Credit Rating Information Services of India Limited (CRISIL)

Introduction
An increased range of borrowers, increasingly complex financial transactions and large quantum of debt borrowed in India warranted the need of provider of objective, accurate and timely information of credit quality. To fulfill this objective, CRISIL was incorporated in 1987 as public limited company. Today CRISIL is Indias largest and most respected rating agency. CRISILs majority share holder is standard $ Poors the worlds foremost provider of independent credit rating, indices, risk evaluation, investment research and data. Leading corporation worldwide are rated by S&P. S&Ps credit risk tracer (CRT) has analyzed about 10 lakh SMEs in Europe. Established in 1987, CRISIL has been promoted by leading Indian financial institutions like The Industrial Credit and Investment Corporation of India Limited (ICICI), Unit Trust of India (UTI) and Housing Development Finance Corporation Limited. The major shareholders include Standard & Poor's, ICICI, UTI, Life Insurance Corporation, General Insurance Corporation and a host of nationalized and foreign banks. CRISIL became a public limited company in November 1993 and is presently a quoted company on the Bombay Stock Exchange and the National Stock Exchange . Crisil pioneered the concept of credit rating in India and developed the framework and methodology for rating debt in the context of the India financial, monetary and regulatory system. CRISIL today has attained a pre-eminent position in the rating industry. It is the largest rating agency in the South East Asia region and is amongst the four largest ratings agencies in the world. In February 1996, CRISIL entered into a strategic alliance with Standard and Poors .The relationship got strengthened with S&P with CRISILs working credibility, competence and management. The relationship got further strengthened with S&P taking up a majority stake in CRISIL. CRISIL started with the rating of corporate

dept and other the years extended its scope of activities. Its range of services one includes rating services, advisory services and investment research related services.

CRISIL Business and Services

CRISIL Limited is Indias leading Ratings, Financial News, Risk & Policy Advisory Company. CRISIL helps clients manage and mitigate business and financial risk, enables markets to function better through benchmarks and best practices and provides workable inputs in shaping public policy. CRISILs services and products span the entire value chain starting from data collection and management to providing opinions and integrated solutions. These products and services are backed by highest standards of integrity, independence and analytical rigor, making CRISIL the most credible provider of these services in the market. CRISILs clients depend upon it to constantly deliver objective opinions and the most workable solutions. Through a sustained theme of innovation and thought leadership, CRISIL has led the markets with new thoughts, new analytical frameworks and new approaches, placing it in its leading position in the Indian market place. to all participants in the financial markets. CRISIL Infrastructure Advisory Group provides workable policy and transaction level solution to Central and State governments, public sector and private sector entities, that help them make the difference. CRISIL Investment and Risk Management Group (part of CRISILs advisory services) and Global Data Services India Ltd (GDSIL), both CRISIL subsidiaries. CRISIL Ltd provides business knowledge through research on industries, companies and the economy, GDSIL provides analytical data base to support CRISIL as well as external clients in there research and analysis. CRISILs news services (CRISIL Market wire CMW) are Indias leading provider of real time news and analysis on India debt markets.

OBJECTIVE OF CRISIL
The main objective of CRISIL is as under: 1. To assist investors in making investment decisions 2. To assist issuers in raising funds from a wider investor base 3. To provide a marketing tool to entities placing debt with clients

4. To provide regulators with a market driven system for bringing about the development of the capital markets. 5. To institutionalise a viable and market-driven system of credit rating in India 6. To facilitate individuals in investing in financial instruments rather than in Nonproductive assets. 7. To rate debt obligation of Indian Companies. 8. Its rating provides a guide to the investors as to risk of timely payment of interest and principal on a particular debt instrument.

CRISILS RATING PROCESS

CRISILs rating processes is as given below: 1. Request of the Company: The rating process begins at the request of a company decisions of having its issue obligations under proposed instrument rated by CRISIL. 2. Assignment to Analytical Team: On receipt of the above request, CRISIL assigns the job to an analytical team that will be responsible for carrying out the rating assignments. 3. Obtaining and processing of Data: The analytical team, which generally contains experts visit the companys plant and inspects the operations. And obtains requisite information from the client company and analyses the same. To obtain clarification and better understanding of clients operations the team meets and interacts with companys executives. 4. Findings Presentations: The findings of the team completion of investigation process are presented to rating committee, which comprises some directors not connected with any CRISIL shareholder which then decides on the rating. Within the industry is evaluated from different angles i.e, market share and stability of markets share, competitive advantage through marketing distribution strength and weakness. Marketing/support

