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INDEX

S. NO.
1.

CONTENTS
CREDIT RATING MEANING

PAGE NO.
3

2.

INDIAN CREDIT RATING AGENCIES

3.

NEED, METHODOLOGY, BENEFITS, FUNCTIONS ADVANTAGES & DISADVANTAGES

4,5,6,7

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7,8,9,10

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CRISIL & SYMBOLS

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6.

CARE & SYMBOLS

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7.

ICRA & SYMBOLS

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8.

FITCH & SYMBOLS

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9.

REFRENCES

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CREDIT RATING
An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default. A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects. A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrowers overall credit history. A credit rating is also known as an evaluation of a potential borrowers ability to repay debt, prepared by a credit bureau at the request of the lender. Credit ratings are calculated from financial history and current assets & liabilities. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan.
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INDIAN CREDIT RATING AGENCIES


A Credit Rating Agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as debt instruments. Four Main Credit Rating Agencies in India: 1. Credit Rating Information Services of India Limited (CRISIL), Associate of Standards & Poors 2. Credit Analysis & Research Ltd. (CARE Ratings) 3. Investment Information and Credit Rating Agency of India Limited (ICRA), Associate of Moodys Investors Service 4. Fitch Ratings

Who needs credit ratings: 1. Commercial Banks 2. Mutual Funds 3. Investment Banks 4. Leasing companies 5. Insurance companies 6. Bond Issuers

Why the need of Credit Rating: As said earlier, credit rating is an opinion expressed by an independent professional organization, after making a detailed study of all relevant factors. Such an opinion is of great assistance to investors in making investment decisions.
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It also helps the issuers of debt instruments to price their issues correctly and to reach out to investors and win their confidence. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. For example, the RBI has stipulated a minimum credit rating by an approved agency for issue of Commercial Paper. Credit Rating also proves as a valuable input in establishing business relationships of various types. Rating Methodology: A certain methodology is adopted by rating agencies to ascertain the credit worthiness of the debt issuers. In brief, following aspects are taken into consideration while assigning a rating:
o o o o o o o o o

Industry Risk Market position Ownership Earnings & Performance Cash flows Management structure and composition Capital & Debt Structure Corporate Governance Other factors like (for financial institutions): Capital adequacy & Liquidity, Quality of asset, Asset/Liability structure, Sourcing of funds, cost of funds.

Benefits of Credit Ratings:


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To Corporates:

For corporates, a good credit rating enables them to have lower interest costs, win confidence of investors. Also there is a compulsion from the regulators to have credit rating assigned to certaindebt issues.

To Investors:

For investors it is a boon since they can take informed investment decisions, can rely on the issues / offers, they get an ease of selection of investment products.

Given the benefits of credit ratings, recently, the role of rating agencies has come under the scanner during the global financial crisis, as many companies and their issues collapsed despite high rating.

Reasons for this being like, abnormally high payment of fees to the rating agencies for getting a high / good rating, biasedness of agencies in analysis and judgement, etc.

Functions of a Credit Rating Agency 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 It has no vested interest in an issue unlike brokers, financial intermediaries.

2. Provides quality and dependable information:. A credit rating agency is in a position to provide quality information on credit risk which is more authenticate and reliable because: i. It has highly trained and professional staff who 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, then analyse the same. At last these interpret and summarise 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 Benefits to Investors: 1. Safety of investments. Credit rating gives an idea in advance to the investors about the degree of financial strength of the issuer company. Based on rating he decides about the investment. Highly rated issues gives an assurance to the investors of safety of Investments and minimizes his risk. 2. Recognition of risk and returns. Credit rating symbols indicate both the returns expected and the risk attached to a particular issue. It becomes easier for the investor to understand the worth of the issuer company just by looking at the symbol because the issue is backed by the financial strength of the company. 3. Freedom of investment decisions. Investors need not seek advise from the stock brokers, merchant bankers or the portfolio managers before making investments. Investors today are free and independent to take investment decisions themselves. They base their decisions on rating symbols attached to a particular security. Each rating symbol assigned to a particular investment suggests the creditworthiness 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. 6. Easy understanding of investment proposals. Investors require no analytical knowledge on their part about the issuer company. Depending upon rating symbols assigned by the rating agencies they can proceed with decisions to make investment in any particular rated security of a company. 7. Relief from botheration to know company. Credit agencies relieve investors from botheration of knowing the details of the company, its history, nature of business, financial position, liquidity and profitability position, composition of management staff and Board of Directors etc. Credit rating by professional and specialised analysts reposes confidence in investors to rely upon the credit symbols for taking investment decisions. 8. Advantages of continuous monitoring. Credit rating agencies not only assign rating symbols but also continuously monitor them. The Rating agency downgrades or upgrades the rating symbols following the decline or improvement in the financial position respectively.

