CHAPTER II

REVIEW OF LITERATURE

The literature available on economic reforms, financial sector

reforms and NBFCs can be broadly categorized as follows:

1. Reports of various committees;

2. Books;

3. Information brochures / booklets / seminar / conference / workshop

reports and papers;

4. Project reports and doctoral theses; and

5. Articles published in leading newspapers, journals and magazines.

A few important of them that have a direct relevance to the

proposed study are reviewed here under:

Goldsmith (1969)1 pioneered the cross-country work in the area

of NBFCs. He traced the relationship between the mix of financial institutions

and economic development for 35 countries over the period 1860-1963.

Srivastava (1984)2 in his paper entitled, “Two Leading

Monetary and Fiscal Reforms in India and their Impact”, asserted the view

that fiscal reforms have benefited the rich community and the monetary

reforms have favoured the poor.

Goacher et. al. (1987)3 have reviewed the development of non-bank

sector and conducted a detailed economic analysis of its main components,

52
with special emphasis on building societies, insurance companies and pension

funds. He has attempted to study the growth of NBFCs taking into account its

impact on the banking sector.

Verma (1995)4 in his book “Concepts, Practices and Procedures

of Non-Banking Finance Companies” has discussed at length the concepts,

practices and procedures regulating and governing the NBFCs and has

evaluated the role of leasing industry in equipment buying decisions of

business firms in private corporate sector.

Goel (1996)5 stressed the need for having well regulated

financial intermediaries and identified the general reasons for the growth of

financial institutions.

Bhattacharya (1998)6 evaluated the ongoing reforms in India.

His study traced the links between the fiscal and financial reforms and

concludes that the fiscal reform is a must for financial reform in India. His

study concluded that the Indian financial system is still in a critical condition

and urgent reform measures are necessary to make it viable.

Anand (2000)7 analysed the factors leading to the rapid growth

of NBFCs during the 1990s and showed that the transition phase from a

regime of controls to one based on market signals could be characterized by

excessive entry into financial services. This could be particularly true where

the initial conditions are marked by a weak regulatory regime. Institutional

reform is perhaps the most difficult part of the reform process, mainly because

financial regulation is not an exogenous process that can be imposed on the

financial institutions and markets of a country.

53
 Ashok Desai (2002)8 in his article on ‘A Decade of Reforms’

was explained the causes for the present economic crisis even after the

reforms. He observed that it is not due to the reforms in industry, trade and

capital markets, but due to the undone reforms in industrial protection,

exchange rate policy, railways and transport.

Bimal Jalan (2002)9 in his article on ‘Before and After Ten

Years of Economic Reforms’ emphasized urgent reform programme in

addition to economic reforms to revitalize the governance and public delivery

system at all levels of government-centre, state and districts.

Shiva Rama Krishna Rao (2002)10 in his keynote paper,

“Prospects of Financial Sector Reforms in India”, discussed the first and the

second generation reforms relating to financial sector in India and observed

that financial sector reforms have aggravated the imperfections in credit

market and have led to regional disparities by diverting credit from

agriculturally rich states like Punjab to business based states like Maharashtra,

Tamil Nadu and Delhi.

Malla Reddy (2002)11 in his paper “Financial Sector Reforms

and Capital Markets in India”, explained that the wide fluctuations in BSE

market are due to the large scale inflow / outflow of Foreign Institutional

Investments (FIIs). He called for imposing regulatory norms of FIIs.

Anupam Sharma’s (2002)12 paper “Financial Sector Reforms

and Capital Markets” attempted to highlight some of the policy issues facing

the liberalization of the financial sector in India, with special attention to the

capital markets. It focuses on the initiatives taken such as formation of SEBI,

54
NSE, entry of FIIs, issue of GDRs / ADRs, introduction of rolling settlement,

electronic trading, incorporation of derivative instruments, rationalization of

margins, and introduction of book building mechanisms. He asks for suitable

modifications in the existing system to improve legal, accounting and physical

infrastructure.

Tandon (2002)13 in his paper “Financial Sector Reforms-Issues

before the Seminarians” opined that developing financial institutions and

markets are important for growth. According to him, the reforms cover

institutional, supervisory, legislative and technological aspects and these are

preventive in nature so as to build a strong and robust banking system that

withstands the pressures of globalization.

