Credit rating agencies &

their methodology &

Process
 Content

1. Introduction
2. Registration of CRA
i.) Registration & Promoter
ii.) Promoter
iii.) Eligibility
iv.) Grant of certificate of registration
v.) Process
3. Indian CRA (CARE, ICRA, CRISIL)
4. International CRA (MOODY’s, FITCH, Standard & Poor’s)
5. Summary & Conclusion
 Introduction

▪ Credit rating agency means a body corporate which is engaged in

the business of rating of securities offered by companies.
▪ The debt instruments rated by CRAs include government bonds,
corporate bonds, municipal bonds and collateralized securities,
such as mortgage-backed securities and collateralized debt
obligations.
▪ According to CRISIL, credit rating is “an unbiased and
independent opinion as to issuer’s capacity to meet its financial
obligations. It does not constitute a recommendation to buy , sell
or hold a particular security”.
 Registration

It may be noted that as per Section 12 of the SEBI Act, 1992, a person has to get
itself registered with SEBI under SEBI (Credit Rating Agencies) Regulations, 1999
in order to carry on the activities of Credit Rating.

Every CRA shall abide by the code of conduct contained in the Third Schedule to
SEBI (Credit Rating Agencies) Regulations, 1999.

It may be noted that SEBI (Credit Rating Agencies) Regulations, 1999 cover
rating of securities only and not rating of fixed deposits, foreign exchange,
country ratings, real estates, etc.
 Promoter of Credit Rating Agency

I. A public financial institution;

II. A scheduled commercial bank;
III. A foreign bank operating in India with the approval of the Reserve
Bank of India
IV. A foreign credit rating agency recognized under Indian Law and
having at least five years experience in rating securities;
V. any company or a body corporate, having continuous net worth of
minimum rupees one hundred crores as per its audited annual
accounts for the previous five years in relation to the date on
which application to SEBI is made seeking registration.
 Eligibility Criteria for CAR

▪ Market regulator SEBI has enhanced the eligibility criteria for

credit rating agencies from the existing Rs 5 crore to Rs 25 crore.

▪ The promoter of a CRA will maintain a minimum shareholding of

26% in a CRA for a minimum period of three years from the date
of grant of registration by the board.
 Application for grant of certificate of CRA

▪ Any person proposing to commence any activity as a credit rating agency on or

after the date of commencement of these regulations shall make an application
to the Board for the grant of a certificate of registration for the purpose.

▪ Any person, who was immediately before the said date carrying on any
activity as a credit rating agency, shall make an application to the Board for
the grant of a certificate within a period of three months from such date:
Provided that the Board may, where it is of the opinion that it is necessary to
do so, for reasons to be recorded in writing, extend the said period upto a
maximum of six months form such date.
 Credit Rating Process

1. Receipt of Request 6. Communication of 7. Dissemination to

from the company decision to the issuer the Public

2. Assignment to 5. Presentation of 8. Continuous

Analytical Team Findings Monitoring

3. Collecting 4. Site visits and

Information and interaction with
conducting
Management
Preliminary Analysis
 CREDIT RATING METHODOLOGY

Steps:
▪ Information is collected and then analysed by a team of professionals in an
agency.
▪ If necessary, meetings with top management suppliers and dealers and a visit
to the plant of proposed sites are arranged to collect additional data. This
team of professionals submit their recommendations to the rating committee.
▪ Committee discusses this report and then assigns rating.
▪ Rating assigned is then notified to the issuer and only on his acceptance,
rating is published.
▪ Assures confidentiality of information.
▪ Once the issuer decides to use and publish the rating, agency has to
continuously monitor it over the entire life of instrument, called surveillance.
 TYPES OF CREDIT RATINGS

1. SOVEREIGN CREDIT RATING

2. SHORT TERM RATING
3. CORPORATE CREDIT RATINGS
 CREDIT RATING AGENCIES IN
INDIA

In India, the business of credit rating was first started in 1987 by large financial
institutions and creditors through CRISIL (Credit Rating Information Services of
India Ltd.).
In the last 30 years, seven CRAs have been established, three with the most
influential ones being owned by Moody’s, Standard & Poor’s and Fitch. Four
CRAs have now become an essential part of the Indian financial system. They
are regulated by the Securities and Exchange Board of India (‘SEBI’) through the
SEBI (Credit Rating Agencies) Regulations, 1999 and circulars issued under it.
 CREDIT RATING AGENCIES IN INDIA

1. CRISIL
2. ICRA
3. CARE
4. Acuite Ratings & Research (earlier SMERA Ratings Limited)
5. Brickwork Ratings India Private Limited:
6. India Ratings and Research Private Limited:
7. Infometrics Valuation and Rating Private Limited
 Limitations of working

Bad governance can contaminate financial statements, and hence annul the
entire credit rating exercise. It is sad to know that CRAs heavily depend on the
audited financial statements and do very little to gain the maximum from
cross-verification from formal and informal sources
Need for Credit Ratings Agencies

➢ There are seven rating agencies are practicing in India as stated above, these rating agencies are
regulated by both SEBI and RBI.