service infrastructure, diversity of products and customers bases long term sales contract, strong marketing position of the company within the industry attracts better grade rating. 5. Operating Efficiency: Operating efficiency of the company is assessed vis--vis competitors comparison. For instance, thee pricing or cost advantage, availability cost, quality or race material, availability of labour and labour relations, cost effectiveness of plant and equipments level of capital employed and productivity, energy cost etc. taken into consideration. 6. Legal Position: Legal position of issue of debt instrument is assessed by : letter or offer, terms of debentures trust deed, trustees and their responsibilities, system of timely payment of interest and principal, or protection of forgery and fraud . Thus, business covers all relevant aspects as related to business. 7. Communication of decision: The decision of the rating committee is communicated to the client company with remarks. That the company if it so likes, may present some additional information for reconsideration of rating grade assigned to this instrument. In case the company has nothing to produce as additional fact, the rating grade is formally confirmed to the company by CRISIL. 8. Monitoring of Change of Rating: Once the company has decides to use the rating, CRISIL is obliged to monitor the rating, over the life of the instrument. Depending upon new information, or developments concerning the company. CRISIL may change the rating. Any change, so effected, is made public by CRISIL.

THE RATING PROCESS OF CRISIL CAN ALSO BE EXPLANED WITH THE HELP OF DIAGRAM:

RATING METHODOLOGY:
CRISIL analyses five factors while assessing the instrument. These factors are follows: 1) Business Analysis: All the relevant information concerning the business are covered under the following subheads: a) Industry Risk: CRISIL evaluates the industry risk by taking into consideration various factors like nature and basis of competition, key success factors, demand and supply factors, structure of industry, government policies etc., Industry strength is evaluated within the economy considering factors like inflation, energy requirements and availability. International competitive situation and socio-political scenario, demand projection growth stages and maturity of markets, cost structure of industry in domestic and international scenario or government policies towards industry. Industry risk analysis may set upper limit on rating. b) Market Position of the company within the Industry: Market position of the company operations of the client company to assess all credit worthiness of the company. 2. FINANCIAL ANALYSIS: Under the financial analysis all relevant aspects connected with the business and financial position of the company are assessed. Such as qualification of auditors, method of Income recognition, deprecation policies and inventory calculations, under valued/ over valuing of assets or off balance sheet liabilities. Earning Potential Return, Profitability ratios, coverage ratios, earning on assets/capital employed, source of future earning or ability to finance growth internally. Adequacy of the cash flows is appraised in relation to debt and fixed and working capital requirements of the company, future cash flows, working capital management. Ability to attract capital, capital spending flexibility, asset redeployment potential or the debt service schedule.

3. MANAGEMENT EVALUATION: The track record of management is evaluated by observation the roles and philosophies strategies and ability to overcome adverse situations, judgement of management performance based on past operating and financial results, planning and control systems, depths of managerial talents and succession plans, shareholding pattern and constitution of board of directors relationship with shareholders or mergers and acquisition considerations. 4. REGULATORY AND COMPETITIVE ENVIRONMENT: CRISIL evaluates structure and regulatory framework of the financial systems in which it works. Trends in regulation/deregulation and their impact on the company are evaluated. 5. FUNDAMENTAL ANALYSIS: It covers aspects on liquidity management, assets quality, profitability and financial position and interest and tax sensitively. Liquidity management includes aspects on capital structure, matching f assets and liabilities. Interest rte charges, revenues on nonfund based activities, accretion to reserves.

RATING SYMBOLS USED BY CRISIL DEBENTURES 1) High investment grade: Symbols AAA (Triple A) HIGH SAFTEY Definition Debentures rated AAA are judged to offer higher safety to timely payment of interest and principal. Though the circumstances providing this degree of safety are likely to change, such changes as can be envisaged are most unlikely to affect adversely the fundamentally story position of such issues. Debentures rated AAA are judged or offer high safety of timely payment of interest and principal. They differ in safety from AAA issues only.

