OBJECTIVES OF CREDIT RATINGS:

1. Investor Information and Protection: Basic objective of credit rating is to protect the interest of retail investors. They are unable to assess the risk profile of the issuer. Credit rating agencies offer a ready, mandatory and regulator (SEBI) approved rating. 2. Common Scale of Comparison: Credit rating is on pre-determined scales such as AAA, AA, etc. This enables comparison of two corporate/ two instruments on the same scale. 3. Time Efficiency: Credit rating once obtained, can be used for 6 months to 1 year for most of the instruments. Hence, whenever a borrower approaches a new lender for Commercial Paper or any such instrument, he can show the credit rating. 4. Corporate Image: Continuous high rating is a reflection on ability of management.FM respect highly rated corporate and hence may result in lower cost of capital. 5. Lower Cost of Risk Assessment: Project appraisal by a bank is a costly process. They charge a specified % of loans as fee for appraisal, whereas credit rating is for fixed fee, approved by SEBI. 6. Regulation: Ratings compare corporate on common scale and the regulators find it easy to frame their policies with reference to the scale of rating. 7. Reduce Information Asymmetry: CRAs play a key role in FM by helping to reduce the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies or countries.

CREDIT RATING PROCESS

In general the rating process has 7 steps. The agency whose instrument is to be rated is referred to as the client and credit rating agency as agency. 1. Collection of Information: The client should provide all the necessary information to the agency This should mainly contain financial reports, audited balance sheets , copy of the agreements and contracts of relevance. It should also brief the agency about purpose of the instruments, proposed security.

2. Management Meeting: Agency would collate and analyze all the information provided and prepare its preliminary findings report. It would demand any further information or documents from the client, if required. Clients take this opportunity to justify his unsubstantiated information.

3. Assignment of Ratings: Ratings team of the agency examines all the data, information and documents. It also considers all the points presented by the client.

4. Advice to the Clients: The client is informed about the rating proposed by the rating agency.

5. Appeal: If the client feels that the rating can be improved and has adequate reason for it, it can appeal so to the agency. Such appeal should be substantiated with proper reasoning and justification. 6. Publication: On the finalization of rating, it is formally communicated to the client, to regulator and after their acceptance it is released for general public.

7. Surveillance and Review: Rating is a dynamic activity. So rating has to be monitored continuously. Also it is mandatory.