➢ Out of these, two have financial and technology tie-ups with global leaders, while one is subsidiary
to a global leader. So, three out of seven companies have access to global best practices.

➢ In India, the same rating agency rates and provides valuation opinions on the same set of securities
to investors like mutual funds and provides advisory services too.

➢ Since all rating agencies approach the same set of clients, they have little bargaining power in terms
of selecting the instruments to rate. Regrettably, on many occasions, the CRA quoting the lowest
price or quite shockingly promising an investment-grade rating beforehand, wins the mandate.

➢ Rating Shopping
➢ In essence, if the rating is not as high as the issuer expects it to be, it can choose to go to
another CRA and fish for a better rating.
Post ILFS

•SEBI tightened disclosure norms for credit rating agencies on November 13, 2018.
The rating agencies will now need to disclose the liquidity position of the company
being rated. A company’s liquidity position would include parameters such as liquid
investments or cash balances, access to unutilised credit lines, liquidity coverage
ratio,and adequacy of cash flows for servicing maturing debt obligation.

•Credit rating agencies would also need to disclose if a company is expecting

additional funds to pare its debt along with the name of the entity that will provide
the money.
•Also, when the subsidiaries or group companies are consolidated to arrive at a
rating, CRAs will have to list all such companies and state the rationale for
consolidation.
 Business Model of Credit Rating Agencies:

Credit rating agencies mainly adopts two business model for earning:
1) Issuer Pay Model
This model is generally applicable in rating of debt instruments issued by various
organisations for raising the money from the market in form of bonds and other
debt instruments.
2)Subscription Model:
There are business entities who are constantly in requirement of the funds for
their business needs. They are in regular contact with the bankers and financials
institution of their requirements of funds and for this purpose the need to get
rated from the CRA’s on regular basis. In short, they become the regular
customers of the rating agencies and pay subscription fee on regular basis for
obtaining their services.
 Issues in Credit Ratings

❑False Ratings.
❑o Flawed methodology;
❑o Political biasness,
❑o Selective aggression and
❑o Rating shopping.
 CRISIL

• CRISIL stands for Credit Rating Information Services of India Ltd.

•Promoted by ICICI Ltd. Along with UTI and some banks and insurance
companies as a public limited company.
•• Headquarter – Mumbai.
• Services offered are:
a)Credit rating services
b) Advisory services
c) Research and information services
•CRISIL is the largest credit rating agency in India and the market
leader.
• S & P is the major shareholder of CRISIL with a stake of 56.5%.
 CRISIL DEBENTURE RATING SYMBOLS
SYMBOL SAFTY LEVEL

AAA HIGEST SAFETY

AA HIGH SAFETY

A ADEQUATE SAFETY

BBB MODERATE SAFETY

BB INADEQUATE SAFETY

B HIGH RISK

C SUBSTANTIAL RISK

D SUBSTANTIAL RISK

For Fixed Deposit letter “F” is added before the symbol of Debenture Symbol
 ICRA
•ICRA stands for Investment Information and Credit
Rating Agency Ltd.
•Promoted by IFCI,SBI,UTI(Unit Trust of
India),LIC,GIC(General Insurance
Corporation),HDFC,UCO bank etc.
• Moody’s Investors Service is the largest shareholder.
• Services rendered by ICRA are:
a. Rating services
b. Information services
c. Advisory services
 ICRA LONG-TERM DEBT INSTRUMENT RATING SYMBOLS
SYMBOL SAFETY LEVEL

L AAA HIGEST SAFETY

L AA HIGH SAFETY

LA ADEQUATE SAFETY

L BBB MODERATE SAFETY

L BB INADEQUATE SAFETY

LB HIGH RISK

LC SUBSTANTIAL RISK

LD SUBSTANTIAL RISK
ICRA MEDIUM-TERM INSTRUMENTS(ICLUDING FIXED DEPOSITS &
CERTIFICATES OF DEPOSITS)
SYMBOL SAFETY LEVEL

M AAA HIGEST SAFETY

M AA HIGH SAFETY

MA ADEQUATE SAFETY

MB INADEQUATE SAFETY

MC RISK PRONE

MD DEFAULT
ICRA SHORT-TERM INSTRUMENTS(INCLUDING COMMERCIAL PAPER) RATING
SYMBOLS
SYMBOLS SAFETY LEVEL

A1 HIGEST SAFETY

A2 HIGH SAFETY

A3 MODERATE SAFETY

A4 RISK PRONE

A5 DEFAULT
 CARE
• Credit Analysis and Research Ltd
• Incorporated in 1993, is based in Mumbai
• Deals with advisory services, information and credit rating.
•Promoted by UTI, Canara Bank, IDBI and many other reputed banks
and companies dealing with financial services.
• VARIOUS SERVICES OFFERED ARE:
a) Rating Services
b) Credit Reports
c) Valuations
d) Credit Appraisal
e) Reviewing Debt Market
•In 1994 commenced publication of ‘CAREVIEW’ a quarterly journal
of CARE Ratings.
 CARE LONG-TERM AND MEDIUM-TERM INSTRUMENTS RATINGS SYMBOLS

