CHAPTER - 5

OPERATIONAL PERFORMANCE OF CREDIT RATING AGENCIES

A comparative analysis of the operations carried out by the various credit rating agencies under study, viz. CRISIL, ICRA, CARE and FITCH has been presented in this chapter. The chapter is divided into two sections. Section-I provides the general information about these rating agencies and Section-II describes the operational performance of all these agencies. SECTION-I 5.1 CREDIT RATING INFORMATION SERVICES OF INDIA LTD. (CRISIL) CRISIL is Indias leading rating, research, risk and policy advisory company, and is the fourth largest in the world. It was incorporated in 1987 and was promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India (UTI). It commenced its operations of rating in 1987-88. CRISIL has its association with internationally recognized rating agency Standard and Poors (S&P) since 1996. CRISILs majority shareholder is Standard and Poors which is a subsidiary of The McGraw-Hill Companies. The latter is the worlds foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. CRISIL has been recognized by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999. CRISIL is a group of businesses which offers the following diversified services: Rating and Risk Assessment, Infrastructure Advisory, and Business Research. CRISILs services include credit ratings and risk assessment; research on Indias economy, industries and companies; financial research and analytics outsourcing; fund services; risk management and infrastructure advisory services. Through its IPO Grading

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initiative, CRISIL has also established a presence in the equity research domain. It provides all these services through its different subsidiaries. Figure 1: CRISILs Business

CRISILS BUSINESS

Rating

Business Research

Infrastructure Advisory & Risk Assessment

CRISIL Ratings

CRISIL Research The CRISIL Centre for Economic Research CRISIL Fund Services Irevna

CRIS

CRISIL Information Advisory CRISIL Risk Solution

5.1.1 CRISIL Ratings It is the only rating agency in India to operate on the basis of sectoral specialization. It rates different kinds of organizations, including industrial companies, banks, SMEs, non-banking financial institutions, insurance providers, mutual funds, infrastructure entities, state governments, and urban local bodies. It also rates securitized papers. 5.1.2 CRISIL Fund Services CRISIL Fund provides fund evaluation services and risk solutions to the mutual fund industry through use of various benchmarks and analytical tools.

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5.1.3 CRISIL Research CRISIL Research is India's largest independent integrated research house which provides research, analysis and forecasts on the Indian economy, industries and companies across financial, corporate, consulting and public sectors. 5.1.4 The CRISIL Centre for Economic Research The CRISIL Centre for Economic Research was set up in April 2002. It provides research offerings to different financial players, corporates and policy-makers. It offers products and services based on economic analysis to external clients, both independently and in collaboration with other group businesses. 5.1.5 Irevna CRISIL entered in equity research business by acquiring Irevna. Irevna is a division of CRISIL which provides customised equity research and analytics, and knowledge process outsourcing, to the world's leading financial institutions, investment banks, private equity firms and consulting companies. CRISIL transferred its advisory and risk consulting business into a 100 per cent subsidiary CRISIL Risk and Infrastructure Solutions Limited (CRIS) with effect from April 01, 2007. CRIS is engaged in the areas of infrastructure policy and transaction advisory services; integrated risk management services and consulting to banks and corporates, through its divisions CRISIL Infrastructure Advisory and CRISIL Risk Solutions. 5.1.6 CRISIL Risk and Infrastructure Solutions Limited (CRIS) CRISIL Infrastructure Advisory works extensively in the areas of policy-making and economic development. Its range of activities include undertaking complex feasibility studies, creation of appropriate policy frameworks, sector reforms, regulatory support and project structuring for various large and complex projects.

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CRISIL Risk Solutions business provides risk management solutions and advice to banks and corporates in the areas of credit and market risk. 5.2 INVESTMENT INFORMATION AND CREDIT RATING AGENCY OF INDIA LTD. (ICRA) ICRA is a full-service credit rating agency but besides Ratings, Group ICRA offers Consulting services, IT-based services, Information services, and Outsourcing services. Thus, along with the ICRA Limited, Group ICRA has three wholly-owned subsidiaries which together form the ICRA Group of Companies (Group ICRA). These are: ICRA Management Consulting Services Limited (IMaCS); ICRA Techno Analytics Limited (ICTEAS); and ICRA Online Limited (ICRON). Figure 2: ICRAs Business Group ICRA

Credit Rating / Grading

Management Consulting

IT Software

ICRA Online Limited ( ICRON )

ICRA Limited ( ICRA )

ICRA Management Consulting Services Ltd. ( IMACS )

ICRA Techno Analysis Limited ( ICTEAS )

M. Serve Business Solutions Pvt. Ltd. ( M. Serve )

ICRA Sapphire Inc. ( ICSAP )

Axiom Technologies Ltd. ( AXIOM )

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5.2.1 ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) It was incorporated in 1991 and was jointly sponsored by Industrial Finance Corporation of India (IFCI) and other Financial Institutions and banks as an independent and professional investment information and credit rating agency. ICRA is an associate of the international rating agency Moodys Investors Services which is ICRAs largest shareholder. Moodys assists ICRA in organising formal training programmes and it gives advice to ICRA on rating-products strategy and the ratings business in general. ICRA has been granted registration with SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999. ICRA provides information products, ratings and solutions to different businesses and investors. 5.2.2 ICRA Management Consulting Services Limited (IMaCS) It is a wholly-owned subsidiary of ICRA Limited and offers consulting services in strategy, risk management, regulation and reform, transaction advisory, development consulting and process reengineering. IMaCSs clientele includes banks and financial service companies, corporate entities, institutional investors, governments, regulators, and multilateral agencies. IMaCS provides management consulting services to clients based in India and abroad through five Business Groups: infrastructure, energy, banking and insurance, corporate advisory, and government. 5.2.3 ICRA Techno Analytics Limited (ICTEAS) It is a wholly-owned subsidiary of ICRA Limited, and offers Information Technology (IT) solutions to meet the dynamic needs of present-day businesses. The services range from the traditional development of client-server, web-centric and mobile applications to the generation of cutting-edge business intelligence applications and analytics solutions. ICTEAS has two subsidiaries, ICRA Sapphire Inc. (ICSAP) and Axiom Technologies Limited (AXIOM).

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ICSAP is a wholly-owned subsidiary of ICTEAS and is based in Connecticut, USA. It provides business analytics and software development services backed by offshore teams. AXIOM is also a wholly-owned subsidiary of ICTEAS and it operates in Kolkata, India. AXIOM provides various customization and implementation services on the Oracle E-Business Suite. 5.2.4 ICRA Online Limited (ICRON) It is a wholly-owned subsidiary of ICRA Limited. ICRON was incorporated in January 1999 and is providing software and outsourcing solutions since then. ICRON has a wholly-owned subsidiary M-Serve Business Solutions Private Limited, a KPO services company which is headquartered in Kolkata, India. ICRON has two Strategic Business Units. The Knowledge Process Outsourcing Division (KPO Division) ICRON diversified into the Knowledge Process Outsourcing (KPO) business in April 2004, with focus on the banking, financial services and insurance as well as on retail, healthcare and pharmaceuticals sectors. The KPO Division of ICRON offers Knowledge Process Outsourcing services by translating data and information into structured business inputs. The Information Services and Technology Solutions Division (MFI Division) The MFI Division serves the Mutual Fund Industry through Research, Analytics and Mutual Fund Ranking. Besides, the company provides several innovative products to meet the varied needs of its clients. 5.3 CREDIT ANALYSIS & RESEARCH LTD. (CARE) Credit Analysis & Research Ltd. was incorporated in 1993 by consortium of Banks/financial institutions in India. The three largest shareholders of CARE are IDBI Bank, Canara Bank and State Bank of India. CAREs Ratings are recognized by Govt. of India and all regulatory authorities like RBI and SEBI. CARE has been granted

