policy obligations from being met. Financial strength ratings do not refer to
an insurance company's ability to meet non-policy obligations (i.e. debt
contracts).The ratings are not recommendations to purchase or discontinue a
policy, contract or security issued by an insurance company nor are they
guarantees of financial strength.
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Secure Ratings
AAA Reflects Highest Financial Strength to meet policyholder

obligations. Though the circumstances providing this strength are
likely to change, such changes as can be envisaged are most unlikely
to affect adversely the fundamentally strong position.
AA Reflects High Financial Strength to meet policyholder

obligations. Though the circumstances providing this degree of
strength are likely to change, such changes as can be envisaged are
most unlikely to affect adversely the fundamentally strong position.
Companies in this category differ only marginally from the 'AAA'
rated insurance companies.
A Reflects Adequate Financial Strength to meet policyholder

obligations. However, change in circumstances can adversely affect
such companies more than those in the higher rated categories.
BBB Reflects Moderate Financial Strength to meet policyholder

obligations. However, changing circumstances are more likely to
lead to a weakened capacity to meet policyholder obligations than the
higher rated categories.
Vulnerable Ratings
BB Reflects Inadequate Financial Strength to meet policyholder

obligations. While companies rated in this category are less
susceptible to default than other speculative grade companies in the
immediate future, the uncertainties that they face could lead to
inadequate capacity to meet their policyholder obligations.
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B Reflects Greater Susceptibility to default on policyholder
obligations. While current obligations are met, adverse business or
economic conditions would lead to lack of ability or willingness to
meet policyholder obligations.
C Vulnerable to default. Ability to meet policyholder obligations is

possible only if favorable circumstances prevail.
D In default. Current policyholder obligations are in default. Insurance

companies rated "D" are extremely speculative and policyholder
obligations may be realized only on reorganization or liquidation.
Financial strength ratings from "AA" to "BB" may be modified by use of a plus
(+) or (minus (-) sign to show the relative standing of the insurance / reinsurance
company within the rating categories.
Bond Fund Rating Scales
AAA The fund’s portfolio holdings provide very strong protection against
f losses from credit defaults.
AAf The fund’s portfolio holdings provide strong protection against

losses from credit defaults.
Af The fund’s portfolio holdings provide adequate protection against

BBBf The fund’s portfolio holdings provide moderate protection against

BBf The fund’s portfolio holdings provide inadequate protection against

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Cf The fund’s portfolio holdings have factors present which make them
vulnerable to credit defaults.
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
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7. Initial Public Offers (IPOs)
CRAs also undertake customised credit research of a number of borrowers in a

credit portfolio, for the use of the lender. CRAs use their understanding of
companies‘ business and operations and their expertise in building frameworks for
relative evaluation, which are then applied to arrive at performance grading. For
example developer gradings are carried out to assess the ability of the developers
to execute Ministry of Finance, Capital Markets Division projects on a timely basis
and promised quality while maritime institute gradings are carried out to assess
quality of education imparted to the students vis a vis DGS (Directorate General of
Shipping) objectives.
CHAPTER 4
RATING PROCESS & FRAMEWORK
Rating is an interactive process with a prospective approach. It involves series of

steps. The main points are described as below:
(a) Rating request:

Ratings in India are
initiated by a formal
request (or mandate ) from
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the prospective issuer . This mandate spells out the terms of the rating assignment.
Important issues that are covered include: binding the credit rating agency to
maintain confidentiality, the right to the issuer to accept or not to accept the rating
and binds the issuer to provide information required by the credit rating agency for
rating and subsequent surveillance.
(b) Rating team:The team usually comprises two members. The composition of
the team is based on the expertise and skills required for evaluating the business of
the issuer.
(c) Information requirements: Issuers are provided a list of information

requirements and the broad framework for discussions. These requirements are
derived from the experience of the issuers business and broadly conform to all the
aspects which have a bearing on the rating. These factors have been discussed in
detail under rating framework.
(d) Secondary information:The credit rating agency also draws on the secondary
sources of information including its own research division. The credit rating
agency also has a panel of industry experts who provide guidance on specific
issues to the rating team. The secondary sources generally provide data and trends
including policies about the industry.
(e) Management meetings and plant visits:Rating involves assessment of