SYMBOLS SAFETY LEVEL

CARE AAA HIGHEST SAFETY

CARE AA HIGH SAFETY

CARE A ADEQUATE SAFETY

CARE BBB MODERATE SAFETY

CARE BB INADEQUATE SAFETY

CARE B SUSCEPTIBLE TO DEFAULT

CARE C HIGH INVESTMENT RISK

CARE D DEFAULT OR LIKELY TO BE IN DEFAULT

 CARE SHORT-TERM INSTRUMENTS RATING SYMBOLS

SYMBOLS SAFETY LEVEL

PR 1 HIGHEST SAFETY

PR 2 HIGH SAFETY

PR 3 ADEQUATE SAFETY

PR 4 INADEQUATE SAFETY

PR 5 DEFAULT OR LIKELY TO BE IN DEFAULT

Rating Fees
 International CRA

1. MOODY,s
2.Standard & Poor’s
3.FITCH
 MOODY’S INVESTORS SERVICES

•John Moody founded the Moody’s agency at the beginning

of the 20th century.

•It undertakes the rating of wide range of debt related

securities , international issues , commercial papers , etc.
Both in USA and international markets.

•Other services include- assessing financial strength of

insurance companies , mutual funds, banks , public utilities.
BCA Scale

SYMBOLS SAFETY LEVEL

AAA Best Quality (Highly Intrinsic)
AA Quality (Highly Intrinsic)
A Good (Highly Intrinsic)
BAA Best Quality (medium-grade intrinsic)
BA Quality (medium-grade intrinsic)
B Good (medium-grade intrinsic)
CAA Speculative intrinsic
CA Expected to default
C Little prospect for recovery of
principal or interest.
 STANDARD AND POOR’S CORPORATION(S &P)

•One of the first credit rating institutions which has a history of 157
years, founded in the year 1860.

•Offers rating on wide range of debt securities , both in the US and

overseas markets.
 Long-Term Issue Credit Ratings

SYMBOL CAPACITY TO MEET OBLIGATION

AAA Extremely Strong

AA Very Strong

A Strong

BBB Weak

BB Economic Condition will effect

B Willingness to meet

CCC Not likely

CC Virtual Certainty

C Lower ultimate recovery

D Default
 Short-Term Issue Credit Ratings

Symbols Safety level

A-1 Extremely Strong
A-2 Satisfactory
A-3 Good
B Inadequate Capacity
C Vulnerable
D Default
 FITCH

▪ The firm was founded by John Knowles Fitch on December 24, 1914 in New York
City as the Fitch Publishing Company.

▪ Fitch Ratings Inc. is one of the "Big Three credit rating agencies”.

▪ Fitch Ratings is dual-headquartered in New York, US, and London, UK.

▪ Hearst owns 100 percent of the company following its acquisition of an

additional 20 percent for $2.8 billion on April 12, 2018.
Investment Scale

SYMBOLS SAFETY LEVEL

AAA Best Quality
AA Quality
A Economic situation can affect finance
BBB Medium class companies, which are
satisfactory at the moment
BB More prone to changes in the
economy
B Financial situation varies noticeably
CCC Currently Vulnerable
CC Highly Vulnerable
C Highly Vulnerable
D Has defaulted on obligations
NR Not Publically Rated
 Short-term credit ratings

SYMBOLS SAFETY LEVEL

F1+ Best Quality
F1 Quality
F2 Good
F3 fair quality
B Minimal capacity to meet its
commitment
C Financial commitment of the obligor are
dependent upon sustained, favorable
business and economic conditions

D Default
 SMERA
• Founded in 2005
• Headquarters situated in Mumbai
• Exclusively set up for micro, small and medium enterprises.
• It provides ratings which enable MSME, SME’S, Corporates to raise bank
loans at competitive rates of interest.
• Registration with SEBI as Credit Rating Agency and accreditation by RBI as
an external credit assesment Institution to rate bank loans has paved way
for SMERA to rate/grade various instruments such as IPO, NCD’s,
Commercial Papers, Bonds, FD’s etc.
BRICKWORK RATINGS INDIA PVT. LTD.
• Incorporated in 2007
• Corporate office in Banglore
• BWR, A SEBI registered Credit Rating agency has also been accredited by
RBI and empanelled by National Small Industries Corporation with an
objective of providing strong research based information for Indian
Investors.
• Provides rating services for various capital market instruments,
Financial Instituitions, Muncipal and Urban Local Bodies.
• BWR also provides other rating services such as Corporate
Governance Ratings, FD Ratings etc.
 TRANS UNION LTD(CIBIL)
• Credit Information Bureau (India) Ltd incorporated in 2000
• India’s first credit information bureau
• Provides credit information rather than credit rating
• It is a repository of information
• Data collected by CIBIL is used for preparing Credit Information Report, popularly
known as CIR.
• Provides information to its members in the form of these Credit
Information Reports
• Members include:
All leading banks, financial institutions ,NBFC, housing finance companies

CIBIL collects and maintains records of an individual’s payments pertaining to loans

and credit cards.
Default Methodology
Conclusion to Credit Rating