The following points highlight the various forms of credit rating services in India. The forms are: 1. Credit Rating and Information Services of India Limited (CRISIL Limited) 2. Credit Analysis & Research in Equity (CARE) (CARE Ltd.) 3. The Investment Information and Credit Rating Agency of India (ICRA) – (ICRA Ltd.) 4. Fitch Ratings India Pvt Ltd. 5. ONICRA (ONIDA Individual Credit Rating Agency).
Credit Rating Services in India
- Credit Rating and Information Services of India Limited (CRISIL Limited)
- Credit Analysis & Research in Equity (CARE) (CARE Ltd.)
- The Investment Information and Credit Rating Agency of India (ICRA) – (ICRA Ltd.)
- Fitch Ratings India Pvt Ltd.
- ONICRA (ONIDA Individual Credit Rating Agency)
- Credit Information Bureau (India) Ltd (CIBIL)
1. Credit Rating and Information Services of India Limited (CRISIL Limited):
CRISIL was promoted in 1987 jointly by ICICI and UTI as a public Ltd. company to rate debt instruments. The other promoters are ADD, LIC, GIC, SBI, Housing Finance Development Corporation, several public, private and foreign banks. It commenced rating operations on January 1, 1988. This was the first rating agency in India.
The objective of CRISIL has been to rate debt instruments of Indian companies on voluntary basis. It aimed to provide the investors a guide as to the risk of timely payment of interest and principal.
CRISIL pioneered the concept of credit rating in the country and introduced new concepts in rating services and has diversified into related areas of information and advisory services. CRISIL started its commercial paper rating program in 1989, Asset backed securities in 1993. They also started rating public sector and private sector banks. It launches CRISIL Rating Scan in 1989 to announce new and current ratings and disseminate the CRISIL rating rationale.
It offered its share capital to the public in 1993. In 1996 it entered into a strategic alliance with Standard & Poor’s (S & P) Rating Group New York to extend its credit rating services to borrowers from the overseas market. In 1997, S & P acquired equity stake in the CRISIL. In 2004, S & P made an open offer to the shareholders of CRISIL and acquired 56.5% rating stake and became the major shareholder. The name of the company changed from “The Credit Rating Information Service of India Ltd. to “CRISIL Limited” in 2004.
CRISIL Operations:
CRISIL, a Standard & Poor’s Company is India’s leading Ratings, Research, Risk and Policy Advisory Company offers various services which are broadly classified as:
(i) Rating
(ii) Information Services
(iii) Infra-structure services
(iv) Consultancy
CRISIL group business includes:
(i) CRISIL Ratings Services
(ii) CRISIL Research Services
(iii) CRISIL Advisory Services
CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral specialization. CRISIL leadership position continues with over a 70% market share of the Indian rating market. CRISIL ratings, plays a major role in the development of the debt market in India.
CRISIL offers:
(i) Credit rating service for banks
(ii) Developed a methodology and frame work for rating of structured obligations (SO) and Asset Securitization Programmes.
(iii) Introduced ratings on real estate developer’s projects, credit quality assessment of state electricity boards and state governments.
(iv) Ratings on mutual funds, bank loans, public finance etc.
(v) Develops and launches Municipal bank ratings, financial strength rating for insurances companies, rating of foreign structured obligations, grading of health care institutions etc.
(vi) Rating and grading for stock brokers corporate governance etc.
CRISIL, established on January 29, 1987 with nearly 30 years of experience in rating services has developed into a brand name that is synonymous with credit ratings CRISIL pioneered ratings of virtually every class of rated entity in the Indian market.
CRISIL is the:
(i) First to rate corporate and banks
(ii) Rated Asia’s first municipal bonds issue
(iii) Rated State Governments and State Government undertakings
(iv) First to rate almost all innovative structures in structured finance transactions.
CRISIL has helped to set up credit rating agencies in Malaysia, Israel and the Caribbean. Its global clients include the World Bank, ADB, foreign investment banks etc.
CRISIL Research is India’s largest independent integrated research house providing accurate and reliable research, analysis and forecasts on the Indian economy, industries and companies to over 500 Indian and International clients across financial, corporate, consulting and public sectors. They also offer high quality financial data analysis to users within and outside the CRISIL group. CRISIL sector wise analysis, CRISIL Company view, CRISIL Eco view, CRISIL Index services, CRISIL Fund services are the different products of CRISIL Research and Information Services.