number of qualitative factors with a view to estimate the future earnings of the
issuer. This requires intensive interactions with the issuer’s management
specifically relating to plans, future outlook,and competitive position and funding
policies.
Plan visits facilitate understanding of the production process, assess the state of
equipment and main facilities, evaluate the quality of technical personnel and form
39 | P a g e
an opinion on the key variables that influence level , quality and cost of
production. These visits also help in assessing the progress of projects under
implementation.
(f) Preview meeting:After completing the analysis, the findings are discussed at
length in the internal committee, comprising senior analysts of the credit rating
agency. All the issues having a bearing on the rating are identified. At this stage,
an opinion on the rating is also formed.
(g) Rating Committee meeting:This is the final authority for assigning ratings. A
brief presentation about the issuers business and the management is made by the
rating team. All the issues identified during discussions in the internal committee
are discussed. The rating committee also considers the recommendation of the
internal committee for the rating. Finally, a rating is assigned and all the issues
which influence the rating are clearly spelt out.
(h) Rating communication: The assigned rating along with the key issues is
communicated to the issuer’s top management for acceptance. The ratings which
are not accepted are either rejected or reviewed. The rejected ratings are not
disclosed and complete confidentiality is maintained.
(I) Rating Reviews: If the rating is not acceptable to the issuer , he has a right to
appeal for a review of the rating. These 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.
(j) Surveillance:It is obligatory on the part of the credit rating agency to monitor
the accepted ratings over the tenure of the rated instrument. As has been mentioned
earlier, the issuer is bound by the mandate letter to provide information to the
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credit rating agency. The ratings are generally reviewed every year, unless the
circumstances of the case warrant an early review. In a surveillance review the
initial rating could be retained or revised (upgrade or downgrade).
How Does the Ratings Process Work?
The process of Rating starts with the issue of the Rating Request by the issuer/
signing of the Rating agreement. A detailed flow chart is as under:
Analytical framework used by CRAs
A credit rating is an opinion on the relative credit risk (or default risk) associated
with the instrument being rated, where a failure to pay even one rupee of the
committed debt service payments on the due dates would constitute a default. For
most instruments, the process involves estimating the cash generation capacity of
41 | P a g e
the issuer through operations (primary cash flows) in relation to its requirements
for servicing debt obligations over the tenure of the instrument. The analysis is
based on information obtained from the issuer, and on an understanding of the
business environment in which the issuer operates; it is carried out within the
framework of the rating agency‘s criteria.
The analytical framework involves the analysis of business risk, technology risk,
operational risk, industry risk, market risk, financial risk and management risk.
Business risk analysis covers industry analysis, operating efficiency, market
position of the company whereas financial risk covers accounting quality, existing
financial position, cash flows and financial flexibility. Under management risk
analysis an assessment is made of the competence and risk appetite of the
management.
Rating process for Bank/Financial institution
Once we have received a request for a new rating of a bank (this should
subsequently be backed by a formal rating agreement), we follow the procedures
outlined below:
1) Analyzing the Bank’s/FIs environment
It is first necessary to collect and analyze data relating to the it system in which the
Bank’s/FIs in question operates and to the place of the Bank’s/FIs within that
system. This process includes analysis of the relevant national Bank’s/FIs market
and of existing and potential competition in that market and also of the degree of
concentration within it. It requires examination of the role and functions of the
Bank’s/FIs supervisory authorities in the country in question, of the degree of state
42 | P a g e
control (or decontrol) of that country’s Bank’s/FIs system, of the requirements of
public reporting Bank’s/FIs and of the accounting practices that lie behind the
figures publicly reported by Bank’s/FIs. On a still wider scale it is necessary to
take into account the requirements of the Basle G 10 Agreement on "International
convergence of capital measurement and capital standards" and subsequent
interpretative statements from the Basle Committee (of international bank
supervisors).
2) Bank questionnaire:
Based on our initial analysis of publicly available data, we prepare a questionnaire

for presentation to the management of the bank to be rated. This is intended to
serve as a basis which may be adapted for the particular circumstances of the bank
being rated.
3) Meeting with bank:
As already indicated, the next step is a meeting with senior management of the
bank in question to discuss and assess the data provided. Such meetings are usually
arranged with the bank's chief financial officer, but many of the more sophisticated
banking groups and banks now employ rating agency liaison officers. The length
and number of meetings with management depend on the complexity of the entity
being rated, but, normally the first time we rate a bank there will be one such
meeting, and it will last for half a day to a day.
4) Analysis of the bank:
The Cramel Model comprises the following:
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I. Capitals adequacy ratio
II. Resource raising ability
III. Asset quality
IV. Management & system evaluation
V. Earning potential
VI. Liquidity / Asset Liability Management
NO one factor has an overriding importance or is considered in isolation.
These entire six factors are viewed in conjunction before assigning rating.
In addition to the factors which constitute the CRAMEL, the size of the financial
entity is also an important parameter. The size of an entity in the financial sector,
imparts it the ability to with stand systematic shock, support that can be expected
for the entity.
I CAPITAL ADEQUACY:
Capital adequacy of an entity provides the necessary capital cushion to with stand
credit risks. While assigning a rating, it analyses the capital adequacy level and its
sustainability in the medium to long term. The analysis of capital adequacy
encompasses the following factors:
I.1 Size of capital:
The absolute size of a capital imparts flexibility to a bank / FI to withstand shock

and thus an entity with higher absolute capital is viewed favorably.
I.2 Quality of Capital (Tier-I Capital):
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The proportion of Tier I capital or core capital of a bank /FI is the primary
indicator of the quality of capital .The level of Tier-I capital is given primary
importance when assigning rating for capital adequacy .Although the presence of
Tier-II capital does provide some cushion in the short to the medium term, the
Tier-II capital needs to be periodically replenished .It also analyses other issues
like the presence of hidden reserve and the percentage of the investment portfolio
marked to the market. These issues help in streamlining accounting policy
differential across various entities and have a bearing on the quality of capital.
I.3 Flexibility to raise Tier –I capital:
An entity has the flexibility to raise Tier –I capital either through internal accruals
or through the capital markets. The ability of the entity to access the capital market
to meet its Tier –I capital needs and its ability to service the increased capital base
is considered while evaluating the flexibility of a bank /FI to support the increased
asset base through earning is an important parameters in assessing sustainability of
capital adequacy.An entity which is able to sustain asset growth through internal
generation without impairing capital adequacy is viewed favorably.
I.4 Growth Plans:
Its factors the future growth plans of a bank/ Fi while analyzing capital adequacy
.The capital adequacy of the entity (although at currently high levels) would
be regarded as unsustainable , if it pursuing a strategy of high growth .
II Resource raising ability:
It analyses the resource position of the bank /FI in terms of its ability to maintain a
low cost , stable resource base .In the domestic context , the resource (funding)
45 | P a g e
composition of bank and FIs is very different.Bank are significantly deposit funded
whereas the FIs have to depend on wholesale funds .
Although some FIs do raise retail funds, they are at a natural disadvantage (in
raising retail deposits) as compared to the banking sector in terms of the
restrictions on the minimum tenure and interest rates, the absence of a cheque
issuing facility and a relatively smaller branch network. Some of the FIs do have
access to significant concessional funding from the government if they are playing
a role which is of policy importance t the country. However, in general the
dependence on wholesale funding attaches a degree of risk t the funding profile of
FIs.These risks (especially stability of resource) are partly mitigated by the access
that the all India Financial Institutions (AIFIs) have to funds from provident funds
and insurance sectors; these funds are of a retail origin .Given this basic distinction
in funding profiles between bank/FIs, the funding risk profile of bank / FIs is
discussed separately.
The following issues are considered while analyzing the resources position of a
bank.
II.1 Size of a deposit base:
A large deposit base provides stability to the resource position of a bank. The size
of a deposit base provides the bank, a critical mass for effectively managing its
cash flows and adds considerably to the diversity (in term of the number of
deposits) of the deposit base.Diversity in the deposit base & in term of large
numbers of small ticket size deposit, the geographically spread and the optimal
rural/urban mix, lend stability to the resources position of a bank. The number of
branches and their geographical spread lend diversity to the deposit base of a bank.
46 | P a g e
Thus a bank with large number of branches, dispersed all over India and an optimal
rural / urban mix is viewed favorably.
II.2 Deposit Mix:
The deposit mix of a bank has an impact on the cost of deposits. A high proportion
of saving and current deposit, signify a well-entrenched deposit base and lead to a
stable and low cost resource base. It also analyses the trends in deposit mix to form
an opinion on the future stability and costs.
II.3 Growth in deposit:
Accretion to deposit is the main source of funding asset growth, and managing
liquidity risk in bank.It compares the growth in deposit of a bank with industry
trends to make relative judgments.
II.4 Cost of deposit:
Cost of deposit is a function of deposit mix of the bank, its region of operation and
the bank to attract deposit at lower rates. Bank which have a low cost of resources,
not only benefits through higher profitability but also have a higher flexibility to
maintain their resources position, in the face of increasing competition. The
relevant issues while analyzing the resources position of a FIs:
II.5 Diversity of investor base:
Given the fact that the FIs are predominantly wholesale funded, the diversity of
the investor population (both domestic and international) does mitigate the
risk profile to a certain extent.FIs which is dependent on a few investors are
viewed less favorably.
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II.6 Funding mix and cost of funds:
Traditionally, all the FIs enjoyed concessional funding from the government in
the form of SLR bonds. This facility has been progressively withdrawn from
the institutions and they have been increasingly accessing market borrowing over
the past few years. The mix of funds between the government and market
borrowing over the past few years. The mix of the funds between the government
and market borrowed funds is an important determinant of the overall cost of
funds for an FI.
FIs which still carry a significant proportion of concessional funds on their

books will tend to enjoy a cost of funds advantage in the near terms. The funding
mix between domestic and foreign currency funding is also examined to determine
the overall risk profile.FIs which tend to have a higher proportion of a foreign
currency borrower defaulting on payment obligation and thus exposing the FI to
currency risk. This risk assumes significance in the current context, when the
economy is slowing down and there is a greater instance of corporate defaults. In
case of FIs which have been significantly dependent on foreign currency
multilateral funds, the recently imposed economic sanction would affect their
resource raising capabilities.
II.7 Retail Penetration:
Some of the leading FIs have started tapping the retail market for bonds and
deposits. These funds do impart stability to the funding mix and the trends in
raising retail resource are factored favorably into its risk evaluation
III ASSET Quality:
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Asset quality of bank/FIs is a measure of the ability of the bank to manage credit
risks.Its analyses the asset quality on the basis of the following parameters-
Geographical diversity of an asset base and diversity across industries, along with
single risk concentration limits are important inputs in determining the asset
quality of bank/FIs. Industrial development of the states in the western region, like
Maharashtra and Gujarat is relatively higher. Thus, the amount of credit extended
in this region is higher concentration of advances in the western region. However,
the bank /FIs with all India presence have the additional flexibility due to their
widespread branch network, to enhance their exposure to other region, in case of
adverse economic development in these states. However, the regional banks with
limited operation and branch network have lesser flexibility to diversify their
advances portfolio and are thus susceptible to adverse economic condition in a
particular region.
Diversity across industries is largely a function of the geographical presence of the

Bank/FIs and Management policy. The industry exposure and single risk
concentration is monitored by the central bank through exposure guidelines.
However, some bank/FIs show a high degree of exposure to certain industries thus
making themselves vulnerable to downturns in those industries.
III.1 Client Profile of the corporate asset portfolio:
Credit quality of the corporate portfolio of the bank is an important input in the
analysis of the asset quality.It analyses the profile of the client in the asset
portfolio to make a judgement on portfolio quality. The ability of bank/FIs to
attracts better credit quality, especially after the dismantling of consortium
lending. The size (of capital) of a financial sector entity lends considerable
flexibility to the entity to attract larger and better quality clients given its sheer
49 | P a g e
ability to take on larger exposure in its balance sheet. Also, the ability of the
entities to attract and retain good quality clients by providing value added
service would enhance asset quality in the future.
III.2 Quality of Non-industrial lending:
Bank in India have an obligation to lend a proportion of their funds to the priority
Sector which primarily encompasses agriculture and small scale industries.
To his extent, FIs are better placed than banks because they do not have any such
obligation. It analyses the credit quality of this non-industrial portfolio in arriving
at a judgement on an overall asset quality of a bank. The credit quality of the asset
portfolio is also indicated by the segment wise NPA levels of the portfolio,
indicates the performance of the bank in each segment. This help in gauging the
relative strength of the bank in each of the loan segment. Some of the banks have a
higher level of exposure to the trading. These advances provide a comparatively
higher yield and also provide diversity due to their small ticket size. The
Indian banks have to compulsorily lend 40% of their total advances to the priority
sector. The break–up of the loan within these sectors in an important indicator of
the quality of the portfolio
E.g. an agricultural loan in an agriculturally prosperous state of Punjab would have