Disadvantages of Credit Rating 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 investors decision as to investment, to the investigation team of the credit rating company. 2. Static study. Rating is a static study of present and past historic data of the company at one particular point of time. Number of factors including economic, political, environment, and government policies have direct bearing on the working of a company. 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 investors which hampers the companys interest.
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INDIAN CREDIT AGENCIES


CRISIL
CRISIL is the largest credit rating agency in India. It was established in 1987. The worlds largest rating agency Standard & Poor's now holds majority stake in CRISIL. Till date it has rated more than 5178 SMEs across India and has issued more than 10,000 SME ratings. Rating scale for Long-Term Instruments CRISIL AAA (Highest Safety) Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. CRISIL AA (High Safety) Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. CRISIL A (Adequate Safety) Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. CRISIL BBB (Moderate Safety) Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. CRISIL BB (Moderate Risk) CRISIL B (High Risk) CRISIL C (Very High Risk) CRISIL D Default Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations. Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations. Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. Instruments with this rating are in default or are expected to be in default soon.

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CARE: Credit Analysis & Research Ltd.


Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research and advisory committee promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other financial and lending institutions. CARE has completed over 7,564 rating assignments since its inception in 1993. Symbols: CARE AAA- Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. CARE AA- Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. CARE A- Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. CARE BBB- Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. CARE BB- Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations. CARE B- Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations. CARE C- Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. CARE D- Instruments with this rating are in default or are expected to be in default soon.

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ICRA - Investment Information and Credit Rating Agency of India Limited, Associate of Moodys Investors Service
ICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It analyzes data and provides rating solutions for Individuals and Small and Medium Enterprises(SMEs). ONICRA has an extensive experience in operating a wide range of business processes in areas such as Finance, Accounting, Back-end Management, Application Processing, Analytics, and Customer Relations. It has rated more than 2500 SMEs. SYMBOLS: LAAA- The highest credit quality rating assignned by ICRA. The rated instrument carries the lowest credit risk. LAA - The high credit-quality rating assigned by ICRA. The rated instrument carries low credit risk. LA- The adequate credit quality rating assigned by ICRA. The rated instrument carries average credit risk. LBBB- The moderate credit quality rating assigned by ICRA. The rated instrument carries higher than average credit risk. LBB- The inadequate credit quality rating assigned by ICRA. The rated instrument carries high credit risk. LB- The risk prone credit quality rating assigned by ICRA. . The rated instrument carries very high credit risk. LC- The poor credit quality rating assigned by ICRA. The rated instrument has limited prospects of recovery. LD- The lowest credit quality rating assigned by ICRA. The rated instrument has very low prospects of recovery.

ICRAs Medium-Term Rating Scale (only for Public Deposits)


Medium-Term Rating Scale: All Public Deposit Programmes. MAAA- The highestcredit quality rating assigned by ICRA. The rated deposits programme carries the lowest credit risk MAA- The high-creditquality rating assigned by ICRA. The rated deposits programme carries slow credit risk.
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MA- The adequate credit quality rating assigned by ICRA. The rated deposits programme carries average credit risk. MB-The inadequate credit quality rating assigned by ICRA. The rated deposits programme carries high credit risk. MC- The risk prone credit quality rating assigned by ICRA. The rated deposits programme carries very high credit risk. MD- The lowest-credit-quality rating assigned by ICRA. The rated instrument has very low prospects of recovery.

ICRAs Short-Term Rating Scale


Short-Term Rating Scale: All instruments with original maturity within one year. A1- The highest-credit quality rating assigned by ICRA to short term debt instruments. Instruments rated in this category carry the lowest credit risk in the short term. Within this category, certain instruments are assigned the rating of A1+ to reflect their relatively stronger credit quality. A2- The above average credit quality rating assigned by ICRA to short term debt instruments. However, instruments rated in this category carry higher credit risk than instruments rated A1. A3- The moderate credit quality rating assigned by ICRA to short term debt instruments. However, instruments rated in this category carry higher credit risk than instruments rated A2 and A1. A4- The risk prone credit quality rating assigned by ICRA to short term debt instruments. Instruments rated in this category carry high credit risk. A5- The lowest credit quality rating assigned by ICRA to short term debt instruments. Instruments rated in this category have very low prospect of recovery.

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FITCH RATINGS
Fitch Ratings is a global rating agency committed to providing the world's credit markets with independent and prospective credit opinions, research, and data. Fitch Ratings is headquartered in New York and London and is part of the Fitch Group.

Long-Term Rating Scales


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AAA: Highest credit quality. AAA ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA: Very high creditquality. AA ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A: High credit quality. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB: Good credit quality. BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

BB: Speculative. BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
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B: Highly speculative. B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

CCC: Substantial credit risk. Default is a real possibility.

CC: Very high levels of credit risk. Default of some kind appears probable.

C: Exceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a C category rating for an issuer include: a. the issuer has entered into a grace or cure period following non payment of a material financial obligation; b.the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation.

RD: Restricted default. RD ratings indicate an issuer that in Fitch Ratings opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating.

D: Default. D ratings indicate an issuer that in Fitch Ratings opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.

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REFERENCES
http://www.iloveindia.com/finance/encyclopedia/crisil.html http://smallb.in/%20/fund-your-business%20/credit-rating%20/msme-rating%20/ratingagencies-india http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf http://taxguru.in/finance/all-about-credit-rating-in-brief.html http://crisil.com/ratings/credit-rating-scale.html http://www.careratings.com/Portals/0/Content/Bank%20Loan%20Rating.pdf http://www.icra.in/files/content/ratingsscale-2008.pdf http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pf http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf http://taxguru.in/finance/all-about-credit-rating-in-brief.html

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