Vashist (2002)14 in his paper, “Capital Market Reforms in

Retrospect” traced the history of growth and development of capital markets.

He argues that further reforms are necessary to make capital market

transparent, or sell extremely well diversified portfolio of stocks.

Vasudeva (2002)15 in his paper “Financial Reforms and the

Budget” has discussed the shift in Budget (1999-2000) that took place as a

part of a strategy of financial reforms. He stated that the budget could not

proceed far in the direction of reduction of government expenditure and

removal of the fiscal deficit. The study stresses upon the demand for

autonomy to RBI so that it is free to use monetary policy as a device to

control inflation, manage the balance of payments and influence growth.

Agarwal and Naveen Kumar (2003)16 in their article “Economic

Reforms _ Retrospect and Prospect” discussed financial sector reforms,

55
stabilization and economic growth in developing areas with special reference

to India and set an agenda for the new millennium. Their study attempted to

examine the contribution of financial liberalization in selected developing

countries, including India during the period 1980-1998 to economic growth,

with the help of their actual experience and by Regression Analysis both on

cross-sectional and time series data.

Arora (2003)17 in his article entitled, “Financial Sector Reforms

and Service Sector: A Study of Life Insurance Industry in India”, discussed

the objectives of LIC and examined the major improvements initiated by LIC

since its inception. It elaborates the likely impact of the Act on life insurance

market, more specifically on LIC with reference to autonomy granted,

response of LIC to market changes and competitors, professionalization in

making investments, consciousness of reduction of service cost,

improvements of service quality, facing promotional war with private insurers

and the productivity of its field force. It also discusses the competitive

strengths, weaknesses, opportunities and threats in the emerging scenario.

Kaur, Gian and Navdeep (2003)18 in their article, “SBI Group

versus Nationalized Banks: Impact of Banking Sector Reforms”, comparative

analysis of the SBI group and the nationalized banks over the pre-reform and

post-reform i.e., 1981-99 periods and indicated that the former group has been

a better more shock absorber than the latter group. The post-reform period and

the growth of most of the variables were moderate during 1991-98.

Anil Kumar et al. (2003)19 in their paper have examined the

financial sector reforms carried out in the first phase. They have discussed the

56
role of the financial sector and essence of reforms. They observed that the

specific reform measures undertaken have varied from country to country as

also the pace of reforms and their sequencing. They consider financial sector

reforms important, as financial sector is the lubricant for the entire economy.

Manwani (2003)20 states that the Committee on Financial

System 1991 introduced and gave real good direction to the banking system.

The Second Committee on Financial Reforms (1998) made the norms even

more stringent. He feels that the decision to introduce private sector banks in

India has resulted into a healthy competition amongst the banks and has

helped in improving the technology of banking.

Guru Murthy (2003)21 in his paper entitled, “Globalization in the

Economic Reforms Period of Indian Economy”, examined the meaning and

scope of globalization and other aspects such as foreign trade and investment,

monitoring and feedback. He called for a serious introspection of policy

makers in view of the large-scale nepotism and corruption, and oppression of

women and poor conditions prevailing in our country.

Venkata Narayana (2003)22 in his article on, “Impact of

Economic Reforms in India with special reference to Service Sector” analyzed

the Sectoral Contribution to GDP and revealed the fact that economic reforms

have promoted the growth of service sector in terms of both net value added

and employment generated.

Ramakrishna et al. (2003)23 in their book “Economic Reforms-

Retrospect and Prospect” have examined the consequences of economic

reforms by taking into account the nature of the existing socio-economic

57
structure within which these reforms are being implemented. They have

concluded that without simultaneously pursuing reforms for restructuring the

prevailing institutions, economic reforms as conceived and implemented, at

present, cannot yield desired results.

McKinnon and Shaw (1973)24 in their study on “Money and

Capital in Economic Development” have pointed out the advantages of

reducing financial repression in the domestic financial system. They

concluded that lifting financial restrictions can exert a positive effect on

growth rates as interest rates rise toward their competitive market equilibrium.

According to this tradition, ceilings on interest rates reduce savings, capital

accumulation, and discourage inefficient allocation of resources. Additionally,

it was pointed out that the repression can lead to dualism in which firms that

have access to subsidized funding will tend to choose relatively capital-

intensive technologies, whereas those not favored by the policy will only be

able to implement high-yield projects with short maturity.