a better probability of being repaid as compared to other agriculturally weak states.
Retail consumers’ loans (primarily vehicle and housing loans) still do not
constitute a major portion of the asset profile of bank/FIs. However, some large
bank/FI is strategizing towards a universal bank strategy and proposes to expand
significantly in this segment. It looks at the quality of retail consumer’s credit
growth and its final analysis.
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III.3 NPA LEVEL:
The asset quality of a bank depends not only on the credit quality of its but also on
the ability of the bank to manage its asset portfolio. The NPA figures at gross
and net levels help in benchmarking the bank’s ability to manage their
portfolio, on a relative scale. While the gross NPA levels are an indicator of the
inherent quality of the asset portfolio of the entity and thus the credit appraisal
capabilities, the net NPA levels are an indicator of the balance sheet strength of the
bank, The NPA levels also indicate the proportion of earning asset of the bank and
the potential credit loss of bank. The proportion of earning asset and the potential
credit loss would have a bearing on the future earning capability of the bank.
Movement of provision and write offs: Some bank/FIs follow a practice of their
bad loans, in large portion of their bad loans, in order to clean up their balance
sheets.
Thus the present NPA numbers are not a true indicator of the bank’s asset
portfolio.Hence, NPA levels alone cannot be criteria to assess future asset quality
of the bank. Average provisioning including write-offs, over a five years’ time
frame is an indicator of the levels cleaning up done by the bank, over the years, in
order to reduce its NPA levels. The amount of provisioning done is also an
indicator of the inherent credit quality of the asset portfolio. The average
provisioning levels and its movement serve as indicators of the credit risk of the
portfolio and the expected future write-offs and provisioning which would further
affect the earning capability of a bank.
III.4 Growth in advance:
High growth rates in the financial sector bring the establishment of collection
systems, tracking of asset quality and low seasoning of the lending portfolio. It
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closely analyses the pattern and nature of growth .It studies the entities with higher
growth rates more carefully to look at the nature of growth, reason growth and
its implications on the asset quality. An entity which has grown by attracting
good quality clients from its competitors would be viewed more favorably as
compared to one which has grown by attracting good quality clients from its
competitors would be viewed more favorably as compared to one which has grown
just by increasing its geographical presence or diluting credit criteria.
IV Management and system evaluation:
It believes that the quality of management can be an important differentiating

factor in the future performance of the bank/FI. The analysis of the management is
carried out on the following parameters.
IV.1Goals & strategies:
The future goals and strategies of the bank are evaluated to take a view in the
vision of the bank management. The ability of bank to adapt to the changing
environment and their ability to manage credit and market risk, especially in a
scenario of increasing deregulation of the financial market assumes critical
importance.
IV.2 System & monitoring:
It studies the credit appraisal system for managing and controlling credit and
market risk at a portfolio levels. Significant emphasis is laid on the risk monitoring
system and the periodically and quality of such monitoring. Most Indian banks face
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the challenges of enhancing their information system and quality of information
reporting. The degree of acceptance of new system and procedure in the bank, data
monitoring systems and the extent of computerization within the bank is given
significant importance. The level of computerization is gauged on the basis of the
extent of the business covered by computerization, the computerization in branches
and computerization of money market and forexmarket desks.
It attaches significance to the operating system for data capture and MIS
reporting in a bank.A bank balance sheet with a large volume of operating system
in the bank, and is viewed negatively.
IV.3Appetite for risk:
A high risk propensity of a management, typically reflect in the higher volatility

in earning in both fund based as well as non-fund based business. A
management with a higher propensity to take risk is viewed cautiously.
IV.4 Motivation level of staff:
The motivational level of employees would direct affect the service level of the
bank which is a key success factor in a market driven environment.
V Earning Potential:
It analyses on the following basis of the level
V.1 Level of earning:
It is measured by return on total asset provides the cushion for its debt service, and
also increases the ability of the bank to cover its asset risk. The ROTA is a function
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of interest spread, expenses levels provisioning levels and the non-interestincome
earned by the bank.
The size of net profit is also factored while rating of the entity. Earning of the bank
/FIs has been affected due to the volatility in interest rates. Thus, the trend in
profitability at gross profit levels is examined over the past levels is examined over
the past years to take a view on the sustainability of earning. The various elements
leading to the profitability like net interest income, non-interest income, expense
levels and the provisioning levels are also analyzed to take and the sustainability of
profits in future.
V.2 Diversity of income sources:
It is an important input in analyzing the stability of earning. Diversity of income

sources between various categories of funds based income like industrial portfolio,
retail portfolio, etc. lends stability to the income streams through non-interest
income like guarantees, service charges from its retail customer, trading income,
etc. The non-interest income provides cushion to the profitability, especially which
have the capability to provide better value added service would be in a better
placed to improve their fee based income. A closer analysis the composition of the
revenue streams, help in taking a view regarding the sustainability of the earning.
VI Liquidity/Asset Liability Management:
It assesses the liability maturity profile of the entity to form an opinion on the
liquidity risk as well the interest rate risk.
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VI.1 Liquidity risk:
It factors the resources strength of the bank in form of access to call borrowing and
the extent of refinance available from RBI. The bank are the primary channel
through which retail saving are channeled back into the public sector bank having a
wide spread branch network act as conduits for mobilization of retail saving . It
views most of the public sector bank favorably on the liquidity support available to
the liquidity support available to the bank in the form of call money and RBI
refinance.
VI.2 Interest rate Risk:
The rating factor the volatility of the bank /FIs earning to interest rate changes .It
analyses the asset liability maturity profile of an entity to judge the level of interest
rate risk carried by the entity. In the Indian banking system, the interest rate and
maturity profile of the asset and liabilities have an inherent mismatch. the floating
rate advances portfolio (linked to prime lending rates ) and the relatively long
duration investment portfolio are funded through short to medium tenure liabilities
which exposes the bank to an element of interest rate risk.
FIs do score over bank in this regard due to the whole sale nature of their operation
and policies which link the nature of their operation and policies which link the
nature of borrowing (fixed/ floating) with corresponding matched lending. On an
overall basis, FIs carry relatively lesser interest rate risk as compared to the bank.
4. Parent support:
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It factors the parentage of the entity in the final rating decision .The extent of
support factored is a function of the relative size of the two entities, the credit
quality of the parent and the strategic importance of the subsidiary to the parent .It
positively factors the system support for specialized entities in the financial sector,
which have a policy role in the national economy.
5. Draft report:
Following the meeting with its management and subsequent analysis of the data
obtained, the analysts draft a rating report on the bank. Depending on the rating
agreement and the particular circumstances, this may be a short-form report (one
page of text forming the rating report, plus spread sheets) or a long-form report
(one front page of text forming the rating report, plus ca. five pages of text
providing our rating analysis, plus spread sheets, plus spread sheet annex,
providing explanatory notes to the spread sheets). The analysis in the text of the
long-form report is arranged under main and sub- headings which tie in with the
topics covered in the bank questionnaire.
6. Presentation of draft report to bank
We send our draft report (without ratings) to the bank being rated, for two reasons:
- So that its factual accuracy may be checked;
- To allow management to determine whether we have included any information in