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registration with SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999. CARE is a founder member of Association of Credit Rating Agencies in Asia (ACRAA). CARE is set up with two divisions: 5.3.1 CARE Ratings CARE Ratings offers a wide range of rating and grading services across sectors. Types of debt instruments rated by CARE Ratings include commercial paper, fixed deposit, bonds, debentures, hybrid instruments, structured obligations, preference shares, loans, etc. CARE Ratings provide investors and risk managers with credit opinions based on detailed in-depth research, which encompasses detailed analysis of risks that affect credit quality of an issuer. 5.3.2 CARE Research and Information Services CARE Research & Information Services is an independent division of CARE. The research division undertakes two activities, i.e., providing an in-house support to the ratings division and providing sectoral research to financial intermediaries, corporates, analysts, policy-makers, etc. as an aid to their decision-making process. CARE Research & Information Services offers both subscription based reports and also customised reports on request. Sector Research Sector Research includes an in-depth analysis of business environment of industry, trends, future direction, coverage on sectors in India, including updates at regular intervals for a year forward. Customised Research Customised Research involves business analysis and position in the market, financial analysis, future outlook, etc. which helps the clients to make better credit/investment decisions. 5.4 FITCH RATINGS INDIA PRIVATE LTD. (FITCH) Fitch Ratings India Private Ltd., formerly Duff and Phelps Credit Rating (India) Private Ltd. (DCR), was established in 1996. Duff & Phelps India became wholly-owned subsidiary of FITCH in November

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2001. Fitch Ratings credit ratings provide the agency's views regarding the future performance and the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. FITCH rates sovereigns, financial institutions, insurance companies, corporates, municipalities, structured finance obligations, etc. FITCH has been recognized by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999. SECTION-II In this section, an attempt has been made to study the various operations conducted by the rating agencies covering the following dimensions: 1) Activities Undertaken 2) Instruments and Products Rated 3) Methodology Adopted 4) Rating Symbols Used 5) Rating Process Adopted. 5.5 ACTIVITIES UNDERTAKEN BY THE CREDIT RATING

AGENCIES Credit rating agencies (subsequently denoted as CRAs)

specialize in analysing and evaluating the creditworthiness of corporate and sovereign issuers of debt securities. Credit rating agencies are expected to become more important in the wake of various services/activities being undertaken by various credit rating agencies, along with the rating services that provide information and guidance to institutional and individual investors/creditors. These agencies enhance the ability of borrowers/issuers to access the money market and the capital market for lapping a large volume of resources from a wider range of the investing public. These services provided by the credit rating agencies also assist the regulators in promoting transparency in the financial markets. A comparative view of the activities undertaken by all these agencies is presented in Table 5.1

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Table 5.1 Activities Undertaken Activities Rating & Grading Information Advisory Services Research Services Business Process Outsourcing Information Technology Services CRISIL __ ICRA CARE __ __ FITCH __ __

5.5.1 Rating and Grading Services Credit rating is the symbolic indicator of the relative capability of the corporate entity to timely service its debt obligations, whereas grading is done to assess the quality of performance of that particular entity. Ratings may be changed, qualified, placed on rating watch or withdrawn as a result of changes in, additions to, accuracy of, unavailability of or inadequacy of information or for any related reason. Different types of rating and grading services provided by all rating agencies are shown in Table 5.1a: It is evident from the table that all the agencies rate long/ medium-term debt instruments, short-term debts, claims paying ability of insurance companies, corporate governance and structured finance/ structured obligation of various companies. The rating of various types of long-term, medium-term as well as short-term instruments depicts the rating agencies views regarding the ability of the issuer of a particular debt instrument to repay the debt and pay the interest in a timely manner. Claims paying ability ratings (CPRs) for insurance companies are credit rating agencies opinion on the ability of the insurers concerned to honour policyholder claims and obligations on time. In other words, a CPR is credit rating agencies opinion on the financial strength of the insurer, from a policyholders perspective. On the other hand, corporate governance rating (CGR) is meant to indicate the relative level to which an organization accepts and follows the codes and guidelines of corporate governance

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practices prevalent in the organization. As the corporate governance practices reflect the distribution of rights and responsibilities among different participants in the organization such as the Board, management, shareholders and other financial stakeholders, and the rules and procedures laid down and followed for making decisions on corporate affairs. Moreover, rating of structured finance obligations is the opinion of credit rating agencies as an obligators capacity and willingness to make timely payment, of financial obligations, on the rated instrument.
Table 5.1a Rating and Grading Services Rating/Grading Rating of long /medium-term debt instrument Rating of short-term debt instrument Claims company Corporate Governance rating Structured Finance/ Obligation rating Grading of Mutual Funds/Bond Funds Grading of real estate/ Project finance rating SSI/ SME rating Issuer credit rating IPO Grading Loan/ Bank Loan rating Assessment of State Governments/ Rating of Urban Local Bodies Micro Finance Institution(MFI) Grading Grading of Maritime Training Course Grading of Healthcare Institutions Rating of Subsidiaries & Joint Ventures of MNCs in India __ __ __ __ __ __ paying ability of insurance CRISIL ICRA CARE FITCH

Further, all the agencies are involved in Grading of mutual

funds/bond funds, real estate or project finance gradings, SSI/ SME rating and issuer credit rating. Mutual fund grading scale is used to

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rate the underlying credit risk of debt funds portfolio or risk associated with investing in individual mutual fund schemes. The Mutual fund/ Debt Fund rating signifies the likelihood of schemes to achieve the objectives and meet the obligations to investors. Grading of real estate developers and projects provides an independent opinion on the relative performance capability of real estate development entities. For the investor (buyer of property), the gradings communicate the risks associated with the developers ability to deliver in accordance with the terms, quality parameters, and time stipulated. For developers, the gradings provide a scientific assessment of their abilities and risk profiles, serve to assist them in presenting their case to lenders. SSI/ SME rating signifies the prospect of SSI/ SME of timely servicing of interest and principle as per terms. Issuer Ratings, on the other hand, provide an opinion on the general creditworthiness of the rated entities and not specific to a particular debt instrument. All agencies are also involved in IPO Grading and Bank loan IPO Grade represents a relative assessment of the rating.

fundamentals of the issue graded in relation to the universe of other listed equity securities in India. The bank loan ratings provide a uniform benchmark for credit and pricing decisions in the bank loan market, offering comments on the likelihood of repayment of loans to banks. The rating agencies focus both on the risk of default, and the likelihood of ultimate recovery in the event of default. The grading of microfinance institutions as well as the assessment of State Governments and rating of Urban Local Bodies is being done by all the agencies. MFI Grading is a symbolic indicator of credit rating agencys current opinion on the relative capability of the Microfinance Institution (MFI) concerned to manage its microfinance activities in a sustainable manner. The rating of State Governments and Urban Local Bodies include the ratings of those borrowings which

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are guaranteed by such bodies including those of State Electricity Boards, Irrigation Corporations, Road Development Corporation, etc. With the passage of time CRISIL, ICRA and CARE have started grading of maritime training institutions/courses. Grading of maritime training institutions/courses depicts the level of consistency of institutions resources and processes with those required for delivering the best quality of maritime education and training. The grading of healthcare institutions is done by CRISIL and ICRA only. Healthcare Grading presents an independent opinion on the quality of care provided by healthcare entities to their patients. CRISIL has also pioneered the rating of subsidiaries and joint of multinationals in India and has rated several ventures

multinational entities. 5.5.2 Information and Advisory Services The information and advisory services are the next very important activity being undertaken by rating agencies, which include information services, advisory services, project and infrastructure advisory services, investment and risk management advisory, Financial Restructuring advisory, etc. as highlighted in Table 5.1b. A glance at the table provides that all the agencies provide advisory services and such services are usually undertaken by the agencies through their advisory arms. Further, all the agencies are engaged in the information services which primarily focus on addressing the unique information needs of investors and the capital market community. Information services promote the efficiency in business and financial markets by providing proper information to the users as and when required. The Project/ Infrastructure advisory services are undertaken by three agencies except FITCH. These agencies evaluate the credit risks of the projects in areas such as roads, ports, power and telecom to advise investors and banks about the regulatory framework, the specific project risks and the ways of risk mitigation. Investment and risk management advisory services are undertaken by

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CRISIL and ICRA in which risk management advice is offered on the efficient management of risk to banks and other lenders. Services relating to financial restructuring advice are provided by ICRA and CARE under which these agencies give advice to various companies about the optimal capital structure and the financial restructuring options. CARE is the only agency to perform credit appraisal services which help banks and other non-banking finance companies to set up or modify their credit appraisal systems.
Table 5.1b Information and Advisory Services Services Information Services Advisory Services Project/ Infrastructure Advisory Investment & Risk Management Advisory Financial Restructuring Advice Credit Appraisal System CRISIL __ __ ICRA __ CARE __ FITCH __ __ __ __