Murthy (1992)25 in his study “Leasing Industry in India-Study of

Selected Equipment Lease Contract in India” evaluated the role of leasing

industry in equipment decisions of business firms in private corporate sector.

Jayaram Reddy (1997)26 in his thesis “Accounting Practices in

Lease Financing Companies- A Study of Selected Companies” studied the

accounting practices in a few select lease financing companies.

Rachna Baid (1998)27 in his thesis “Management of NBFCs-A

Study on Select Units” examined the role of regulatory framework in the

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performance of NBFCs based on their aggregate study of the financial

performance and also made an analysis of managerial effectiveness.

Suresh (1999)28 in his study “NBFCs’- An Assessment of

Performance” has analyzed the regulation of NBFCs on the basis of RBI

Amendment Act 1997 and credit rating methodology. By using Ratio analysis,

he proved that the performance of select NBFCs was good.

Antony Pon Vijay (2000)29 in his study on “Managerial

Ownership and Performance of NBFCs in India” has analyzed the association

between the managerial ownership and performance at various levels giving a

bird’s eye view of the growth and development of NBFCs and regulatory

aspects of NBFCs.

Tarapore (1960)30 in his article entitled “Financial Sector

Reforms and Non-Banking Financial Companies” has highlighted the

financial sector reforms, more specifically in the area of non-banking financial

companies.

Srinivasan (1991)31 in his paper “How Profitable are Finance

Companies Today” has analysed the deposits held NBFCs and explained the

growing role of NBFCs in comparison with the deposits of SCBs.

Seema Sagar (1995)32 in his paper “Financial Performance of

Leasing Companies, During the Quinquennium Ending 1989-90” has

examined the financial performance of ten leasing companies at disaggregate

level, and compared them with other groups of NBFCs for the period 1985-

90. This study revealed the performance of only ten leasing companies and

not the overall performance of NBFCs.

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 Shankar (1995)33 in his article “Capital Adequacy Norms for

NBFCs” explained the prescribed norms and accounting standards for NBFCs

on the lines of the norms prescribed earlier in respect of banks. Besides

examining the technicalities involved, this article also analyzed the strength of

the prudential norms.

Gulatim (1996)34 in his article stated that leasing business has

come to be recognized as an important means of industrial financing and he

highlights that leasing business has recorded appreciable growth along with

notable problems faced by these leasing companies.

Rangarajan (1996)35 in his article “Role of Non-banking Sector

in the Financial Sector Development” has examined the role being played by

almost all components of non-banking financial sector and explained how this

sector paves way for the further development of an economy through its

contribution.

Gaurav (1997)36 in his article has said that Indian financial

companies are way behind their foreign counterparts when it comes to

scientific risk management. They need to get them out together urgently if

they need to thrive and survive in the emerging scenario. He opines that

NBFCs have not been doing well, both in terms of earning performance and

the movement of their stock prices, since 1994.

Agarwal, Sanjeev (1998)37 in his paper “Regulation of Non-

banking Financial Companies for Investor Protection” analyzed the regulatory

environment of NBFCs and its impact on the sector.

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 Guruswamy (1998)38 in his article “Non-Banking Financial

Companies-Rating Blues” discussed the implications of minimum credit

rating requirements on NBFCs and concluded that credit rating methodology

would protect the interest of the depositors.

Harihar (1998)39 in his article “Non-Banking Finance

Companies, The Imminent Squeeze” examined the financial performance of

all NBFCs taken together in terms of cost of debt, operating margin, net profit

margin, return on net worth, asset turnover ratio, etc. The study reveals the

aggregate performance of different groups of NBFCs separately.

Vijayaragavan (1998)40 suggested that sufficient finance should

be made available to NBFCs through development financial institutions which

provide them only to select NBFCs. And he also suggested for revival of

NBFCs through a formation known as Hire Purchase Refinance Corporation,

preferably as a joint sector enterprise with contributions towards equity from

all registered NBFCs. He brought to light the financial needs of mainly hire

purchase companies and insisted upon the availability of credit by RBI.

Thakurta (1999)41 in his article “Problems and Prospects of

Leasing and Hire Purchase Companies” has listed down the views of different

people on what is an economic reform? To some of them, it may be opening

up the country’s door wider to foreign investment, value added tax, and

privatization and integration of Indian economy with the rest of the world. To

others, it may be exactly the policy measures responsible for slow economic

development, sharper inequality, higher unemployment and widening regional

imbalances.
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 Chakrabarthy (2000)42 in his article “The Economy Had on

Whom?” studied the union government tax revenue as a proportion of GDP.

He opined that just because the tax-GDP ratio has been declining in the recent

years, there is no scope to raise the ratio. The ratio of two major indirect taxes,

customs and excise to GDP has been on the decline since 1990-91.

Kavitha (2000)43 in her article on “New Private Banks may Push

NBFC out of Truck Financing” has observed that the truck financing business

of NBFCs is weakening, as the private banks have started granting truck

finance at 11 per cent to 13 per cent as against 16 per cent of NBFCs. The

RBI had issued a notification in 1998 that banks should grant truck finance

through NBFCs, and this situation of truck finance loans by private banks can

be avoided if the banks treat NBFCs as a complement instead of a competitor.

Bhatt Sham (2000)44 made an attempt to examine critically the

financial sector reforms with special reference to the Narasimham Committee

Report and studied their impact on the major indicators of the banking sector.

The study revealed that the reforms have contributed to an improvement in

banking sector indicators such as number of banks, number of branch offices,

deposits, investments and priority sector advances of scheduled commercial

banks.

Subhabashish (2000)45 in his article on “NBFCs: Is the Future

Bright?” highlighted the growth of NBFCs in the nineties and the reasons for

their downfall suggesting also the ways of improving the growth of NBFCs.

He called for immediate mergers, and entry into insurance business likes

Kotak Mahindra, Sundaram Finance, etc., and increase in the quality of their

services.
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 Debabroa (2002)46 in his article “Financial Disintermediation”

has explained the importance of financial disintermediation as the means of

development in the era of liberalization world over. The effects of such

disintermediation process on the economy have been dealt with.

Llewellyn (1986)47 attempted to answer certain issues relating to

the need of regulation in the financial system, its purpose, form and efficiency

compared with alternative mechanism, its cost and the balance to be struck

between the benefits of regulations.

Amita (1998)48 has made an attempt to examine the relative

financial performance of different groups of NBFCs for the period 1985-86 to

1994-95 in terms of profitability, leverage and liquidity. The study has found

that there is a significant difference in the profitability, leverage and liquidity

ratios of various categories of NBFCs.

Fischer (1993)49 in his cross-sectional and panel regressions for

a large set of countries, found a negative relationship between inflation and

growth. This is because inflation reduces growth by reducing investment and

productivity.

Bruno and Easterly (1998)50 examined the relationship between

inflation and economic growth for Latin American countries between 1960

and 1992.They argued that a negative association between inflation and

growth is due to a long period of high inflation.

“Key Advisory Group Recommendations on the Non-Banking

Finance Companies (NBFCs) under the Ministry of Finance” (2012)51. The

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recommendations are aimed at removing the bottlenecks and introducing

measures and creating a prudential environment for effective functioning of

the NBFCs in the country. The group is of the opinion that the

recommendations are critical for the growth of NBFCs; and also for achieving

the broader objectives of financial inclusion and extension of effective

prudential framework for the entire financial sector, including NBFCs.

Neetha Maheswari and Rajeev Biyani (2012)52 examined the

effect of inflation on the Indian economy using CPI indices. Monthly

variations of CPI indices for the last five year are presented, which indicates

that the inflation is almost continuously raised (from 5.265 to 16.22%).

Measures taken by RBI (changes in CRR, RR and RRR) to control inflation

are reviewed. These measures are effective to check the inflation upto a

certain extent only, as there are many other factors such as global recession,

agricultural production, etc., which influence the growth rate. In brief, there is

no direct exclusive relationship between growth rate and inflation, as the

growth rate depends on many other factors besides rate of inflation.

Jim Berg (1999)53 conducted a study – “Fundamental Analysis

Using Internet”. The study examined that fundamental analysis which looks at

the fundamental issues that drive the value of a particular company. These

issues include its financial position, the industry sector, and the current

economic environment. The objective was to identify companies that may be

considered undervalued in the market with a view to investing when the time

is right. In this study, Jim Berg outlined more about what fundamental

analysis is and how it could be used.

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 In this study, John Colnan (1994)54, Senior Research Analyst

from SHAN Stock Broking’s Research Department, provides some briefs

pointers on what information to look for and how to make sense of what is

available.

Mark Bauman (1996)55 conducted a study named, “A Review of

Fundamental Analysis Research in Accounting”. This paper has outlined the

development of fundamental valuation model and reviews related empirical

work. First, an accounting-based expression for a firm’s equity value has been

developed into a rich theoretical framework. They verified its descriptive

validity regarding the mapping of accounting numbers into stock prices. This

paper identified three major issues associated with practical implementation of

the model; the prediction of future profitability, the length of appropriate

forecast horizon, and the determination of the appropriate discount rate.

John Lynch (1998) conducted a study56, “Share Market

Analysis-Fundamental Vs Technical Analysis”, which reveals that in recent

times, there has been a bigger push towards stock market research, which is

being conducted by private individuals. This has been possible through the

vast amount of information on the Australian stock market, now available

online to any subscriber. This article explains the difference between the

fundamental and technical analysis the most common method adopted to

conduct research on the performance of stock markets.

Vastone et. al. (2004)57 conducted a study entitled “Enhancing

Security Selection in the Trading from the Aspect of Security Selection”. In

practice, it is unrealistic for a financial trader to participate in the full market

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of tradable securities competing for investment capital. Essentially, there are

two main methodologies used namely, fundamental analysis and technical

analysis. This paper examines the practice of fundamental analysis and

demonstrates how neural networks can be practically employed to enhance the

fundamentalist selection process.

Reddy (2012)58 in his paper “Industrial Financial Services by

APSFC – A Study” highlighted the relationship between sanctions and

disbursements, gross sanctions and sanctions granted to the SSI sector –

purposewise, constitution wise, loan type wise, social-class wise, region wise,

classification of assistance and some viable and useful suggestions were

offered to tone up the overall performance of the Corporation for industrial

development in Andhra Pradesh.

Bhat (2012)59 in his article “Financial Statement Analysis of

Andhra Pradesh State Financial Corporation” found there is a need to reduce

the operating expenses to improve the profit ability and the corporation should

frame a good credit policy to speed up the collection period.

Mahesh Thakkar (2011)60 in his article “Figures Published by

the RBI at the end of March 2010” shows that the total assets of the NBFC

sector, at Rs. 6,56,185 crore, forms 10.9 per cent of the assets of the

commercial banking system. NBFCs had borrowings of Rs. 1,70,746 crore,

mainly from the banking system. They had also issued debentures of

Rs. 1,38,722 crore and the investors include banks. Thus, a sizeable portion of

the finance is lent by banks to NBFCs at lower rate of interest against loans

granted by the latter to agriculturists, with jewelry as security. The provision

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to classify such loans as priority sector advance is necessary, where this target

is achieved by commercial banks through NBFCs.

Sornaganesh and Thangarani (2014)61 in “Global Financial

Crisis and Its Impact on Mutual Fund Industry in India” tell that the

September 2008 global financial crisis has put more pressure for this industry

because of funding interlink ages among NBFCs, mutual funds and

commercial banks. The ripple effect of the turmoil in American and European

markets led to liquidity issues and heavy redemption pressure on the mutual

funds in India, as several investors, especially institutional investors, started

pulling out their investments in liquid and money market funds. Mutual funds

being the major subscribers to commercial papers and debentures issued by

NBFCs, the redemption pressure on MFs translated into funding issues for

NBFCs, as they found raising fresh liabilities or rolling over of the maturing

liabilities very difficult. Drying up of these sources of funds along with the

fact that banks were increasingly becoming risk averse, heightened their

funding problems, exacerbating the liquidity tightness. RBI undertook many

measures, both conventional as well as unconventional, to enhance

availability of liquidity to NBFCs such as allowing augmentation of capital

funds of NBFCs through issue of Perpetual Debt Instruments (PDIs), enabling

as a temporary measure, access to short term foreign currency borrowings

under the approved route, providing liquidity support under Liquidity

Adjustment Facility (LAF) to commercial banks to meet the funding

requirements of NBFCs, Housing Finance Companies (HFCs) and Mutual

Funds, and relaxing of restrictions on lending and buy-back in respect of the

Certificates of Deposit (CDs) held by mutual funds.

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 Chari (1997)62 found that given the scenario, while one

understands the need “for a regulatory framework to improve the efficacy of

the credit and monetary policy”, in the words of Shah Committee, it would be

desirable and in the interest of the economy, if well managed NBFCs are

given encouragement, support and access to funds from the commercial

banking system, to enable them to serve the financial sector much better.

Ananda Bhoumik and Arshad Khan (2008)63 found that “since

the 90s crisis, the market has seen an explosive growth for five years (2002-

2007); asset CAGR of Fitch analysed NBFCs was 40 per cent. In comparison,

the CAGR of Fitch analysed banks was 22 per cent.”

Reddy (2009)64 avers that there is a general agreement now that

the scope of regulation in most countries had been restricted to banks in the

past, and that it should now be extended to non-banks as well as to the shadow

banking system. The scope of regulation in India currently includes NBFCs in

addition to insurance, pension funds and mutual funds. The RBI monitors and

regulates deposit-taking NBFCs and capital requirements are related to the

nature of business as well. Systematically important NBFCs, defined by size,

are more intensely regulated. Inspite of the RBI’s regulations, however,

during the crisis there was significant pressure on the liquidity of NBFCs and

mutual funds, warranting special windows of refinance by the RBI. The RBI

also identified conglomerates for purposes of supervisory coordination led by

a ‘lead regulator’.

Milind Gadkariet et al. (2010)65 found that profitability is

expected to be lower than historical levels due to conservative ALM

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management, higher provisioning and avoidance of high yielding unsecured

loan segments. However, profits are at the same time expected to be much

more stable and less susceptible to liquidity related pressures going forward.

Nidhi Bothra and Kamil Sayeed (2011)66 found that NBFCs

have been pioneering at retail asset backed lending, lending against securities,

etc., and have been extending credit to retail customers in under-served areas

and to unbanked customers.

Anandan (2010)67 says that “the real challenge in raising funds,

either equity or debt, lies in the organisation’s ability to demonstrate the

capability by maintaining growth and meet the expectations of the investors or

lenders as the case may be.

Suresh Vadde (2011)68 said that it was observed from the

consolidated results of NBFCs that growth in income, both main as well as

other income decelerated during the year 2008-09. Though growth in total

expenditure also declined, it was higher than the income growth. The growth

in expenditure was mainly driven by the growth in Interest payments. As a

result, operating profits of the selected companies declined along with

diminishing profitability during 2008-09. The share of external sources in

total sources declined during 2008-09, when compared with the previous year.

However, they continued to be the major sources of finance”.

Sarkar (1994)69 studied different guidelines regarding credit

rating in India and gave certain suggestions for improvement of credit services

in India. He suggested that more credit rating agencies should be formed in

addition to CRISIL and ICRA to ensure healthy competition among these

69
agencies and to provide better, efficient and effective services to the users.

The ratings assigned by the agencies must be revised frequently and these

agencies should continuously watch the performance of companies rated by

them. The fees charged by the agencies should also be revised from time to

time to meet their expenditure and thus, offering unbiased and effective

services to the users. For the rating purpose, the agencies should rely on

statistical methods too, in order to make their rating services more efficient.

Gopal (1995)70 examined the practices and procedures followed

by two Indian credit rating agencies CRISIL and ICRA. He also analysed the

effect of bond rating changes on the security prices. He observed that the

basic approach to rate certain instruments were similar for all the rating

agencies though they all used different terminologies. He also pointed out that

the investors did not take into consideration the rating of debt instruments

while investing in the equity shares; and the credit rating agencies were not

information specialists as the investors might have taken information from

other sources also. He suggested that the rating agencies would have to take

unsolicited ratings and should publish their options in order to make their

operations more transparent and useful.

Kumar (1995)71 studied the history of credit rating at

international as well as at the Indian levels. The author explained that the

rating is based on the status of the industry, its past performance, its future

prospects, performance commitments, management strategies and on SWOT

(Strength, Weakness, Opportunities and Threat) analysis. The author revealed

that credit rating is an efficiency chip to banks because credit rating of

borrowing companies or individuals would help banks to restore and maintain

their financial soundness.

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 Singh (1996)72 in his paper revealed that as the number of

companies borrowing from capital market increased, the investors felt a need

for an independent and credible agency which could impartially judge the

credit quality of debt obligations of different companies. So, in order to fulfil

this requirement, credit rating agencies were set up in India. The author has

explained the conceptual framework of credit rating and its various types,

including bond rating, equity rating, commercial paper rating, the borrower’s

ratings and sovereign rating. The author has assessed the role of credit rating

agencies and pointed out that credit rating agencies could meet the needs of

corporate borrowers in particular and the common investor in general.

Rao (1999)73 in his article “Credit Rating” described that credit

rating agencies were gaining importance as information providers to investors,

issuers, intermediaries and regulators. He explained the genesis, features and

functions of credit rating agencies and revealed that the ratings were opinions

of the rating agencies on a specific issue of a corporate entity. Thus, credit

ratings encourage investors to inflow their savings into the capital market

activities, which resulted in the productive use of funds thus enhancing

production. So, the author has suggested that keeping in view the significance

of credit rating for both joint stock company and the investing public, the

government should enact a law to mandate and popularize credit rating in

Indian public and private corporate sectors.

Reddy (2000)74 tried to investigate the changing perspectives

and issues of credit rating in India. He gave an overview of credit rating and

agencies involved in such ratings both at the Indian and the international

levels, the benefits expected by the issuers, investors and regulators from
71
credit rating and the criticisms leveled on such rating agencies. He also

focused on the issues relating to sovereign rating and use of credit rating by

regulators especially in the banking sector. The author has said that the

appropriate disclosure of information and accounting standards across the

board and freedom of expression and independence of credit rating agencies

would help in improving the rating system. Further, the credit awareness of

the investors on the operations of the rating systems should be encouraged to

make the credit ratings more viable.

Arora (2003)75 made an attempt to evaluate the credit rating

system in India. The main objectives concentrated in the study were to study

the factors and their relevant weight-age in bond rating and to develop a

model for testing bond rating by various agencies. The results of the study

indicated that both qualitative and quantitative factors were important for

bond rating, but the findings revealed that credit assessment done by credit

rating agencies was relatively weak. The post-rating performance of

companies did not justify initial ratings assigned to them. Further, the external

inconsistency and variability in rating of bonds was observed due to changing

corporate business environment and poor forecasting abilities of the analysts.

Kraussl (2003)76 in his working paper assessed the role of credit

rating agencies in the international financial market, particularly in the

emerging market economies in the second-half of 1990s. Credit rating

agencies have played an important role in financial decision-making by

providing information about credit risks associated with different financial

investments and they have provided standardized in evaluation of the likely

risks and returns associated with alternative investments. The role of

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sovereign credit ratings has also been examined by the author in financial

markets of the emerging economies because sovereign credit ratings might

convey certain new information about any country’s credit worthiness and

thus might encourage financial market downturns. Therefore, the study

inferred, that the credit rating agencies affect the size and volatility of

emerging market lending. These results were stronger in the case of

government bond downgrades. Further, the study also revealed that the

speculative grade rated emerging market economies were more vulnerable to

interest rate changes in the financial markets.

Azahagaiah (2004)77 in his study, made an attempt to highlight

the practices and problems of credit ratings in India. He studied the

perceptions of Indian investors and revealed that out of various investment

options, maximum respondents (37%) preferred company deposits. The

analysis on the basis of investment showed that 35 per cent of respondents

depend on credit rating for their investment decisions. The analysis also

revealed that majority of the respondents (50%) depended on CRISIL ratings,

followed by those of ICRA (30.43%). The study concluded that even though

with many problems, the issue with a credit rating has more chances of getting

subscribed than that without a credit rating.

Gill (2005)78 in her research paper, made an attempt to examine

the performance of ICRAs on the basis of average default rate. The study

relates to the long-term debt instruments over a period of seven years from

1995 to 2002. The author brought out that ICRAs performance about the

company rated by it had not been up to the mark and defaults on ICRA rated

long-term debt instrument are the highest in manufacturing sector, followed

73
by financial sector. Further, the study found that many of the debt issues that

defaulted during the period were placed in ICRAs investment grade until just

before being dropped into default grade. So, the author has suggested that

excessive reliance on credit ratings should be reduced and proper steps should

be taken to make the working of credit rating agencies more accountable.

Upadhe (2005)79 in her study, concentrated on an overview of

the credit rating system in India. The paper explained the various factors being

taken into consideration by rating agencies which include past performance,

profit turnover, cash flow and fund flow, nature of competition etc., and

various types of ratings being done by ICRA. The paper also gave details of

various credit rating agencies in India like CRISIL, ICRA, CARE and

ONICRA. The author has criticized the working of these agencies and

suggested that a standardized fee structure and standardized rating grade

system should be adopted by all rating agencies in order to simplify the

procedures.

Kanagaraj and Murugesan (2006)80 in their paper, tried to

evaluate the relationship between credit rating and financial variables. The

sample of the study includes the group of manufacturing firms whose

debentures were rated by CRISIL and the study covers a period of six years

from 1996-97 to 2001-02. The author had grouped the important variables

which form the basis for rating classification, into nine financial dimensions

including profitability, liquidity, activity, debt service coverage, liabilities

structure, size, firm’s age, leverage and sales turnover. The authors revealed

that there is a very good relation between the financial performance of a firm

and its credit rating classification, while the size of the firm, its working
74
capital management and liabilities structure are given a moderate

consideration in rating assignments.

Vepa (2006)81 in her study, made an attempt to trace trends in

the corporate debenture issues of the private sector in India and the rating

trends of the same with special reference to the pioneer rating agency of India

– CRISIL. The time period of the study was from 1991-92 to 2004-05. The

author observed that the number of public and rights issues had decreased

during the period under study, whereas the percentage of private placement

out of total issues had increased consistently. Many of the debt instruments,

including debentures, were downgraded during the period but the presence of

multiple credit rating agencies gave scope to issuers to approach more than

one credit rating agency with a hope to secure better ratings. The author

highlighted that when credit rating became mandatory in 1992-93 in India,

private placements of debentures gained importance as a preferred route of

financing as credit rating was not mandatory for private placements; but in

spite of that, the debentures or issues which were rated were considered more

safe and reliable than the unrated ones by the investors.

Reddy and Gowda (2008)82 in their paper, explained the

importance and problems of credit rating in India. They also highlighted the

basis of credit rating and credit rating practices prevalent in India. For this

purpose, the opinions of a sample of investors from Hyderabad were taken.

The results of the study inferred that majority of the respondents were aware

of the existence of various credit rating agencies, including CRISIL, CARE,

ICRA, etc., About 40 per cent (80 out of 200) of the respondents depend on

credit rating for their investment in debt instrument than the other credit rating
75
agencies. The study worked out that though there is confusion among various

investors due to existence of more than one credit rating agency, majority of

them are satisfied with the guidance of credit rating agencies.

Bhattacharyya (2009)83 in her paper, evaluated the issuer rating

system in India with special reference to ICRAs issuer rating model, since

ICRA introduced the issuer rating services in India in 2005. The author

identified various quantitative variables with major impact on the issuer rating

along with their relative importance using the help of discriminate analysis.

The time period of the study is from the date when the issuer rating started in

2005 to March 2008 and the sample consists of 17 companies which have

been rated by ICRA during this period. The study highlighted that out of the

ten variables being used by ICRA for issuer rating, the PBIT and debt plus net

worth ratio, current ratio and net sales growth rate play important roles but the

qualitative factors can also affect the ratings at any time.

Saveeta and Verma (2001)84 analyzed the performance of banks

from a profitability point of view, using various parameters.

Most of the studies (Ganesan, 200185; and Gupta and Jain,

200386) compared the performance of public, private and foreign banks by

using measures of profitability, productivity and financial management.

Janaki Ramudu and Durga Rao (2006)87 conducted a study on

the fundamental analysis of Indian banking industry, by analyzing the

performance of SBI, ICICI and HDFC.

Dangwal and Reetu Kapoor (2010)88 conducted a study on the

financial performance of commercial banks. In this study, they compared the

76
financial performance of 19 commercial banks with respect to eight

parameters and they classified the banks into excellent, good, fair and poor

categories.

Raj Mohan and Pashupati (2010)89 conducted a study to evaluate

the performance of TAICO Bank using profitability ratios.

Dilip Kumar Jha and Durgasankar Sarangi (2011)90 conducted a

study on the performance of new generation banks using modern techniques

to rate the banks.

Prasad and Chari (2011)91 conducted a study to evaluate the

financial performance of public and private sector banks in India. In this

study, they compared the financial performance of top four banks in India

viz., SBI, PNB, ICICI and HDFC and concluded that on overall basis HDFC

bank rated top most position.

Gunjan Sanjeev (2009)92 conducted a study on the efficiency of

Indian public sector banks and found that the efficiency of public sector banks

has not increased during the period 2003-07.

77
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