our draft which was given in confidence and which should be excluded on these
grounds.
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7. Amendment and subsequent circulation of report to rating committee;
composition of the committee
We amend our report in accordance with any comments from the bank which meet
the criteria in 6., above, and circulate it together with other, relevant
documentation among the members of a rating committee, which normally has a
complement of five.There is no single, standing rating committee; rather there is a
committee for ach country we cover, or, in some cases, for each peer group of
banks in each country. The two analysts who visited the bank, did the analysis and
wrote the report are always members of its rating committee.
8. Rating committee meeting; assignment of ratings
At the rating committee meeting the two analysts responsible for the work done so
far present the rest of the committee with the report they drafted, which has since
been seen by the bank and possibly amended, as explained above, to accord with
its comments. They also present relevant confidential data, which they have not
been able to include in the report, and peer group analyses comparing the bank
with its domestic and foreign peers. The ratings implied by the formula are not
treated as definitive: they are considered only as further input to the rating
decision so that there remains a strong subjective element in our final judgments- a
subjectivity tempered, we trust, by several years’ experience (allowing a reasoned
extrapolation of the future), by common sense and by specialized knowledge and
research.
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9. Dissemination (or non-dissemination) of the ratings
When a bank being rated for the first time has been informed of the decision of the
rating committee, it has no recourse to an appeal, but it does have the right to
decide whether it wishes our ratings to be made public and the rating report to be
sent to our subscribers. However, normally before launching ourselves into the
work involved in a new rating, which possibly also involves coverage of a country
which is new to us, we would have tried to provide the entity being rated with an
"indicative" rating. That is to say, on the basis of a brief analysis of the data
available to us we would provide a range of likely ratings within our rating scales
so that the bank being rated has from the start an approximate idea of what its
ratings will be. In the event that the bank does accept that publication should take
place, then the rating report and the ratings will be dispatched to our subscribers
who include over 1,200 major institutions worldwide. In addition, our ratings will
be made available to the public by means of the "wire" services, press releases, etc.
If the bank does not want the ratings published and the report disseminated, then
the project will be terminated, and regular subscribers will not be informed that we
have done rating work on the bank concerned.
The regulatory framework for CRAs
5.1 SEBI Regulations
The Securities and Exchange Board of India (Credit Rating Agencies) Regulations,
1999 empower SEBI to regulate CRAs operating in India. In fact, SEBI was one of
the first few regulators, globally, to put in place an effective and comprehensive
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regulation for CRAs. In contrast, the US market saw CRA regulations only
recently (in 2007), and the European Union is still in the process of framing its
regulations. SEBI‘s CRA regulations have been used as model by other regulators
in the emerging economies. In terms of the SEBI Regulations, a CRA has been
defined as a body corporate which is engaged in or proposes to be engaged in, the
business of rating of securities offered by way of public or rights issue. The term
―securities‖ has been defined under the Securities Contract (Regulation) Act,
1956. SEBI has also prescribed a Code of Conduct to be followed by the rating
agencies in the CRA Regulations. However, SEBI administers the activities of
CRAs with respect to their role in securities market only.
SEBI regulation for CRAs has been designed to ensure the following:
- Credible players enter this business (through stringent entry norms and eligibility
criteria )
- CRAs operate in a manner that enables them to issue objective and fair opinions
(through well-defined general obligations for CRAs)
- There is widespread investor access to ratings (through a clearly articulated rating

dissemination process).
- The applicant should be registered as a company under the Companies Act, 1956
and possess a minimum network of Rs.5 crore.
The following are some of the General Obligations specified in the CRA
regulations. CRAs are amongst the very few market intermediaries for which such
detailed operating guidelines have been prescribed under the regulations.
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CHAPTER - 5
FUCNTIONS OF CREDIT RATING AGECNY
A credit rating agency serves following functions:
1. Provides unbiased opinion: An independent credit rating agency is likely to

provide an unbiased opinion as to relative capability of the company to service
debt obligations because of the following reasons:
i. It has no vested interest in an issue unlike brokers, financial intermediaries.
ii. Its own reputation is at stake.
2. Provides quality and dependable information:. A credit rating agency is in a

position to provide quality information on credit risk which is more authenticated
and reliable because:
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i. It has highly trained and professional staff that has better ability to assess risk.
ii. It has access to a lot of information which may not be publicly available.
3. Provides information at low cost: Most of the investors rely on the ratings
assigned by the ratings agencies while taking investment decisions. These ratings
are published in the form of reports and are available easily on the payment of
negligible price. It is not possible for the investors to assess the creditworthiness of
the companies on their own.
4. Provide easy to understand information: Rating agencies first of all gather

information, and then analyze the same. At last these interpret and summarize
complex information in a simple and readily understood formal manner. Thus in
other words, information supplied by rating agencies can be easily understood by
the investors. They need not go into details of the financial statements.
5. Provide basis for investment: An investment rated by a credit rating enjoys

higher confidence from investors. Investors can make an estimate of the risk and
return associated with a particular rated issue while investing money in them.
6. Healthy discipline on corporate borrowers: Higher credit rating to any credit

investment enhances corporate image and builds up goodwill and hence it induces
a healthy/ discipline on corporate.
7. Formation of public policy: Once the debt securities are rated professionally, it
would be easier to formulate public policy guidelines as to the eligibility of
securities to be included in different kinds of institutional port-folio.
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CHAPTER - 6
RATINGS USED BY BOND ISSUERS
Issuers rely on credit

ratings as an independent
verification of their own
credit-worthiness and the
resultant value of the
instruments they issue. In
most cases, a significant
bond issuance must have at
least one rating from a
respected CRA for the issuance to be successful (without such a rating, the
issuance may be undersubscribed or the price offered by investors too low for the
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issuer's purposes). Studies by the Bond Market Association note that
many institutional investors now prefer that a debt issuance have at least three
ratings.
Issuers also use credit ratings in certain structured finance transactions. For
example, a company with a very high credit rating wishing to undertake a
particularly risky research project could create a legally separate entity with certain
assets that would own and conduct the research work. This "special purpose entity"
would then assume all of the research risk and issue its own debt securities to
finance the research. The SPE's credit rating likely would be very low, and the
issuer would have to pay a high rate of return on the bonds issued.
However, this risk would not lower the parent company's overall credit rating
because the SPE would be a legally separate entity. Conversely, a company with a
low credit rating might be able to borrow on better terms if it were to form an SPE
and transfer significant assets to that subsidiary and issue secured debt securities.
That way, if the venture were to fail, the lenders would have recourse to the assets
owned by the SPE. This would lower the interest rate the SPE would need to pay
as part of the debt offering.
The same issuer also may have different credit ratings for different bonds. This
difference results from the bond's structure, how it is secured, and the degree to
which the bond is subordinated to other debt. Many larger CRAs offer "credit
rating advisory services" that essentially advise an issuer on how to structure its
bond offerings and SPEs so as to achieve a given credit rating for a certain debt
tranche. This creates a potential conflict of interest, of course, as the CRA may feel
obligated to provide the issuer with that given rating if the issuer followed its
advice on structuring the offering. Some CRAs avoid this conflict by refusing to
rate debt offerings for which its advisory services were sought.
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CHAPTER - 7
ADVANTAGES OF CREDIT RATING
Different benefits accrue from use of rated instruments to different class of

investors or the company. These are explained as under:
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. A
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highly rated issue 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 advice 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 of
the investment and indicates the degree of risk involved in it.
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 for making 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.
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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
specialized 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 is benefited 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 and easy liquidity rather than high rate of return. A
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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 or through credit from banks and FIs
to finance their expansion activities.
6. Recognition to unknown companies. Credit rating provides recognition to

relatively unknown companies going for public issues through wide investor base.
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While entering into market, investors rely more on the rating grades than on ‘name
recognition’.
CHAPTER - 8
DATA ANALYSIS AND INTERPRETATION
1. AREA OF WORK
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Percentage
8%
Mumbai
17% Kolkata
Delhi
Chennai
5%
70%
INTERPRETATION: The above pie chart shows the number of Companies out
of 20, according to the area (states) in which they operate. In blue i.e. in Mumbai,
70%, Delhi in Green in 17%, Chennai in Purple is 8% and Kolkata in Red i 5%.
The majority of the companies are operating in Mumbai.
2. AREAS OF BUSINESS
AREAS PERCENTAGE
Food Processing 30%
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Chemicals and allied product 10%
Logistics 20%
Banks 25%
Other 15%
INTERPRETATION: The above table shows the percentage of the companies,

according to the work which they do or the areas in which they are. 30% are in
Food Processing, 10% are in Checmicals and allied product, 20% in Logistics,
25% are in Banking Area and 15% in Other Areas. Food Processing has the
majority over here.
3. DO YOU KNOW ABOUT CREDIT RATING
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CREDIT RATING?
10%
YES
NO
90%
INTERPRETATION: The above pie chart shows that 90% of the companies
knows about Credit Rating, infact they are aware about it and rest 10% are
unaware about it. So the majority thus know about Credit Rating. This bring the
significance of Credit Rating and this project.
4. IF YES, THEN TO, WHICH YOU HAVE HEARED
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AGENICIES
SMERA
ONIRCA
FITCH AGENICIES
CARE
ICRA
CRESIL
0 1 2 3 4 5 6 7 8 9 10
INTERPRETATION: In the above chart out of 20 Companies, 10 Companies

have heared about Crisil, 5 Companies have heared about ICRA, 1 have heared
about CARE, 1 have heared about FITCH, 1 have heared about ONIRCA and 2
Companies have heared about SMERA.
CRISIL here seems to be more famous since 10 companies have heared about it.
This, CRISIL plays a big role/have a huge impact towards Credit Rating.
5. Have YOU GOT YOUR COMPANY RATED BY RATING AGENCY
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YES 70%
NO 30%
INTERPRETATION: In the above table 70% of the companies have been rated
by the Rating Agency. This means here these companies are well aware about
Credit Rating. 30% of the Companies have not been rated by Rating Agency.
Here, the companies are also not aware about Rating Agency.
In short, the above table explain the awareness of Credit Rating Agency in India.
6. TO WHICH BANK YOUR CREDIT LIMIT IS
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BANKS
50%
45%
40%
35%
30%
25% BANKS
20%
15%
10%
5%
0%
SBI
KOTAK
PNB
ICICI
Others
INTERPRETATION: In the above chart, Companies have show to which bank

their credit limit is with. SBI has 20%, Kotak has 50%, PNB has 5%, ICICI has
20% and 5% for Others.
The majority of the companies have the credit limit with Kotak Mahindra Bank.
7. HOW MUCH WOULD BE YOUR CREDIT LIMIT WITH BANK
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Credit Limit
7
4 Credit Limit
0
Less than 10 10 lakhs to 30 30 lakhs to 50 50 lakhs to 70 1 lakhs to 1
lakhs lakhs lakhs lakhs crore
INTERPRETATION: In the above chart, companies has mentioned their credit

limit. 5 Companies have their limit less than 10 lakhs, 6 companies have the limit
upto 10 lakhs - 30 lakhs, 4 Companies have credit limit upto 30 lakhs - 50 lakhs
and 2 companies have their credit limit upto 70 lakhs - 1 crore.
Here the majority of the companies are having credit limit upto 10 lakhs - 30
lakhs which is good.
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8. HOW MUCH WOULD BE APPROXIMATE ANNUAL SALES
TURNOVER
Sales
10% 10%
30% Less than 40 lakhs
20% 40 lakhs - 70 lakhs
70 lakhs - 1 crore
1 crore - 2 crore
2 crore and above
30%
INTERPRETATION - The above pie diagram shows the Annual Sales Turnover
of the companies. 30% of the companies has a annual sales over upto 70 lakhs - 1
crore. 30% of the companies again have an anuual sales over upto 1 core - 2
crore. 20% of the companies have a anuual sales over upto 40 lakhs to 70 laks.
10% of the companies have an annual sales over upto 2 crores and above. At last
10% of the companies have annual sales turnover upto less than 40lakhs.
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9. HOW MUCH OF YOUR PRODUCTS ARE ACTUALLY EXPORTED
NO EXPORTS
(30%)
10% AND ABOVE UPTO 5%