5.5.3 Research Activities Some Indian credit rating agencies have set up research arms to complement their rating activities. These arms carry out research on the economy, industries and specific companies, and make the same available to external subscribers for a fee. Research being done by various agencies present an in-depth analysis into the matter being researched and helps various users to properly make use of that information in future planning or some policy formulation. In addition, they disseminate opinions on the performance of the economy or specific industries. The research is also used internally by the rating agencies for arriving at their rating opinions. The research related activities done by various agencies are highlighted analysis an in Table and 5.1c. study All of the the agencies Under are engaged scenario, in the industry/sector corporate analysis. industry/sector

in-depth

competitive

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imperatives of succeeding in a global market and the relative position of industry participants is undertaken. Under the corporate analysis various reports about Indian corporates are provided, by the rating agencies, with regular updates to cover the implications of changes in business and economic conditions on corporate. Thus, this corporate analysis facilitates investment decisions of large investors and meets the informational requirements of others. Customised research is done by CRISIL, ICRA and CARE. These customised research solutions are meant to meet the specific requirements of particular companies and provide information advantageous to them. Equity research is done by CRISIL and CARE only. Equity research involves assessment of the fundamental quality of the company and the valuation of equity shares.
Table 5.1c Research Services Services Industry/ Sector Analysis Corporate Analysis Customised Research Equity Research CRISIL ICRA __ CARE FITCH __ __

5.5.4 Business Process Outsourcing Business process outsourcing services are being provided by CRISIL as well as ICRA. These agencies provide knowledge process outsourcing to various financial institutions, investment banks, private equity firms and consulting companies at the global level, and help them to achieve sustainable competitive advantage. The outsourcing services being provided include financial modelling, data analysis valuation, outsourced research, financial assets pricing, etc. CRISIL provides knowledge process outsourcing through one of its divisions called Irevna, whereas ICRA is involved in this service through its subsidiary ICRA Online Limited.

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5.5.5 Information Technology Services Information and Technology services are provided by ICRA only through its subsidiary ICRA Techno Analytics Limited (ICTEAS). ICTEAS provides IT products and solutions along with engineering services. It provides onsite and offshore design expertise in the areas like automotive, plant design, construction and instrumentation space. 5.6 INSTRUMENTS AND PRODUCTS RATED BY RATING

AGENCIES The primary focus of the rating exercise is to assess the adequacy to meet debt obligations of a particular instrument in adverse conditions. Different types of products and instruments are being rated by all the rating agencies as shown in Table 5.2. The table reflects that almost similar types of instruments and products are being rated by all the agencies, but with a distinct classification of the products or instruments. The table depicts that various types of long-term instruments rated by credit rating agencies include bonds, non-convertible debentures, preference shares, loans/bank loan ratings (BLR), etc.; and medium-term instruments include fixed deposits of companies (FD) and certificates of deposit (CD), whereas short-term instruments being rated by the agencies include commercial papers (CP), short-term loans (STL), etc. The grading of other instruments including IPOs and mutual funds is also done by all these agencies.

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Table 5.2 Instruments & Products Rated CRISIL Long & Medium-Term Instruments Debentures Bonds Preference shares Structured Obligations Fixed deposits Certificates of Deposit Loans/Bank Loans Short-Term Instruments Commercial Papers Short-term deposits Loans Others IPOs Mutual funds ICRA Long-Term Instruments Debentures Bonds Preference shares Loans/Bank Loans Medium-Term Instruments Fixed deposits Certificates of Deposit Short-Term Instruments Commercial Papers Loans Others IPOs Mutual funds CARE Long & MediumTerm Instruments Non-convertible Debentures Bonds Fixed deposits Certificates of Deposit Structured Obligations Convertible Preference Shares Redeemable Preference Shares Loans/Bank Loans Short-Term Instruments Commercial Papers Loans Others IPOs Mutual funds FITCH Long-Term Instruments Debentures Bonds Loans/Bank Loans Medium-Term Notes Fixed deposits Certificates of Deposit Commercial Papers Preferred Stock Loans IPOs Mutual Funds

5.6.1 Number of Instruments and Products Rated Instruments and products of various issuers including corporate sector (manufacturing and trading companies), financial institutions and banks, finance companies, Nigams, corporations, etc. are rated by all the credit rating agencies. Further, other institutions being rated by the agencies include micro finance institutions, maritime training institutions, healthcare institutions, etc. So, the details regarding the number of issuers as well as the instruments rated by all the four rating agencies during the time period 2001-09 have been shown in Tables 5.2a to 5.2h. It is clear from Table 5.2a that in the case of CRISIL, 58.85 per cent of the total rated instruments are of long-term duration, 12.97 per cent of them are of short-term duration, 6.80 per cent instruments are of medium-term duration and 21.38 per cent of rated instruments

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fall in others category. Among the long-term instruments rated during the given period, the highest percentage is of Loans/ Bank Loans rating (39.34%) followed by debentures/bonds (13.31%) and preference shares (6.20%). This is also verified by the respective mean values of the given instruments. But CV values of Loans/Bank Loans ratings depict that there is more variation in number of Loans/Bank Loans rated by CRISIL over the years as compared to other long-term instruments. The yearly analysis highlights that among the long-term instruments, debentures and bonds hold the highest percentages during the period 2001-03, whereas during 2004-09 Loans & Bank Loans ratings hold the highest position. As far as the medium-term instruments are concerned, the average number of fixed deposits of companies rated is more than those of Certificates of Deposit. The CV value signifies that there is more variation in number of Certificates of Deposit rated during the given period. In the case of short-term instruments the average number of commercial papers rated during the period is more than double the number of short-term loans, and there is more stability in rating of commercial papers during the period as highlighted by CV value. The ratings of other instruments including mutual funds and IPOs have also picked up after the year 2005 as is evident from the table.

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Table 5.2a Instruments Rated by CRISIL Long-term Instruments Preference Debentures/Bonds shares Loan/BLR 197(24.72) 205(24.79) 213(24.51) 420(28.26) 429(22.63) 436(21.06) 487(20.66) 505(16.80) 539(15.61) 2231(13.31) 89(11.17) 79(9.55) 92(10.59) 107(7.20) 123(6.49) 117(5.65) 138(5.85) 145(4.82) 149(4.31) 1039(6.20) 58.85 381.22 137.61 115.44 25.53 599.44 377.97 153(19.20) 169(20.44) 161(18.53) 496(33.38) 705(37.18) 728(35.17) 855(36.27) 940(31.27) 1188(34.39) 6595(39.34) Medium-term Instruments FD 42(5.27) 47(5.68) 55(6.33) 63(4.24) 69(3.64) 88(4.25) 97(4.12) 103(3.43) 111(3.21) 675(4.03) CD 22(2.76) 22(2.66) 35(4.03) 48(3.23) 50(2.64) 59(2.85) 69(2.93) 74(2.46) 86(2.49) 465(2.77) Short-term Instruments CP 131(16.44) 145(17.53) 137(15.77) 149(10.03) 175(9.23) 192(9.28) 177(7.51) 190(6.32) 196(5.67) 1492(8.90) STL 60(7.53) 53(6.41) 66(7.59) 79(5.32) 67(3.53) 80(3.86) 89(3.78) 93(3.09) 95(2.75) 682(4.07) Others 103(12.92) 107(12.94) 110(12.66) 124(8.34) 278(14.66) 370(17.87) 445(18.88) 956(31.80) 109(031.56) 3583(21.38) 21.38 75.78 15.04 19.85 398.11 377.05 94.71

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL Overall Percentage Mean SD

Total
797(100) 827(100) 869(100) 1486(100) 1896(100) 2070(100) 2357(100) 3006(100) 3454(100) 16762(100)

6.80 75.00 25.46 33.95 51.67 22.60 43.74

12.97 165.78 25.37 15.30

CV 36.10 22.12 63.05 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

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Table 5.2b Issuers Rated by CRISIL Corporate Sector 86(46.99) 95(43.58) 103(42.92) 110(39.71) 116(33.33) 134(31.38) 153(31.74) Financial Institutions and Banks 28(15.30) 32(14.68) 34(14.17) 46(16.61) 54(15.52) 69(16.16) 77(15.98) Finance Companies 21(11.48) 26(11.93) 27(11.25) 29(10.47) 35(10.06) 57(13.35) 70(14.52) Nigams/ Corporations 25(13.66) 31(14.22) 27(11.25) 37(13.36) 48(13.79) 59(13.82) 65(13.49)

Year 2001 2002 2003 2004 2005 2006 2007

Others 23(12.57) 34(15.60) 49(20.42) 55(19.86) 95(27.30) 108(25.29) 117(24.27)

Total 183(100.00) 218(100.00) 240(100.00) 277(100.00) 348(100.00) 427(100.00) 482(100.00) 521(100.00) 580(100.00) 3276(100.00)

2008 138(26.49) 90(17.27) 78(14.97) 80(15.36) 135(25.91) 2009 140(24.14) 109(18.79) 88(15.17) 85(14.66) 158(27.24) TOTAL 1075(32.81) 539(16.45) 431(13.16) 457(13.95) 774(23.63) Mean 119.44 59.89 47.89 50.78 86.00 SD 22.89 28.26 25.61 22.68 47.58 CV 19.17 47.18 53.49 44.66 55.33 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

Table 5.2b highlights the number of issuers rated by CRISIL during the given time period. The maximum number of instruments of corporate sector including manufacturing and trading companies are rated (119 on an average) followed by other institutions (average 86) including micro finance institutions, maritime training courses, healthcare institutions, etc. Next in order appear financial institutions and banks, Nigams/corporations and finance companies. The CV value indicates that the highest variation appeared in rating of issuers belonging to Others category over the period.