CRISIL offers Advisory Services in the field of policy, regulatory, investment and risk management. CRISIL infra-structure advisory and CRISIL investment a Risk management services are the two wings of CRISIL that offers advisory services to clients.
CRISIL through its advisory services helps in governments and companies in formulation of policies, sector reforms, management assistance etc. It also provides integrated risk management solutions to their clients. In 2007, CRISIL has transferred its advisory business (CRISIL infrastructure Advisory and CRISIL investment and Risk Management Services) into a 100% subsidiary CRISIL Risk and Infrastructure Solutions Ltd.
CRISIL Ratings:
The CRISIL rating symbols indicate in a summarized manner CRISIL’s current opinion as to the relative safety of timely payment of interest and principal on a debenture, structured obligation, preference share, fixed deposit programme or short-term instrument.
A CRISIL rating relates to the particular debt instrument and is not a rating for the company as a whole inasmuch as it takes into account the specific terms of the instruments. The rating is not a recommendation to invest or not to invest.
Methodology:
CRISIL assigns ratings after an assessment of all factors that could affect the creditworthiness of the borrowing company.
The key factors considered are as under:
1. Business Analysis:
Industry Risk nature and basis of competition; key success factors; demand supply position: structure of industry; cyclical/seasonal factors; Government policies; etc.
Market position of the company within the industry- market share; competitive advantages; selling and distribution arrangements; and customer diversity; etc.
Operating efficiency of the company- locational advantages; labour relationships; cost structure; technological advantages and manufacturing efficiency as compared to those of competitors etc.
Legal position terms of prospectus, trustees and their responsibilities; systems for timely payment and for protection against forgery/fraud; etc.
2. Financial Analysis:
Accounting Quality:
Overstatement / understatement of profits; auditors qualifications; method of income recognition; inventory valuation and depreciation policies; off balance sheet liabilities etc.
Earnings Protection:
Sources of future earnings growth; profitability ratios; earnings in relation to fixed income charges; etc.
Adequacy of Cash Flows:
In relation to debt and fixed and working capital needs; sustainability of cash flows; capital spending flexibility; working capital management etc. Financial Flexibility- alternative financing plans in times of stress; ability to raise funds; asset redeployment potential etc.
3. Management Evaluation:
Track record of the management; planning and control systems; depth of managerial talent; succession plans, evaluation of capacity to overcome adverse situations, Goals, philosophy and strategies etc. are considered for companies with manufacturing activities. The assessment of finance companies will lay emphasis on the structure and regulatory framework of the financial system.
4. Fundamental Analysis:
Capital Adequacy:
Assessment of true net worth of the company, its adequacy in relation to the volume of business and the risk profile of the assets.
Asset Quality:
Quality of the company’s credit-risk management; systems for monitoring credit; sector risk; exposure to individual borrowers; management of problem credits etc.
Liquidity Management:
Capital structure terms matching of assets and liabilities; policy on liquid assets in relation to financing commitments and maturing deposits.
Profitability and Financial Position:
Historic profits; spreads on fund deployment; revenues on non-fund .based services; accretion to reserves etc.)
Interest and Tax Sensitivity:
Exposure to interest rate changes; tax law changes and hedge against interest rate etc.
Rating Process:
CRISIL evaluation is carried out by professionally qualified persons and includes data collection analysis and meetings with key personnel in the company to discuss strategies, plans and other issues that may affect CRISIL’s credit evaluation of the company. Typically, companies present information to CRISIL on the topics indicated earlier at the time of requesting for a rating.
The rating process begins at the request of a company. On receipt of the request, CRISIL assigns a team that will be responsible for carrying out the rating assignment.
The team obtains and analyzes information, meets the company’s executive and interacts with a back-up team which would have also collected industry information. Their findings are presented to an International Committee consisting of Senior Executives of CRISIL and thereafter, presented to the Rating Committee (which comprises some Directors not connected with any CRISIL shareholder) which then decides on the rating. The rating is, thereafter, communicated to the company. