PROJECT REPORT ON:

CREDIT RATING

SUBMITTED TO:
DR. HETAL JHAVERI

SUBMITTED BY:
GROUP 11
Abhik Shah
Archi Shah
Parshwa Shah
Riya Shah
Siddharth Shah
Jay Nathwani
INTRODUCTION
In a market, financial markets play the role of efficient intermediary. They act as a link
between savers and investors, mobilizing capital on one hand, and efficiently allocating them
between competing users to the other hand. In addition to this an investor can also base the
investment decision on the grading offered by credit rating agencies.

Concept of Credit Rating

A credit rating is a measure used by creditors to determine how much they can trust a certain
borrower, whether the borrower is an individual, a corporation, or a country. The credit rating
is derived using past financial data or the borrowers credit history. There are several factors
that can affect the credit rating of an individual including: -

The persons ability to pay a loan Reflected by the persons salary and other assets

- The amount of credit in existence This is what credit limits are for. If the Person is near
his credit limit or has reached it is harder to get a loan. This Also reflects whether the person
is in the habit of going into debt

Credit history Shows whether the person makes payments on time. This also reflects the
persons spending and saving patterns.

Definition
The process of assigning a symbol with specific reference to the instrument being rated, that
acts as an indicator of the Current opinion on relative capability on the issuer to service its
debt obligation in a timely fashion, is known as credit rating.

According to the Moodys, A rating on the future ability and legal obligation of the issuer to
make timely payments of Principal and interest on a specific fixed income security. The
rating measures the probability that the issuer will default on the security over its life, which
depending on the instrument of the expected monetary loss, should a default occur.

According to ICRA, Credit ratings are opinions on the relative capability of timely servicing
of corporate debt and obligations.

CREDIT RATINGS
An assessment of the credit worthiness of individuals and corporations. It is based
upon the history of borrowing and repayment, as well as the availability of assets and
extent of liabilities
 Rating is a symbolic indicator of the current opinion on the relative capability of
timely servicing of the debts and obligations.
Lower rating does not mean lesser funds available rather it suggests higher risk level.
Credit rating essentially establishes a link between risk and return.
A rating is valid for the lifetime of the debt instrument subject to continuous
surveillance and depending upon the performance of the issuer, it may be retained,
placed under watch, upgraded or downgraded.

NEED FOR CREDIT RATING

It is necessary in view of the growing number of cases of defaults in payment of interest and
repayment of principal sum borrowed by way of fixed deposits, issue of debentures or
preference shares or commercial papers.

Maintenance of investors confidence, since defaults shatter the confidence of

investors in corporate instruments.
Protect the interest of investors who cannot into merits of the debt instruments of a
company.
Motivate savers to invest in industry and trade.

OBJECTIVES OF CREDIT RATING

The main objective is to provide superior and low cost information to investors for taking a
decision regarding risk return trade off, but it also helps to market participants in the
following ways;

Improves a healthy discipline on borrowers,

Lends greater credence to financial and other representations,

Facilitates formulation of public guidelines on institutional investment,

Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions
related to debt issues,

Encourages greater information disclosure, better accounting standards, and improved

financial information (helps in investors protection),

May reduce interest costs for highly rated companies,

Acts as a marketing tool

Features of Credit ratings Specificity.
Relativity.
Guidance.
Not a Recommendation.
Broad Parameters.
No Guarantee.
Quantitative and Qualitative.