(15%) (40%)
5% - 10%
(15%)
INTERPRETATION: Here the companies have mentioned how much of their

products are actually exported. 30% of the companies do not export. Upto 5% of
companies exports upto 40% of their actual product. Upto 5% to 10% of the
companies exports 15% of their actual product and Upto 10% of the companies
exports 15% if their actual product.
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10. DO YOU INTEND TO EXPAND THE OVERALL CAPACITY IN
FUTURE? IF YES, THEN UPTO WHAT EXTENT OF PRESENT
OVERALL CAPACITY DO YOU PLAN TO INCREASE?
CAPACITY
10
9
8
7
6
5 CAPACITY
4
3
2
1
0
0 - 5%
5 - 10%
10% - 30%
30% and abov
INTERPRETATION: The above graph the capacity of the companies planning

to expand.
5 companies has capacity upto 0 - 5%, 10 companies have capacity upto 5 - 10%,
5 companies has capacity upto 10% to 30% and 5 companies has capacity upto
30% and above.
Here the majority of the companies have capacity upto 5 - 10% which is fair
enough.
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11. DO YOU AVAIL LOANS FROM MANAGING BUSINESS?
FACILITIES INCLUDING NON FUN BASED. IF YES, PURPOSE OF
FUND?
45%
40%
35%
30%
25%
Series3
Series2
20%
Series1
15%
10%
5%
0%
Working Capital Expansion DiversificationMachineary Maintenance
INTERPRETATION: The above graph shows the percentage of the companies

availing loans from their business. 40% of companies plans to avail loans from
Working Capital, 10% from Expansion, 20% from Diversification and 20% from
Machineary Maintenance
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12. HOW MUCH INTEREST DO YOU PAYT AGAINST YOUR LOANS
FROM BANK
Percentage
Below 9%
9%-11%
11-14%
Above 14%
INTERPRETATION: In the above pie diagram, shows the Percentage of the

companies paying interest against Loans. Below 9% in Blue, 9 to 11% in Red, 11 -
14% in Green and Above 14% in Purple.
The majority of the companies fall under Below 9% section
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13. HAS YOUR COMPANY ACQUIRED ANY CERTIFICATION FOR
ADOPTING ANY QUALTIY STANDARDS
ISO 9000 0%
ISO 14000 0%
Any Other (Specify) 0%
No Having 100%
INTERPRETATION: NO Company has acquired any certification for adopting

any sort of quality standards.
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14. DO YOU USE SERVICE OF PROFESSION EXPERT
YES
80%
NO
20%
INTERPRETATION: Here upto 80% of the companies use services of
Professional Expert which is great. The remaining 20% does not take any kind of
advice from any professional Expert which is bad.
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15. HOW IS THE PROSPECT OF THE INDUSTRY IN THE NEAR
FUTURE FOR SMALL AND MEDIUM UNITS
Percentage
Excellent
Moderate
Bad
Good
Not Good
INTERPRETATION: The above diagram shows the prospect of the industry in

the near future for small and medium units. The percentage of Excellent is in blue,
Moderate in Red, Good in Purple. The Bad and Not Good area has received no
votes.
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CHAPTER - 9
CONCLUSION
Credit Rating is thus the need of the time since investors should be equipped with
easy methods to make their investment decisions. If ratings are assigned in a
proper, systematic, transparent way, then it will be a boon for investors and will go
a long way in making the investment world a safe place. It is an undisputed fact
that CRAs play a key role in financial markets by helping to reduce the
informative gap between lenders and investors, on one side, and issuers on the
other side, about the creditworthiness of companies (corporate risk) or countries
(sovereign risk).
An investment grade rating can put a security, company or country on the global
radar, attracting foreign money and boosting a nations economy. Indeed, for
emerging market economies, the credit rating is the key to showing their
worthiness of money from foreign investors. Credit rating helps the market
regulators in promoting stability and efficiency in the securities market. Ratings
make markets more efficient and transparent.
Ratings are opinions on creditworthiness based on objective and subjective

analysis.
Rating agencies play an important role in the world markets, they can best
servemarkets when they operate independently, adopt and enforce internal
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guidelines to avoid conflict of interest, and provide confidential information from
issuers.
SUGGESTIONS AND RECCOMENDATION
(A) For investors
 Investors should not forget the Contract Law principle of ‘Caveat Emptor’.
Caveat Emptor means ‘let the buyer beware’. It should be forgotten that everything
including returns cannot be guaranteed and investments cannot be risk-free.
 Investors should observe caution while investing their money and be aware
themselves before taking their investment decisions. Investors should self study the
facts and information available about the investment products and the creditability
of the issuers, before zeroing on their decisions.
 It is equally important for individual investors to maintain their good credit

history by repaying loans on time and not breaching any rules of law inrespect of
investments, taxation, etc. that will go a long way in making the individual’s future
secure and smooth.
 Investors must understand that the objective of assessment for IPO Grading and
Credit Rating are very different; though the basis elements of the analysis are
same. IPO Grading assesses factors from equity-holder's perspective and is a
point in time exercise, whereas Credit Rating assesses factors from debt- holders
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perspective and usually requires recurring surveillance over the life of the
instrument.
(B) For credit rating agencies
 CRISIL, ICRA & CARE, the three major rating agencies are handling
90%- 95% of the business of credit rating promoted by financial institutions who
while advancing loans take the help of credit rating agencies to get the company
rated. All these agencies have continued to expand their activities in recent years.
They must also be updated about the reforms in the financial sector which can have
a impact on the businesses of these agencies as the market is volatile in nature
especially in case of debt instrument like bonds.
 Another aspect is regarding the procedure or the methodology that these rating
agencies follow for rating. Sometimes companies not satisfied with rating of one
agency approach use another rating agency for better rating. For this purpose the
rating process or procedure followed for rating must be relevant and accurate.
Rating agencies should not only take into consideration past & present
performance; the projected future performance must not be ignored.
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ANNUEXURE
Q1. Area of work

(a)Mumbai
(b)DelhI
(c)Chennai
(d)Kolkata
Q 2 Area of business
(a)Food processing
(b)Chemical & allied products
(c)Cotton gin. &Pressing
(d)Rice Sheller
(e)And others
Q3 Do you know about credit rating?

