How does a credit rating agency differ from a credit bureau?

A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers.

Is a credit rating a recommendation to invest in a debt instrument? A credit rating is not a recommendation to buy, hold, or sell a debt instrument. A credit rating is one of the inputs used by investors to make an investment decision.

What is the difference between credit rating and equity research? Credit ratings are assigned to debt instruments, while equity research relates to equity shares. A credit rating is focused on the risk of non-payment, the primary variable in debt instruments. Equity research is focused on growth possibilities, for that is what drives equity valuations.

How does a credit rating differ from an audit? A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not.

Does a credit rating assure repayment? A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default.

Who pays for a credit rating? Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating.

If the issuer pays for the rating, how does a credit rating agency maintain its independence? Although the issuer pays for the rating, the investor uses it. Like any other product or service, the 'value' of the rating depends entirely on the perceptions of the investor. Investor perceptions

are based on the credibility of the past ratings assigned by each rating agency.

Who regulates a rating agency? The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.

How do investors benefit from a credit rating? Credit ratings help investors facilitate comparative assessment of investment options, complement the investors' own credit analysis, and allow asset monitoring.

What do the various credit rating symbols mean? CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's long-term credit rating scale and the description associated with each category on the rating scale is given below: Symbol (Rating category). AAA AA A BBB BB B C D Highest Safety High Safety Adequate Safety Moderate Safety Inadequate Safety High Risk Substantial Risk Default Description (with regard to the likelihood of meeting the debt obligations on time)

Does the minus sign in a rating symbol have negative connotations relating to the issuer's performance or its debt-servicing capability? Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever.

What is the validity period of a credit rating? Credit ratings are assigned either to specific instruments or to the general debt obligations of issuers. CRISIL assigns credit ratings to debt obligations. A rating is valid until the rated debt obligation is fully paid.

How are credit rating changes communicated? Once a credit rating is assigned and published, CRISIL keeps the credit rating under surveillance until the instrument is fully repaid. The surveillance process may result in credit rating changes from time to time. All changes in CRISIL's credit ratings are communicated publicly through CRISIL's website (www.crisil.com) and media releases.

Why do credit ratings change? Credit ratings are assigned based on certain expectations and assumptions about variables that impact the issuer's performance. However, these variables can change, causing the rated entities' performance to deviate materially from expectations. This is reflected in their changed credit ratings.

What is a bank loan rating? Why has it become relevant? A bank loan rating indicates the degree of risk with regard to timely payment of the bank facility being rated. The facility includes principal and interest, if any, on the principal.

RBI issued guidelines on capital adequacy for banks in 2007. The guidelines require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs), such as CRISIL.

What are the types of facilities rated by CRISIL? CRISIL rates all types of bank loans and working capital facilities. These include project loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities, such as letters of credit and bank guarantees.

Does CRISIL rate every bank facility separately? CRISIL assigns ratings to each facility separately. The validity of each rating is linked to the tenure of the rated facility.

What is CRISIL's rating scale for bank loan ratings?

CRISIL rates long-term loans or facilities (with original contracted maturities of one year or more) and cash credit facilities (as required by the RBI guidelines) on its long-term rating scale. Short-term facilities (with original contracted maturities of one year or less) are rated on CRISIL's short-term rating scale.

How long does CRISIL take to rate a bank loan? From the day it receives a written request for a bank loan rating, along with all information required for the analysis, CRISIL takes three to four weeks to complete the exercise of assigning a bank loan rating.

Does a corporate entity have the option of not accepting the rating assigned by CRISIL? The corporate entity has the option to accept or not accept the rating assigned by CRISIL.

If the corporate entity does not accept the rating, will CRISIL share the rating with the bank? Only after the corporate entity accepts the bank loan rating, it will be publicly released and shared with the bank.

Is credit rating of loans mandatory under RBI guidelines? Credit rating is not mandatory. However, it is in the interest of banks to have ratings on their corporate exposures from an external credit rating agency, such as CRISIL. The banks could save capital, depending on the credit profile of their corporate exposures.

Should a bank get all its loans rated by a bank loan rating agency? Yes, it is desirable that all the loan accounts are rated by an external credit rating agency.

Is CRISIL capable of handling rating requests from many corporate entities at the same time? Yes, CRISIL is fully equipped to handle large volumes of ratings. Presently, CRISIL has:

A direct presence in 65 major industrial centres across India to handhold first-time rating clients

The largest and most experienced team of rating analysts (175 analysts and 75 data specialists)

A qualified team of industry analysts and economists that contributes to a large knowledge base (expert team of 100 plus industry analysts)

A state-of-the-art automated workflow, with dedicated support-services teams Increased frequency of rating committee meetings to handle increased volume of rating assignments

Does CRISIL rate the entire portfolio of a bank? Yes, CRISIL can rate the entire portfolio of a bank. A bank can also sign a memorandum of understanding (MoU) with CRISIL, whereby all borrowers who approach the bank for a rating will be rated on priority by CRISIL. However, each borrower will have to mandate CRISIL separately for carrying out the rating exercise.