Function of credit ratings

Superior Information
Low cost information
Basis for proper risk- return trade off
Healthy discipline on corporate borrowers
Formulation of public policy guidelines on institutional investment

TYPES OF CREDIT RATINGS

Two type of credit rating has been noticed :

1) Traditional debt rating (TDR)

2) Private placement rating (PPR)

Traditional debt ratings (TDR):

Traditional debt ratings are a symbolic prediction about the debtsecurity probability resulting
in a default in timely payment of interest and principal. In other words,traditional debt rating
reflects the current opinion of a credit rating agency of the relative capabilityand willingness
of an issuer of a debt instrument to service the debt obligation as per the term of contract
.Traditional debt rating is specific to specific to to a debt instrument in term of credit risk
associated with such instrument .Traditional debt rating enable an investor to establish a link
between risk and return and provide a symbolic yardstick to identify the risk level associated
withthe instrument and the return it offers to match with his preferences with expectations

Private placement rating (PPR):

Privately rating is newly introduced credit rating system findingin the literature generated by
standard & poor on credit rating , private placement rating is not muchdifferent to traditional
debt rating but it goes one step ahead to traditional debt rating ,ie. Apart fromevaluating a risk
of default in timely payment it also evaluates the likelihood of loss to an investor in the vent
of default according on the investment . Never the less, either or both of the two types of
rating can be used for new issues of debt securitiesor structured obligations.13
Credit Rating agencies in India
There are mainly 4 rating agencies in India:

CRISIL
ICRA
CARE
ONICRA

RATING SYMBOLS
Rating agencies use symbols such as AAA, AA, BBB, B, C, D, to convey the safetygrade to
the investor. Ratings are classified into three grades: High investment grades,
investmentgrades and speculative grades. In all ratings is classified into 14 or 15 categories.
Signs + or -are used to show the certainty of timely payment. The suffix + or may be
used to indicate thecomparative position of the instrument within the group covered by the
symbol. Thus FAA- lies onenotch above FA+. To provide finer gradations, rating industry
attach + or to their ratings. Therating symbols for different instruments of the same
company need not necessarily be the same.

High Investment Grades AAA:

- Triple A denotes highest safety in terms of timely payment of interest and principal. The
issuer is fundamentally strong and any adverse changes are not going toaffect it.

AA: - Double A denotes high safety in terms of timely payment of interest and principal.
Theissuer differs in safety from AAA issue only marginally.

Investment Grades A: - denotes adequate safety in terms of timely payment of interest and
principal. Changes in circumstances can adversely affect such issues.

BB:- Triple B denotes moderate safety in terms of timely payment of interest and
principalspeculative grades.15

Speculative Grades BB: - Double B denotes inadequate safety terms of timely payment of
interestand principal. Uncertain changes can lead to inadequate financial capacity to make
timely paymentsin the immediate future.

B:- denotes high risk. Adverse changes could lead to inability or unwillingness to pay timely
payment.

C:- denotes substantial risk. Issue rated is vulnerable to default.

D: - denoted default in terms of timely payment of interest and principal.These symbols are
just a current opinion of an agency and they are not recommendations toinvest or not to
invest. The rating assigned applies to a particular instrument of the company and isnot a
general evaluation of the company.

Rating Fees:

-In the credit rating business, the users of rating service, such as investors,
financialintermediaries and other end- users, do not pay for it. The issuer of the financial
instrument pays feesto the credit rating industry and this is the major source of revenue to the
rating agency. Todayissuers fees constitute 95% of the total revenues of the rating agencies.
In India rating agenciescharge 0.1 % of the instrument size as rating fees. They also charge an
annual surveillance fees at arate of 0.03% to monitor the instrument during his life. 16

CRISIL
Credit Rating Information Services Limited (CRISIL)
The first credit agency floated on January 1, 1988, jointly started by ICICI and UTI with an
equity capital of Rs. 4 crores, as public Ltd Company. CRISIL is India's leading rating
agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings
market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is
a full service rating agency that offers a comprehensive range of rating services. CRISIL
Ratings provides the most reliable opinions on risk by combining its understanding of risk
and the science of building risk frameworks, with a contextual understanding of business.

OBJECTIVE OF CRISIL
The principal objective of CRISIL is to rate the debt obligations of Indian companies. Its
rating guides the investors about the risk of timely payment of interest and principal on a
particular debt instrument.

Credit Rating Committee - CRISIL's rating process and rating committee are designed to
ensure that all assigned ratings are based on the highest standards of independence and
analytical rigor.