AA (Double A) HIGH SAFETY

2) Investment Grades: Symbols A Adequate Safety Definition Debentures rated A: are judged to offer adequate safety of timely payment of interest and principal, however, change in circumstances can adversely affect such issues more than those in higher rated categories Debentures rated BBB are judged to offer sufficient safety of timely payment of interest and principal for the present, however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for debenture in higher rated categories. Debentures rated BB are judged to carry in adequate safety of timely payment of interest and principal while they are less susceptible to default than other speculative grade debentures in the immediate future the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments Debentures rated B are judged to have greater susceptibility to default, while currently interest and principal payment are met, adverse business or economic condition would lead to lack of ability or willingness to pay interest or principal Debentures rated C are judged to have factors present that make them vulnerable to default, timely, payment of interest and principal is possible only if favourable

BBB (Triple B) Moderate Safety

BB (Double B) Inadequate safety

B high risk C Substantial Risk

D Default

circumstances continue. Debentures rated D are in default and in arrears of interest or principal payments or are expected to default on maturity. Such debentures are extremely speculative and returns from these debentures may be realized only on reorganization liquidation.

FIXED DEPOSIT Symbols FAAA (F Triple A) Higher Safety FAA (F-Double A) High Safety FA Adequate Safety FB Inadequate Safety

FC high risk FD Default

Definition This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. However, the relative degrees of safety are not as high as for fixed deposits FAAA rating. This rating indicates that the degree of safety regarding timely payment of interest and principal are satisfactory changes in circumstances can effect such issues more than those in the higher rated categories. The rating indicates inadequate safety of timely payment and interest and principal such issues are less susceptible to inadequate capacity to make timely interest and principal payments. This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such issues have factors at present that make them vulnerable to default, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. This rating indicates that the issue is either in default or in expected to be in default upon maturity.

SHORT TERM INSTRUMENTS Symbols Definition P-1 This indicates that safety regarding strong. This rating indicates that the degree of safety regarding timely P-2 payment on the instruments is strong, however the relative degrees of safety is lower than that for instrument rated P-1. This rating indicates that the degree of safety regarding timely payment on the instrument is adequate, however the P-3 instrument is more vulnerable to the adverse effect of changing circumstances than an instrument rated in the two higher categories. This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be P-4 adversely affected by short term adversity or less favorable conditions. This rating indicates that the instrument is expected to be in P-5 default on maturity or in default.

INVESTMENT INFORMATION AGENCY (ICRA)

AND

CREDIT

RATING

INTRODUCTION
ICRA Ltd., has been promoted by industrial finance corporation of India (IFCI) as its main promoter with its Head quarters at New Delhi. It is an independent credit rating agency established in 1991. ICRA has been contributed by a number of leading public sector banks and financial institutions such as IFCI, state Bank of India, UTI, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank etc. In early December 1998, the US based international credit rating agency Moodys investors service and ICRA jointly agreed to Moodys taking up a minority stake in the equity capital of ICRA. Moodys has agreed to minority stake in a venture in a developing market. Moodys association with ICRA shall bring to India the global expertise and research, which Moodys has developed over decades. Besides, the tie-up will entail Moodys conducting regular training and business seminars for ICRA analyst on concepts and issues relating to the development of capital markets in India. ICRAs association with Moodys dates to 1996 when ICRA signed a business development and marketing agreement with financial preformed inc. (FPI), a Moodys company, to provide risk management software, credit education and consulting services to banks, financial and investment institutions, financial services companies and mutual fund in India.

OBJECTIVE OF ICRA
1. ICRA was established to provide. Information and guidance to institutional and individual investors and creditors. 2. To enhance the ability of borrower/issuers to access the money market and capital market for tapping a larger volume of resources in the financial markets. 3. To enable banks, investments bankers and brokers in placing debt with investors by providing them with a marketing tool.

4. The provide regulator with a market driven system to encourage healthy growth of the capital markets in a disciplined manner without costing an additional burden on the government for this purpose. ICRAS RATING PROCESS 1. Rating Request Rating is initiated by a formal request from the prospective issuer. This mandate spells out the terms of the rating assignment, important issues that are covered include. Binding the credit rating agency to maintain confidentiality the right to the issuer to accept or not to accept the rating and issuer to provide information required by the credit rating agency for rating and subsequent surveillance. 2. Rating Team The team usually comprises two members. The composition of the terms if based on the expertise and skills required for evaluating the business of the issuer. 3. Information Requirements Issuers are provided a list of information requirements and broad framework for discussions. 4. Secondary Information ICRA also draws on the secondary source of information including its own research division. The credit rating agency also has a panel of industry experts who provide guidance on specific issues to the rating team. The secondary sources generally provide data and trends including policies about the industry. 5. Management meetings and Plant Visits Rating involves assessment of number of qualitative factors with a view to estimate the future earnings of the issuer. This requires intensive interactions with issuers management specifically relating plants, future outlook, competitive position and funding policies, plant visits facilitates understanding of the production process, assess the state of equipment and main facilities. These visits also help in assessing the progress of

project under implementation.