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Table 5.2c Instruments Rated by ICRA Long-term Instruments Preference Debentures/Bonds Shares Loan/BLR 42(22.22) 24(12.70) 33(17.46) 38(19.59) 53(22.75) 59(24.69) 67(23.67) 68(21.79) 98(21.12) 26(13.40) 28(12.02) 28(11.72) 34(12.01) 41(13.14) 58(12.50) 35(18.04) 38(16.31) 38(15.90) 45(15.90) 50(16.03) 78(16.81) Medium-term Instruments FD 14(7.41) 15(7.73) 17(7.30) 17(7.11) 22(7.77) 23(7.37) 35(7.54) CD 4(2.12) 5(2.58) 8(3.43) 8(3.35) 10(3.53) 12(3.85) 19(4.09) Short-term Instruments CP 27(14.29) 29(14.95) 35(15.02) 35(14.64) 42(14.84) 47(15.06) 74(15.95) 85(14.46) 59(13.82) 433(14.78) STL 13(6.88) 14(7.22) 15(6.44) 15(6.28) 19(6.71) 21(6.73) 33(7.11) 40(6.80) 28(6.56) 198(6.76) Others 32(16.93) 32(16.49) 39(16.74) 39(16.32) 44(15.55) 50(16.03) 69(14.87) 83(14.12) 76(17.80) 464(15.84) 15.84 51.56 19.46 37.75 Total 189(100.00) 194(100.00) 233(100.00) 239(100.00) 283(100.00) 312(100.00) 464(100.00) 588(100.00) 427(100.00) 2929(100.00)

Year 2001 2002 2003 2004 2005 2006 2007

2008 119(20.24) 82(13.95) 95(16.16) 57(9.69) 27(4.59) 2009 86(20.14) 58(13.58) 68(15.93) 29(6.79) 23(5.39) TOTAL 630(21.51) 379(12.94) 480(16.39) 229(7.82) 116(3.96) Overall Percentage 50.84 11.78 Mean 70.00 42.11 53.33 25.44 12.89 SD 26.63 19.84 21.97 13.69 8.19 CV 38.04 47.11 41.19 53.82 63.56 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

21.54 48.11 20.44 42.49

22.00 9.58 43.54

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Table 5.2c highlights that during the time period 2001-09 among all the instruments rated by ICRA, 50.84 per cent were of long-term duration; 21.54 per cent of them were of short-term duration; 11.78 per cent instruments were of medium-term duration; and 15.84 per cent of rated instruments fall in others category. Moreover, in the case of long-term instruments rated by ICRA, the average number of debentures and bonds (70) is the highest followed by loan as well as Bank loan ratings (53) and preference shares (42). This trend has been observed during the whole period of study. CV value further clarifies that there is more variation in the rating of preference shares during the given period. In the case of mediumterm instruments rated by ICRA the average number of fixed deposits being rated, i.e., 25 is almost double the number of certificates of deposit, i.e., 12. However, in the case of short-term instruments also the average number of commercial papers rated is more than double the number of short-term loans rated. Among all the instruments being rated over the period, the highest variation has been found in the rating of certificates of deposit as depicted by their CV value.
Table 5.2d Issuers Rated by ICRA Corporate Sector 20(30.77) 25(31.25) 32(30.77) 37(30.33) 39(29.10) 42(28.19) 45(27.11) 49(26.49) 68(30.49) 357(29.07) 39.67 14.11 35.56 Compiled from Financial Institutions and Banks 14(21.54) 17(21.25) 20(19.23) 21(17.21) 24(17.91) 30(20.13) 33(19.88) Finance Companies 12(18.46) 15(18.75) 18(17.31) 18(14.75) 24(17.91) 22(14.77) 26(15.66) Nigams/ Corporations 10(15.38) 10(12.50) 18(17.31) 22(18.03) 21(15.67) 26(17.45) 28(16.87)

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL Mean SD CV Source:

Others 9(13.85) 13(16.25) 16(15.38) 24(19.67) 26(19.40) 29(19.46) 34(20.48)

Total 65(100.00) 80(100.00) 104(100.00) 122(100.00) 134(100.00) 149(100.00) 166(100.00) 185(100.00) 223(100.00) 1228(100.00)

36(19.46) 29(15.68) 33(17.84) 38(20.54) 40(17.94) 36(16.14) 38(17.04) 41(18.39) 242(19.71) 230(18.73) 209(17.02) 190(15.47) 26.11 22.22 22.89 25.56 9.02 7.46 9.53 11.19 34.54 33.58 41.65 43.80 various publications and website of the agency.

Note: Figures in parentheses denote percentages.

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Table 5.2d carries the data showing the number of issuers rated by ICRA during the period 2001-09. On an average 39 issuers falling in corporate sector have been rated by ICRA during the given period, followed by 26 financial institutions and banks, 25 issuers falling in others category, whereas the average number of finance companies and nigams/corporations rated by ICRA during the period are 22 each. The CV value being the highest for issuers falling in others category clarifies that there is more variability in rating of these types of issuers during the study period. Table 5.2e exhibits the number of instruments rated by CARE. The table explains that in the case of CARE, 52.78 per cent of the total rated instruments were of long-term duration, 25.92 per cent of them were of short-term duration, 8.89 per cent instruments were of medium-term duration and 12.91 per cent of them fall in others' category. Further, among the long-term instruments the average number of debentures and bonds is higher, followed by loan & bank loan rating and preference shares. Whereas among the medium-term instruments rated almost equal number of Fixed Deposits and Certificates of Deposit were rated during the period but yearwise variation in rating of Certificates of Deposit is more as is clear from their CV value. As far as short-term instruments are concerned, the average number of commercial papers rated (56) during the given period are more than the short-term loans (32). A good number of other instruments including mutual funds and IPOs are also rated by CARE during the given period.

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Table 5.2e Instruments Rated by CARE Long-term Instruments Preference Debentures/Bonds Shares Loan/BLR 40(21.51) 24(12.90) 35(18.82) 45(21.13) 50(19.84) 61(21.03) 73(21.10) 82(21.52) 93(21.68) 29(13.62) 35(13.89) 37(12.76) 45(13.01) 49(12.86) 56(13.05) 40(18.78) 46(18.25) 58(20.00) 64(18.50) 70(18.37) 76(17.72) Medium-term Instruments FD 7(3.76) 9(4.23) 9(3.57) 11(3.79) 13(3.76) 15(3.94) 18(4.20) CD 7(3.76) 8(3.76) 10(3.97) 13(4.48) 15(4.34) 17(4.46) 19(4.43) Short-term Instruments CP 30(16.13) 34(15.96) 48(19.05) 50(17.24) 56(16.18) 61(16.01) 70(16.32) 75(15.99) 81(15.91) 505(16.42) STL 18(9.68) 19(8.92) 22(8.73) 27(9.31) 34(9.83) 37(9.71) 41(9.56) 44(9.38) 50(9.82) 292(9.50) Others 25(13.44) 29(13.62) 32(12.70) 33(11.38) 46(13.29) 50(13.12) 56(13.05) 60(12.79) 66(12.97) 397(12.91) 12.91 44.11 14.90 33.77 Total 186(100.00) 213(100.00) 252(100.00) 290(100.00) 346(100.00) 381(100.00) 429(100.00) 469(100.00) 509(100.00) 3075(100.00)

Year 2001 2002 2003 2004 2005 2006 2007

2008 100(21.32) 59(12.58) 88(18.76) 20(4.26) 23(4.90) 2009 109(21.41) 66(12.97) 93(18.27) 20(3.93) 24(4.72) TOTAL 653(21.24) 400(13.01) 570(18.54) 122(3.97) 136(4.42) Overall Percentage 52.78 8.89 Mean 72.56 44.44 63.33 13.56 15.11 SD 25.13 14.28 20.52 4.95 6.19 CV 34.63 32.14 32.41 36.54 40.99 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

25.92 56.11 17.56 31.30

32.44 11.54 35.58

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Table 5.2f Issuers Rated by CARE Corporate Sector 19(28.79) 22(26.19) 26(25.74) 27(23.68) 34(25.95) 40(27.97) 45(27.44) Financial Institutions and Banks 14(21.21) 17(20.24) 20(19.80) 28(24.56) 26(19.85) 28(19.58) 33(20.12) Finance Companies 14(21.21) 18(21.43) 20(19.80) 25(21.93) 28(21.37) 29(20.28) 31(18.90) Nigams/ Corporations 10(15.15) 14(16.67) 17(16.83) 19(16.67) 23(17.56) 25(17.48) 28(17.07)

Year 2001 2002 2003 2004 2005 2006 2007

Others 9(13.64) 13(15.48) 18(17.82) 15(13.16) 20(15.27) 21(14.69) 27(16.46)

Total 66(100.00) 84(100.00) 101(100.00) 114(100.00) 131(100.00) 143(100.00) 164(100.00) 182(100.00) 203(100.00) 1188(100.00)

2008 47(25.82) 2009 51(25.12) TOTAL 311(26.18) Mean 34.56 SD 11.70 CV 33.84 Source: Compiled from

36(19.78) 38(20.88) 33(18.13) 28(15.38) 38(18.72) 40(19.70) 39(19.21) 35(17.24) 240(20.20) 243(20.45) 208(17.51) 186(15.66) 26.67 27.00 23.11 20.67 8.35 8.76 9.27 8.17 31.32 32.45 40.09 39.53 various publications and website of the agency.

Note: Figures in parentheses denote percentages.

Table 5.2f highlights that the average number of issuers related to corporate sector rated by CARE are 34 which is followed by finance companies as well as financial institutions and banks. However, the least number of instruments of issuers related to others category during the given period. The CV value further depicts that the highest variation have been found in the rating of nigams/corporations during the study period. It is clear from Table 5.2g that among all the instruments rated by FITCH, 52.61 per cent were of long-term durations; 21.76 per cent of them were of short-term duration; 10.71 per cent instruments were of mediumterm duration; and 14.92 per cent of rated instruments fall in others category. Further, in the case of long-term instruments rated by FITCH during the period 2001-09, the highest average is of debentures and bonds , i.e., 46 followed by loan/bank loan rating (25) and preference shares (14) but CV value explains that the highest variation has been found in the rating of preference shares during the years. Among medium-term instruments, almost double number of the Fixed Deposits are rated as compared to Certificates of Deposit. As far as rating of short-term instruments is concerned, the average number of commercial papers being

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Table 5.2g Instruments Rated by FITCH Long-term Instruments Preference Debentures/Bonds Shares Loan/BLR 26(30.95) 0(0.00) 17(20.24) 30(27.27) 36(27.27) 42(30.22) 47(28.31) 50(27.93) 50(25.64) 8(7.27) 11(8.33) 14(10.07) 14(8.43) 16(8.94) 18(9.23) 19(17.27) 21(15.91) 24(17.27) 26(15.66) 27(15.08) 29(14.87) Medium-term Instruments FD 7(8.33) 8(7.27) 8(6.06) 9(6.47) 10(6.02) 11(6.15) 13(6.67) CD 0(0.00) 0(0.00) 6(4.55)` 6(4.32) 7(4.22) 8(4.47) 10(5.13) Short-term Instruments CP 12(14.29) 18(16.36) 20(15.15) 11(7.91) 23(13.86) 24(13.41) 27(13.85) 29(12.95) 30(12.20) 194(13.15) STL 7(8.33) 9(8.18) 10(7.58) 12(8.63) 15(9.04) 16(8.94) 18(9.23) 19(8.48) 21(8.54) 127(8.61) Others 15(17.86) 18(16.36) 20(15.15) 21(15.11) 24(14.46) 27(15.08) 30(15.38) 31(13.84) 34(13.82) 220(14.92) 14.92 24.44 6.46 26.44 Total 84(100.00) 110(100.00) 132(100.00) 139(100.00) 166(100.00) 179(100.00) 195(100.00) 224(100.00) 246(100.00) 1475(100.00)

Year 2001 2002 2003 2004 2005 2006 2007

2008 64(28.57) 22(9.82) 33(14.73) 14(6.25) 12(5.36) 2009 69(28.05) 26(10.57) 37(15.04) 16(6.50) 13(5.28) TOTAL 414(28.07) 129(8.75) 233(15.80) 96(6.51) 62(4.20) Overall Percentage 52.61 10.71 Mean 46.00 14.33 25.89 10.67 6.89 SD 14.40 7.65 6.51 3.08 4.62 CV 31.30 53.36 25.14 28.90 67.09 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

21.76 21.56 6.91 32.07

14.11 4.86 34.43

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rated are 21 as compared to 14 in the case of short-term loans. The other instruments including mutual funds and IPOs are also rated by FITCH during the years of study. Among all the instruments rated the highest variation has been found in the rating of Certificate of Deposits as signified by its CV value.
Table 5.2h Issuers Rated by FITCH Corporate Sector 16(45.71) 19(43.18) 21(41.18) 23(37.10) 25(36.76) 28(34.15) 29(32.22) 31(32.29) 34(30.91) 226(35.42) 25.11 Financial Institutions and Banks 7(20.00) 9(20.45) 9(17.65) 13(20.97) 14(20.59) 17(20.73) 19(21.11) 20(20.83) 23(20.91) 131(20.53) 14.56 Finance Companies 7(20.00) 8(18.18) 10(19.61) 12(19.35) 13(19.12) 14(17.07) 16(17.78) 17(17.71) 20(18.18) 117(18.34) 13.00 Nigams/ Corporations 5(14.29) 5(11.36) 7(13.73) 9(14.52) 10(14.71) 13(15.85) 15(16.67) 16(16.67) 19(17.27) 99(15.52) 11.00

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL Mean

Others 0(0.00) 3(6.82) 4(7.84) 5(8.06) 6(8.82) 10(12.20) 11(12.22) 12(12.50) 14(12.73) 65(10.19) 7.22 4.71 65.23

Total 35(100.00) 44(100.00) 51(100.00) 62(100.00) 68(100.00) 82(100.00) 90(100.00) 96(100.00) 110(100.00) 638(100.00)

SD 5.90 5.57 4.27 5.02 CV 23.51 38.27 32.86 45.68 Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages.

Table 5.2h depicts that among the issuers whose instruments being rated by FITCH during the period 2001-09, average number is the highest (25) for corporate sector (manufacturing & trading companies), whereas average number is the least (7) for institutions falling in others category which includes micro finance institutions only. Whereas financial institutions and banks, finance companies and nigams/ corporations hold the second, third and fourth position respectively. CV values reveal that the highest variations have been in rating of institutions belonging to others category during the period.

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5.7

METHODOLOGY ADOPTED Rating methodology is concerned with the use and appreciation of the

tools in rating process. Both qualitative as well as quantitative factors are considered by the agencies before assigning any rating. Table 5.3 highlights that almost similar basic parameters of rating methodology are being used by all the rating agencies. The analytical framework involves the analysis of business 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 includes 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. In addition to the basic framework, rating agencies also have detailed criteria/methodologies for various industries which take into account the specific features of that industry.
Table 5.3 Methodology Adopted CRISIL Business analysis Regulatory Competitive environment Fundamental analysis Management analysis Financial analysis and ICRA Industry characteristics Competitive position issuer Financial position of the issuer Operational efficiency Management efficiency Commitment new projects Funding policies of the issuer to of the CARE Economic Industry risk Business assignment) Instrument terms Management assessment Financial risk risk (competitors & FITCH Past Rating Methodology Past Competitive position company Forecast future performance Analysis companys financial position and ability to generate cash of of the of the Years Financial Data Years

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5.7.1

CRISIL Rating Methodology: CRISIL assesses all the factors that

could affect credit worthiness of the borrowing company and then assigns rating to debt instruments. The key factors, considered for rating assessment are: Business Analysis: Every relevant piece of information concerning the business is evaluated by assessing industrial risk, market position of the company within industry, operating efficiency and legal position. Financial Analysis: Under financial analysis, all relevant aspects connected with the business and financial position of the company are assessed. The profitability, solvency and liquidity ratios are taken into consideration. Thus, CRISIL considers Growth rate of PAT, PAT/OI, PBIT/Net Worth, Earnings on Capital Employed, PBDITA/TI, Current Ratio, Quick Ratio, Debt to Equity Ratio, Interest Coverage Ratio, Pre-tax Coverage Ratio, Earnings on Assets to Capital Employed, etc. Management Evaluation: Judgment of management performance based on past operating and financial results, planning and control system of management, depths of managerial talents are considered. Regulatory and Competitive Environment: CRISIL evaluates structure and regulatory framework of financial system in which it works. Fundamental Analysis: It covers aspects on liquidity management (capital structure), asset quality, economic as well as industrial analysis of that particular entity to take the rating decision accordingly. 5.7.2 ICRA Rating Methodology: While assigning ratings ICRA considers

all relevant factors that have a bearing on the future cash generation of the issuer. A detailed analysis of the past financial statements is made and estimates of future earnings under various scenarios are drawn up, over the tenure of the instrument being rated. The other factors considered are: Industry Characteristics: Industrial features are evaluated by ICRA by taking into account various success factors, demand and supply position, structure of industry and Government policies related to that particular entity.

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Competitive Position: The competitive position of the issuer is evaluated by considering various factors including nature and basis of competition, competitive advantage through marketing and distribution, strength, weaknesses and opportunities available to the issuer in comparison to the competitors.

Financial Risk Analysis: Under this, ICRA considers various accounting policies, debt servicing track record, cash flow position, profitability position and capital structure of the issuer. The ratios considered specifically for the purpose include: Profit after Tax /Total Income, Profit Before Depreciation Interest and Tax/Total Income, Earnings Before Depreciation Interest and Tax/ Interest and Fixed Charges, Return on Capital Employed, Return on Net Worth, Total Debt/ Net Worth, Current Ratio, Quick Ratio, Cash Accrual Ratio and so on.

Operational Efficiency: Operational efficiency of the company is assessed by evaluating the price or cost advantage availability, cost and quality of raw material, availability of labour and labour relations prevalent in the organization.

Management Quality: The quality of the management is evaluated by observing the goals and philosophies of the management, and its strategies and abilities to overcome adverse situations.

Commitment to New Projects: ICRA also evaluates the companys commitment to new projects by estimating its progress in the initial stages and from past performance on similar projects.

Funding Policies of the Issuer: The funding policies of the issuer are also evaluated to get the deep knowledge of the sources of funds of the issuer company and the uses to which these funds have been put into.

5.7.3

CARE Rating Methodology: CARE also takes into account various

quantitative as well as qualitative factors while assigning rating which include: Economy and Industry Risk: The factors assessed by CARE include the effect of economic cycle on industry, business cycles, tariff structure,

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basis of competition, environmental as well as political factors concerning the issuers business. Business Risks (Competitor's Assessment): Factors considered under this are size of company and market share, supply of raw material and marketing arrangements, bargaining power of issuers, suppliers as well as customers, and location advantages and disadvantages available to the business of the issuer. Financial Risk: It includes analysis of financial management, capital structure, cash flow adequacy and profitability as well as liquidity position of the company. The financial risk is evaluated by CARE by considering various ratios including, Growth in total Income, Profit after Tax/Total Income, Profit before Depreciation Interest and Tax/ Total Income, Return on Capital Employed, Return on Net Worth, Debt-Equity Ratio, Interest Coverage Ratio, Overall Gearing Ratio, Current Ratio, Quick Ratio and Average Collection Period. Management Assessment: CARE makes complete assessment of the background and history of the issuer, corporate strategy adopted, philosophy and quality of management and the strength of management capabilities under stress. Terms of Instrument: Rating also depends on such factors as maturity of instrument, nature of security (whether secured or unsecured), repayment terms, coupon rates, etc. So, CARE also considers all these things before the assignment of rating. 5.7.4 FITCH Rating Methodology: FITCH rating analysis involves the assessment of the following: Past Years Rating Methodology: While assigning ratings FITCH takes into account last few years rating methodology on the basis of which rating was done. Past Years Financial Data: The ratios considered by FITCH while evaluating the past years financial data include, Profit Before Depreciation Interest and Tax/ Total Income, Profit after Tax/Total Income, Return on Capital Employed, Return on Net Worth, Operating 125

Profit/ Profit after Tax, Working Capital Turnover Ratio, Average Collection Period, Debt-Equity Ratio, Interest Coverage Ratio, Current Ratio and Quick Ratio. Forecast of Future Performance: It means how much the business will be able to earn in future which will be helpful in repayment of principal amount borrowed and interest thereof. Comparison of Companys Performance with the Competitors: Under this the agency compares the performance of the company being rated with that of the competitors in the field to properly assess the relative standing of the company. Analysis of Companys Ability to Generate Cash from Operations: The Companys ability to generate cash in future is also assessed by the agency to find out the relative capability of the business to repay its obligations in time. 5.8 RATING SYMBOLS A credit rating compresses an enormous amount of diverse

information into a single rating symbol. Rating symbols are symbolic expression of an issuers ability to respond to adverse changes in circumstances and economic conditions. Rating symbols are indicators of the opinion/assessment of credit rating agency regarding credit quality or grade of the debt obligations or instruments. Rating symbols group together similar entities in terms of their relative capacity of timely servicing of obligations as per terms of contract. The suffixes plus (+) or minus (-) are added to the symbols to indicate the relative position of the instrument within the group covered by the symbol. Currently, rating agencies have standardized rating nomenclatures for long-term ratings, short-term instruments, medium-term ratings, corporate/issuer credit rating, claims paying ability of insurance companies, IPO grading, etc. The comparative analysis of the symbols used by various credit rating agencies is shown in Tables 5.4a to 5.4j.

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Table 5.4a Rating Symbols for Long-term Instruments CRISIL AAA AA A BBB BB B C ICRA LAAA LAA LA LBBB LBB LB LC CARE CARE AAA CARE AA CARE A CARE BBB CARE BB CARE B CARE C FITCH AAA (ind) AA (ind) A (ind) BBB (ind) BB (ind) B (ind) C (ind) Explanation Highest safety High safety Adequate safety Moderate safety Inadequate safety High risk (ICRA risk prove) Substantial risk (ICRA poor

credit quality) D LD CARE D D (ind) Default (ICRA lowest credit)

As depicted in Table 5.4a, for rating long-term debt instruments all the agencies use similar basic symbols from AAA through D. The long-term debt instruments are categorized into investment grade and speculative grade. The symbols from AAA to BBB fall in investment grade whereas symbols including BB and below fall in speculative grade. (CRISIL categorized these instruments into three grades including high investment grade, viz. AAA and AA; investment grade, viz. A and BBB; and speculative grade, viz. BB to D). Agencies may apply + (plus) or - (minus) signs for ratings from AA to C to reflect the comparative standing within the category. In order to differentiate their symbols from one another, the agencies use various prefixes/suffixes : CRISIL uses only the basic symbol, ICRA uses the prefix of letter L in every symbol, CARE uses as prefix the word CARE in every symbol, whereas FITCH uses suffix (ind) in every symbol. ICRA and FITCH use similar symbols for rating preference shares also, whereas CRISIL uses the letter pf as a prefix to the rating symbols, for example, pf AAA. On the other hand, CARE uses the suffix CCPs in

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parentheses along with the symbol given above for rating cumulative convertible preference shares, for example, CARE AAA (CCPs).
Table 5.4b Rating Symbols for Medium-term Instruments CRISIL FAAA FAA FA --FB ICRA MAAA MAA MA --MB CARE CARE AAA (FD)/(CD) CARE AA(FD)/(CD) CARE A(FD)/(CD) CARE BBB(FD)/(CD) CARE BB(FD)/(CD) CARE B(FD)/(CD) FITCH tAAA (ind) tAA (ind) tA(ind) --tB (ind) Explanation Highest safety High safety Adequate safety Sufficient safety(CARE only) Inadequate safety(CARE only) Inadequate safety(CARE

susceptible to default) FC FD MC MD CARE C(FD)/(CD) CARE D(FD)/(CD) tC (ind) tD (ind) High risk Default