The rating committee comprises members who have the professional competence to
meaningfully assess the credit analysis that underlies the rating, and have no interest in the
entity being rated. A team of analysts carries out the credit analysis.
CREDIT RATINGS
A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely
payment of interest and principal on the rated obligation. It is an unbiased, objective, and
independent opinion as to the issuer's capacity to meet its financial obligations. So far,
CRISIL has rated 30,000 debt instruments, covering the entire debt market.

The debt obligations rated by CRISIL include:

Non-convertible debentures/bonds/preference shares

Commercial papers/certificates of deposits/short-term debt

Fixed deposits
Loans
Structured debt

CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex constituent
companies and 39 of the NSE Nifty constituent companies, accounting for 80 per cent of the
equity market capitalization , are CRISIL's clients.

CRISIL rates a wide range of entities, including:

Industrial companies
Banks
Non-banking financial companies (NBFCs)
Infrastructure entities
Microfinance institutions
Insurance companies
Mutual funds
State governments
Urban local bodies

CRISIL REAL ESTATE STAR RATINGS

CRISIL Real Estate Star Ratings provide city specific all-round assessment of real estate
projects and help buyers benchmark and identify quality projects within their city. CRISIL
Real Estate Star Ratings address two critical needs in the realty sector: improved
transparency and objective benchmarking of projects.

The key factors evaluated in the Star Ratings process are

quality of legal documentation
construction related risks
 financial flexibility/viability of the project besides the background
track record of the project sponsor

Star Ratings is based on an eight-point scale that is specific to the city from City 7-Star,
the highest, to City 1-Star, the lowest being 'Non-Deliverable Project'.

RATING METHODOLOGY OF CRISIL

Business Analysis Industry risk, market position and operating efficiency of the
company, legal position.
Financial Analysis Accounting quality, earnings position, adequacy of cash flows,
and financial flexibility.
Management Evaluation Goals, philosophy, strategies, ability to overcome adverse
situations, managerial talents and succession plans, commitment, consistency and
credibility.
Regulatory and Competitive Environment
Fundamental Analysis Liquidity management, assets quality, profitability and
financial position, interest and tax sensitivity.

From the above mentioned methodolgy crisil rates the companies in following ways:

CRISIL may apply '+' (plus) or '-' (minus) signs for ratings from 'AA' to 'C' to reflect
comparative standing within the category.
CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on Rating
Watch will not carry outlooks. A rating outlook indicates the direction in which a
rating may move over a medium-term horizon of one to two years. A rating outlook
can be 'Positive', 'Stable', or 'Negative'. A 'Positive' or 'Negative' rating outlook is not
necessarily a precursor of a rating change.
The contents within parenthesis are a guide to the pronunciation of the rating
symbols.
A suffix of 'r' indicates investments carrying non-credit risk. The 'r' suffix indicates
that payments on the rated instrument have significant risks other than credit risk. The
terms of the instrument specify that the payments to investors will not be fixed, and
could be linked to one or more external variables such as commodity prices, equity
indices, or foreign exchange rates. This could result in variability in payments-
including possible material loss of principal-because of adverse movement in value of
the external variables. The risk of such adverse movement in price/value is not
addressed by the rating.
A suffix of '(so)' indicates instruments with structured obligation. A CRISIL rating on
a structured obligation reflects CRISIL's opinion on the degree of credit protection
provided by the credit enhancement structure. The assessment takes into consideration
any arrangement for payment on the instrument by an entity other than the issuer to
 fulfil the financial obligations on the instrument. It also takes into account any other
means of enhancing the credit quality of the rated obligation.
CRISIL assigns ratings to preference shares on its long-term rating scale. For the
purpose of these ratings, preference dividend payments are construed as being
equivalent to interest payments, and failure to pay the same on time is treated as a
default.