6. Preview Meeting After completing the analysis, the findings are discussed of length in the internal committee, comprising senior analyst of the credit rating agency. All the issue having a bearing on the rating are identified. At the stage, an opinion on the rating is also formed. 7. Rating Committee Meeting This is the final authority for assigning ratings. A brief presentation about the issuers business and the management is made by the rating team. All the issues identified during discussions in the internal committee are discussed. The rating committee also considers the recommendations of the internal committee for the rating. Finally, a rating is assigned and all the issues which influence the rating are clearly spelt out. 8. Rating Communication The assigned rating along with the key issue is communicated to the issuers top management for acceptance. The ratings which are not accepted are either rejected or reviewed. The rejected ratings are not disclosed and complete confidentiality is maintained. 9. Rating Reviews If the rating is not acceptable to the issuer, he has a right to appeal for a review of the rating these review are usually taken up only if the issuer provides fresh inputs on the issues that were considered for assigning the rating. Issuers response is presented to the rating committee. If the inputs are convincing, the committee can revise the initial rating decision. 10. Surveillance

It is obligatory on the part of the credit rating agency to monitor the accepted ratings over the tenure of the rated instruments. The ratings generally reviewed every year. Unless the

circumstances of the case warrents an early review. In a surveillance review the initial rating could be retained or revised.

THE RATING PROCESS OF ICRA CAN ALSO BE EXPLANED WITH THE HELP OF DIAGRAM:

RATING METHODOLOGY

ICRA considers all relevant factor that have a bearing on the future cash generation of the issuers. These factors includes:- Industry characteristics, competitive position of the issuer, operation efficiency, management quality, commitment to new projects and other associate companies and finding policies of the issuer. A detailed analysis of the past financial statements is made to assess the performance under the real world business. Key areas considered in a rating analysis includes the following: Business Risk

Industry characteristics, performance and outlook, operating position, capacity, market share, distribution system, marketing networks etc., Technological aspects, business cycle, size and capital intensity. Financial Risk

Financial management capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, Interest coverage, accounting polices and practices. Income recognition, inventory valuation are evaluated. Management Assessment

Background and history of the issuer, corporate strategy and philosophy, organizational structure, quality of management and management capability under stress, personnel policies including succession planning. Environment Analysis

Regulatory environment, operating environment, national economic outlook, areas of special significance to the company, pending litigation, tax status, possibility of default risk under a variety of future scenarios.

Rating Symbols For Debt Funds

The ICRA Rating Symbols for Credit Risk Rating of Debt Funds and their implications are as follows: Symbols MfAAA mfAA+ mfAA mfAAmfA+ mfA mfAmfBBB+ mfBBB mfBBBmfBB+ mfBB mfBBmfB+ mfB mfBDefinition Indicates highest quality. The investment quality is of highest grade and is similar to that of fixed income obligations of highest safety. Indicates high quality. The investment quality is of high grade and is similar to that of fixed income obligations of high safety. Indicates adequate quality. The investment quality is of upper medium grade and is similar to that of fixed income obligations of adequate safety. Indicates moderate quality. The investment quality is of medium grade and is similar to that of fixed income obligations of moderate safety. Indicates inadequate quality. The investment quality is of low grade and is similar to that of fixed income obligations of inadequate safety. Indicates poor quality. The investment quality is of lowest grade and is similar to that of fixed income obligations that are risk prone.

The ICRA Rating Symbols for Market Risk Rating of Debt Funds and their implications are as follows:

Symbols M1 M2 M3 M4 M5

Definition Indicates very low sensitivity to changing interest rates and other market conditions. Indicates low sensitivity to changing interest rates and other market conditions. Indicates moderate sensitivity to changing interest rates and other market conditions. Indicates high sensitivity to changing interest rates and other market conditions. Indicates very high sensitivity to changing interest rates and other market conditions.