Table 5.4b highlights that for rating medium-term instruments, the basic symbols used by CRISIL, ICRA and FITCH are AAA, AA, A, B C and D, whereas CAREs symbols range through AAA, AA, A, BBB, BB, B, C and D. The letter F is prefixed by CRISIL for rating fixed deposits of companies whereas for rating certificates of deposit, CRISIL uses the similar symbols as used by it for rating short-term instruments, i.e., ranging through P1 to P5. The letter M is used by ICRA as a prefix for rating medium-term instruments. CARE uses as prefix the word CARE and the word FD and CD in parentheses as a suffix for rating fixed deposits and certificates of deposit respectively. FITCH uses the letter t as a prefix and (ind) as a suffix for rating all medium-term instruments. As is evident from Table 5.4c, for rating short-term instruments the basic parameter in the form of a five-point scale ranging from 1 to 5 is similar for all the agencies but different prefixes are used by all the agencies under study as CRISIL uses letter P, ICRA uses the letter A, CARE uses PR, and FITCH uses the suffix (ind).

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Table 5.4c Rating Symbols for Short-term Instruments CRISIL P1 P2 P3 P4 P5 ICRA A1 A2 A3 A4 A5 CARE PR1 PR2 PR3 PR4 PR5 FITCH F1(ind) F2(ind) F3 (ind) F4(ind) F5(ind) Explanation Highest credit quality /safety Above average credit quality/Strong safety Adequate credit quality/ safety Risk prone/Highly uncertain Lowest credit quality/Default

Table 5.4d Rating Symbols Used for Claims Paying Ability of Insurance Company CRISIL AAA ICRA iAAA CARE CARE AAA(In) FITCH AAA (ind) AA A iAA iA CARE AA (In) CARE A (In) AA (ind) A (ind) Explanation Highest claims High ability to repay policyholders, claims Adequate ability to repay policyholders claims BBB iBBB CARE (In) BB iBB CARE BB(In) BBB BBB (ind) BB (ind) Moderate ability to repay policyholders claims Inadequate ability to repay policyholders claims B C iB iC CARE B(In) CARE C(In) B (ind) C (ind) Weak ability to repay policyholders claims Lowest/poor ability to repay policyholders claims D __ CARE D(In) D (ind) Default to repay policyholders claims ability to repay policyholders

Table 5.4d shows that for rating claims paying ability of insurance companies, CRISIL uses only the basic symbols ranging from AAA to D, whereas CARE uses prefix CARE as well as suffix (In), and FITCH uses suffix (ind) with these basic symbols for the same purpose. On the other hand, the basic symbols ranging from AAA to C along with the prefix i are used by ICRA for rating claims paying ability of insurance companies.

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Table 5.4e Rating Symbols Used for Mutual Funds Grading CRISIL AAAf AAf Af BBBf BBf Bf Cf ICRA mfAAA mfAA mfA mfBBB mfBB mfB mfC CARE CARE AAAf CARE AAf CARE Af CARE BBBf CARE BBf CARE Bf CARE Cf FITCH AAA (ind) AA (ind) A (ind) BBB (ind) BB (ind) B (ind) C (ind) Explanation Minimal credit risk Very low credit risk Low credit risk Moderate credit risk High credit risk Very high credit risk Extremely higher credit risk

It is clear from Table 5.4e that for grading of mutual funds, along with basic symbols ranging from AAA through C, CRISIL uses suffix f, ICRA uses prefix mf, CARE uses prefix CARE as well as suffix f, whereas FITCH uses suffix (ind) for the purpose. Table 5.4f mentions that for rating the issuers, CRISIL again uses the basic symbols ranging from AAA to C. ICRA uses the prefix Ir; CARE prefixes the word CARE and suffixes (Is) to the basic symbol; and FITCH uses the suffix (ind). It is also evident from the table that the basic symbols used by CARE range from AAA to D.

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Table 5.4f Rating Symbols Used for Issuer Credit Rating CRISIL AAA ICRA IrAAA CARE CARE AAA(Is) FITCH AAA(ind) Explanation Extremely strong capacity to meet financial commitments AA IrAA CARE AA(Is) AA(ind) Very strong capacity to meet financial commitments A IrA CARE A(Is) A(ind) Strong capacity to meet

financial commitments BBB IrBBB CARE BBB(Is) BBB(ind) Adequate capacity to meet

financial commitments BB IrBB CARE BB(Is) BB(ind) Inadequate capacity to meet financial commitments B IrB CARE B(Is) B(ind) Risk-prone capacity to meet financial commitments CCC/C C/C __ __ CARE D(Is) IrC CARE C(Is) CCC(ind)/CC(in d)/C(ind) __ Lowest capacity to meet

financial commitments Likely to default

Table 5.4g IPO Grading Symbols CRISIL 5/5 ICRA IPO Grade 5 CARE CARE IPO Grade 5 FITCH FITCH IPO Explanation Strong Fundamentals of the issuers concerned Above average fundamentals of the issuers concerned Average fundamentals of the issuers concerned Below average fundamentals of the issuers concerned Poor fundamentals of the

Grade 5(ind) 4/5 IPO Grade 4 CARE IPO Grade 4 FITCH IPO

Grade 4(ind) 3/5 IPO Grade 3 CARE IPO Grade 3 FITCH IPO

Grade 3(ind) 2/5 IPO Grade 2 CARE IPO Grade 2 FITCH IPO

Grade 2(ind) 1/5 IPO Grade 1 CARE IPO Grade 1 FITCH IPO

Grade 1(ind)

issuers concerned

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Table 5.4g reveals that the IPO grades are assigned on a five-point scale ranging from 5 to 1. CRISIL uses the numerical symbol ranging from 5/5 (denoted as five on five) to 1/5 (denoted as one on five). ICRAs 5-point IPO grade ranges from IPO Grade 5 to IPO Grade 1, whereas CARE uses the prefix of word CARE with each symbol used by ICRA. Moreover, FITCH also uses the similar symbols as used by ICRA but with slight modification as it uses word FITCH as prefix and (ind) as suffix to each grade.

Table 5.4h Micro Finance Institutions Grading Symbols CRISIL mfR1 mfR2 mfR3 ICRA M1 M2 M3 CARE MFI1 MFI2 MFI3 FITCH F1 F2 F3 Explanation Highest ability to manage activities High ability to manage activities Moderate ability to manage activities(CRISIL-

adequate ability) mfR4 M4 MFI4 F4 Below average ability to manage activities(CRISILsufficient ability) mfR5 M5 MFI5 F5 Weak ability to manage activities(CRISIL-below average ability) mfR6 mfR7 mfR8 __ __ __ __ __ __ __ __ __ Poor ability to manage activities(CRISIL only) Very poor ability to manage activities(CRISIL only) Poorest ability to manage activities(CRISIL only)

Table 5.4h brings out that the basic symbols used by ICRA, CARE and FITCH for grading the micro finance institutions, include numerals ranging from 1 to 5, whereas this range is 1 to 8 for CRISIL. In order to differentiate their symbols from each other CRISIL uses the prefix mfR, ICRA uses prefix M, whereas CARE uses the prefix MFI and FITCH uses prefix F for the same. For rating maritime training course, CRISIL and CARE use similar symbols including Grade 1 to Grade 5, whereas ICRA uses prefix ICRA to the symbol used by the other two agencies as shown in Table 5.4i. FITCH has not yet started rating of maritime training course.