Investment Information and Credit Rating Agency of India

(ICRA)
ICRA was set up by IFCI on 16th January 1991 ICRA Limited is an Associate of Moody's
Investors Service and an independent and professional company. It is a public limited
company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up.ICRAs
major shareholders IFCI (26%), and the balance by UTI, LIC, GIC, PNB, Central Bank of
India, Bank of Baroda, UCO Bank and banks (SBI).

OBJECTIVES OF ICRA

To access the credit instrument and award it a grade consonant to the risk associated
with such instrument.
To assist investors in making well informed investment decision
To assist issuers in raising funds from a wider investors base
To enable banks, investment bankers and brokers in placing debt with investors by
providing them with a marketing tool
To provide regulators with a market driven system to encourage the healthy growth of
the capital markets in a disciplined manner without
Costing an additional burden on the Government for this purpose.

STRATEGIES OF ICRA

Create awareness of the rating concept and benefits among issuers, investors,
regulators, and financial institutions.
Win the credibility, confidence and trust of the constituents by demonstrating that its
methodology is transparent and its ratings are independent and consistent.
Aggressively focus on business development whitish would result in a significant
increase in the volume of rating assignments and spur the Govt. into introducing an
exclusively market-driven interest rate structure.
RATING SERVICES

As an early entrant in the Credit Rating business, ICRA Limited (ICRA) is one of the most
experienced Credit Rating Agencies in the country today. ICRA rates rupee denominated
debt instruments issued by manufacturing companies, commercial banks, non-banking
finance companies, financial institutions, public sector undertakings and municipalities,
among others. ICRA also rates structured obligations and sector-specific debt obligations
such as instruments
issued by Power, Telecom and Infrastructure companies. The other services offered include
Corporate Governance Rating, Stakeholder Value and Governance Rating, Credit Risk Rating
of Debt Mutual Funds, Rating of Claims Paying Ability of Insurance Companies, Project
Finance Rating, and Line of Credit Rating.

GRADING SERVICES

The Grading Services offered by ICRA employ pioneering concepts and methodologies, and
include Grading of:
Initial Public Offers (IPOs)
Microfinance Institutions (MFIs)
Construction Entities;
Real Estate Developers and Projects;
Healthcare Entities
Maritime Training Institutes.
In IPO Grading, an ICRA-assigned IPO Grade represents a relative assessment of the
fundamentals of the issue graded in relation to the universe of other listed equity securities
in India. In MFI Grading, the focus of ICRAs grading exercise is on evaluating the candidate
institutions business and financial risks. The Grading of Construction Entities seeks to
provide an independent opinion on the quality of performance of the entities graded.
Similarly, the Grading of Real Estate Developers and Projects seeks to make property buyers
aware of the risks
associated with real estate projects, and with the developers ability to deliver in accordance
with the terms agreed. ICRAs Healthcare Gradings present an independent opinion on the
quality of care provided by healthcare entities. In the education sector, ICRA offers the
innovative service of Grading of Maritime Training Institutes in India.

RATING METHODOLOGY OF ICRA

The rating methodology comprises the study of industry as well as the companys SWOT
analysis.
Marketing strategies
Competitive edge
 Level of technological development
Operational efficiency
Competence and effectiveness of management
HRD policies and practices
Hedging of risks
Cash flow trends and potential
Liquidity
Financial flexibility
Asset quality and past record of servicing debts and obligations
Government policies and status affecting the industry.

(ICRA)

Medium term including Fixed deposits Rating Symbols

MAAA: Highest Safety MAA: High Safety
MA : Adequate Safety MB : Inadequate Safety
MC : Risk prone MD : Default
Short-term including CPs
A-1: Highest Safety A-2: High Safety
A-3: Adequate Safety A-4: Risk prone
A-5: Default
Long term Debentures, Bonds and Preference shares-Rating Symbols
LAAA : Highest Safety
LAA : High Safety
LA : Adequate Safety
LBBB : Moderate Safety
LBB : Inadequate Safety
LB : Risk prone
LC : Substantial Risk
LD : Default, Extremely speculative