(a)Yes
(b)No
Q4 If, yes than to, which you have heard about?

(a)Crisil
(b)Icra
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(c)Care
(d)Fitch
(e)Onicra
(f)Smera
Q5 Have you got your company rated by any rating agency?

(a)Yes
(b)No
Q6 To, with which bank your credit limit is?

(a)SBI
(b)OBC
(c)PNB
(d)SBOP
(e)CBI
(f)And others
Q.7 How much would be your credit limit with the banks? (In rupees)
(a)Less than 10 lakh
(b)10 to 30 lakh
(c)30 to 50 lakh
(d)50 to 75 lakh
(e)75 to 1 crore and above
Ques.8 How much would be approximate annual sales turnover? (In rupees)
(a)Less 40 lakh
(b)40 lakh to 70 lakh
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(c)70 lakh to1 crore
(d) 1 crore to 2 crore
(e)2 crore and above
Q.9 How much of your products are actually exported? (In percentage)
(a)No exports
(b) Up to 5%
(c)Between 5% - 10%
(d)10% and over
Q.10 Do you intend to expand the overall capacity in the future? If yes, to what
extent of present overall capacity do you plan to increase? (In percentage)(a)0-5%
(b)5-10%
(c)10-30%
(d)Above 30%
Q.11 Do you avail loans for managing business? Facilities including non-fund
based.If yes, purpose of funds
(a) Working Capital
(b) Expansion
(c) Diversification
(d) Machinery Maintenance
(e) Machinery Purchase
Q.12 How much interest do you pay against your loan from banks? (In percentage)
(a)Below 9%
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(b)9-11%
(c)11-14%
(d)Above 14%
Q.13 Has your company acquired any certification for adopting qualitystandards?
(Multiple Option possible)
(a)ISO 9000
(b)ISO 14000
(c)Any other (Specify)
(d)No Having
Q.14 Do you use services of professional expert?

(a)Yes
(b)No
Q.15How is prospect of the industry in near future for the small & mediumunits?
(a)Excellent
(b)Moderate
(c)Bad
(d)Good
(e)Not good
90 | P a g e
Bibliography
www.care.com
www.careindia.com
www.D&B.com
www.sebi.gov.in
www.moneycontrol.com
www.icraindia.com
www.rbi.org.in
www.economictimes.com
91 | P a g e
Thank you
92 | P a g e

A Study On Credit Rating Agency in India

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PROJECT REPORT ON

CREDIT RATING AGENCY IN INDIA

UNDER THE GUIDANCE OF PROF.

PROF. SAGAR GAIKWAD

SUBMITTED TO UNIVERSITY OF MUMBAI

VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY

Mr. Om Dnyaneshwar Prabhu of in Bachelor in

PROJECT COURSE EXTERNAL PRINCIPAL

I hereby acknowledge all those who directly or indirectly helped me in drafting of

Vidyalankar School of Information Technology

I Om Dnyaneshwar Prabhu, student of T.Y.BMS (Bachelor in

The information submitted is true and original to the best of my

CHAPTERS PARTICULARS PG. NO.

Chap 4 Rating Process and Framework Pg 39 - 60

Chap 5 Functions of Credit Rating Agency Pg 61 - 62

Chap 6 Rating Used by Bond Issuers Pg 63 - 64

Chap 7 Advantages & Credit Rating Pg 65 - 68

Chap 8 Data Analysis and Interpretation Pg 69 - 83

The primary objective of rating is to provide

Credit Rating; as elucidated by the leading rating agencies of the world

"A rating is an opinion on the future

A rating is specific to a debt instrument and is intended as a grade, an analysis of

The above table shows us the

 Improves a healthy discipline on borrowers,

 Lends greater credence to financial and other representations,

 Facilitates formulation of public guidelines on institutional investments,

 Helps merchant bankers, brokers, regulatory authorities, etc., in discharging

 Encourages greater information disclosure, better accounting standards and

 May reduce interest costs for highly rated companies,

Credit ratings establish a link

PRIMARY SOURCE OF DATA COLLECTION:

Primary sources of data refer to firsthand information which is collected to solve a

SECONDARY DATA COLLECTION METHOD:

Information is gathered through secondary sources.

Credit rating suffers from the following limitations:

1. Non-disclosure of significant information. Firm being rated may not provide

3. Rating is no certificate of soundness. Rating grades by the rating agencies are

5. Rating under unfavorable conditions. Rating grades are not always

The History of Lehman Brothers

Lehman Brothers had humble

The Prime Culprit

Lehman's Colossal Miscalculation

Hurtling Toward Failure

Too Little, Too Late

AAA RATING FOR ICICI BANK LTD.

The rating agency has

Bank /Financial Institutional rating, in common with most financial analysis, is

High Investment Grades

Debentures rated `AAA' are judged to offer highest safety of

AA Debentures rated 'AA' are judged to offer high safety of timely

Debentures rated `A' are judged to offer adequate safety of

Debentures rated `BBB' are judged to offer sufficient safety of

BB Debentures rated `BB' are judged to carry inadequate safety of

Debentures rated `B' are judged to have greater susceptibility to

Debentures rated `D' are in default and in arrears of interest or

Fixed Deposit Rating Scales

FAAA This rating indicates that degree of safety regarding timely

This rating indicates inadequate safety of timely payment of

This rating indicates inadequate safety of timely payment of