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Table 5.4i Maritime Training Course Grading Symbols CRISIL Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 ICRA ICRA Grade 1 ICRA Grade 2 ICRA Grade 3 ICRA Grade 4 ICRA Grade 5 CARE Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 FITCH __ __ __ __ __ Explanation Outstanding quality of education Very good quality of education Good quality of education Satisfactory quality of education Poor quality of education

Table 5.4j Healthcare Institutions CRISIL Grade A Grade B Grade C Grade D ICRA H1 H2 H3 H4 CARE __ __ __ __ FITCH __ __ __ __ Explanation Highest quality of care High quality of care Moderate quality of care Weak/poor quality of care

It is clear from Table 5.4j that only CRISIL and ICRA rate the healthcare institutions. CRISIL uses symbols ranging from Grade A to Grade D to grade the quality of services provided by the healthcare institutions. ICRA uses symbols ranging from H1 to H4 for rating healthcare institutions. 5.9 RATING PROCESS Rating is a multi-layered decision-making process which requires interactive dialogue with the issuer. The rating process is a fairly detailed exercise that starts with a rating request from the issuer, the signing of a rating agreement and continues up to the surveillance of rating. It involves among other things, analysis of published financial information, visits to issuers offices and work places, and intensive discussions with issuers auditors, bankers, creditors, etc. It also involves an in-depth study of the industry itself and a degree of environment scanning. The rating process of various rating agencies is explained below: 5.9.1 CRISIL Rating Process The process of rating starts with a rating request from the issuer, and the signing of a rating agreement. CRISILs rating process normally takes 133

three to four weeks. However, rating can be arrived at shorter timeframes, to meet urgent requirements. The CRISIL rating process includes the following steps: 1. Request for Rating: The rating process starts with the issuers request for rating. Then the rating agreement is signed between the client and the rating agency. The rating agency assigns a rating team for the purpose, and the client provides the relevant information to the rating team along with the rating fees. 2. Analysis of Information: The rating team conducts the preliminary analysis of the information provided by the client. The team also conducts the site visits for the purpose of analysis. 3. Meeting: Then the meetings between the rating team and management of the issuer are conducted and the rating team does the final analysis of the information after clarification of any doubts in the management meeting. 4. Assignment of Rating: The rating team presents its analysis to the rating committee which assigns the rating to the given instrument and communicates the same to the issuer. The rating is then accepted by the issuer or the issuer may appeal the rating agency to further refine the rating. 5. Dissemination of Rating: In case the rating is accepted by the issuer it is disseminated to CRISIL's subscriber base, and to the local and international news media. Rating information is also updated on line on the website of rating agency. 6. Continuous Surveillance: All ratings are kept under continuous surveillance throughout its validity by the rating agency. 5.9.2 ICRA Rating Process The Rating involves assessment of a number of qualitative factors with a view to estimating the future earnings of the issuer. This requires extensive interactions with the issuers management, specifically on subjects relating to plans, outlook, competitive position, and funding policies. Thus, the following steps are included in the ICRA rating process:

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1. Formal Request for Rating: ICRAs rating process is initiated on receipt of a formal request (or mandate) from the prospective issuer. 2. Setting of Rating Team and Analysis of Information: A Rating team, which usually consists of two analysts with the expertise and skills required to evaluate the business of the issuer, is involved with the Rating assignment. An issuer is provided a list of information requirements and the broad framework for discussions. Then the Rating team analyzes that information. 3. Interaction with the Management of the Issuer: Then there are extensive interactions between on Rating Team relating and to the issuers outlook, management, specifically subjects plans,

competitive position, and funding policies. In some cases where the agency finds it necessary, the site visits may be done by the rating team for proper analysis of information. 4. Preparation of Rating Report: After completing the analysis, a Rating Report is prepared by the Rating Team, which is then presented to the ICRA Rating Committee. A presentation on the issuers business and management is also made by the Rating Team. 5. Assignment of Rating: The Rating Committee which is the final authority for assigning Ratings assigns the rating. The assigned Rating, along with the key issues, is communicated to the issuers top management for acceptance. Non-accepted Ratings are not disclosed and complete confidentiality is maintained on them unless such disclosure is required under any laws/regulations. 6. Review of Ratings: If the issuer does not find the Rating acceptable, it has a right to appeal for a review. Such reviews are usually taken up if the issuer provides certain fresh inputs. During a review, the issuers response is presented to the Rating Committee. If the inputs and/or fresh clarifications so warrant, the Rating Committee would revise the initial Rating decision. 7. Mandatory Surveillance: As part of a mandatory surveillance process, ICRA monitors all accepted Ratings over the tenure of the Rated instruments. The Ratings are generally reviewed once every year, unless

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the circumstances of the case warrant an earlier review. The Rating outstanding may be retained or revised (that is, upgraded or downgraded) on surveillance. 5.9.3 CARE Rating Process CARE rating process largely depends on the flow of information from client. Rating decisions are made by rating committee. The CARE rating process includes the following steps: 1. Request for Rating and Assignment of Rating Team: The client requests the agency for rating and after signing of agreement between both a rating team is assigned for the purpose by the rating agency. 2. Analysis of Information: The client is required to submit information and detailed schedules and proper analysis of that information is done by the agency. 3. Interaction with the Client: After the analysis of data by the rating team, the team interacts with the client, and the client responds to the queries raised by the team and provides the additional data as required by the team. Further, the team undertakes the site visits and analyzes the additional data submitted by the client. 4. Assignment of Rating: The internal committee of rating agency reviews the analysis and then the Rating committee assigns rating to the client. The rating so assigned is communicated to the client. The client may then accept the rating or it may ask for review of rating in which case the client has to furnish additional information for the purpose. 5. Publishing of Rating: In case the client accepts the rating then the rating agency will give the notification about such rating in the press, otherwise CARE will not publish the rating. 6. Review of Rating: Each rating is then reviewed formally at least once a year when the analyst of rating agency meets the issuers management. 5.9.4 FITCH Rating Process The FITCH rating process includes the following steps:

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1. Rating Agreement Signed: The rating agreement is signed between the rating agency and the entity wanting to get its instrument rated. 2. Review of Publicly Available Information: FITCHs analysis and rating decisions are based on information received from sources known to it and believed by FITCH to be relevant to the analysis and rating decision. This includes publicly available information on the issuer, such as company financial and operational statistics, reports filed with regulatory agencies, and industry and economic reports. In addition, the rating process may incorporate data and insight gathered by analysts in the course of their interaction with other entities across their sector of expertise. 3. Questions Sent to Issuer: In addition to review of publicly available information the rating agency needs to ask certain special questions from the issuer in order to get out the information (that is not available otherwise) about the instrument. The issuers are required to reply within the stipulated period and that too before the management meeting. 4. Management Meeting: After having received the replies from the issuers, the rating agency conducts the meeting with the management to discuss the relevance of information collected about particular instrument. 5. Further Analysis: After having discussions in the management meeting the rating agency goes for further detailed analysis about the product or instrument to be rated. 6. Credit Committee Presentation and Draft Report: The credit

committee (which if formed specifically for the purpose) gives the presentation of its analysis and a draft report is prepared for the same. 7. Rating Committee Review and Discussion: After getting the draft report from the credit committee, the rating committee reviews it. The rating committee considers the relevant quantitative and qualitative issues, as defined in FITCHs established criteria and methodologies, to arrive at the rating that most appropriately reflects both the current situation and prospective performance. Then the rating decision is communicated to the company and the company accepts that rating.

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8. Preparation of Final Rating Report and Press Release: Once the rating is communicated to the company, it passes comments on the rating decision and after that a final rating report is prepared and rating is communicated to the public through a press release and full rating report is made available to the subscribers. 9. Ongoing Dialogues and Application of Rating to the New Issues: After the completion of the rating process, the rating assigned is continuously reviewed by the agency and the agency continues its dialogue with the company for further rating of new issues. Thus, almost similar steps are followed by all the rating agencies as the Rating process is initiated on receipt of a formal request and it ends with the continuous review of ratings in all the cases. Rating decisions are made in accordance with the criteria applicable to that sector. The methodologies and criteria that determine rating levels are created and revised by the analytical rated. The above given discussion leads us to say that the credit rating agencies are engaged in multiplicity of operations. Besides rating, they also provide information advisory services, research services, business process outsourcing and information technology services. Moreover, these agencies rate similar types of instruments and products with only few differences in them. However, during the period 2001-09, the maximum number of instruments, i.e., 16,762 have been rated by CRISIL. This is followed by CARE, ICRA and FITCH with 3075, 2929 and 1475 instruments respectively during the period. As far as rating methodology is concerned almost similar parameters are considered by all the agencies under study. Rating symbols used by all agencies vary from each other in one way or the other in order to differentiate the symbols of all the agencies from one another. Further the rating process adopted by all the rating agencies is similar as almost same steps are followed by all these agencies. groups. Each of the analytical group considers the appropriateness of its criteria and models as individual transactions are

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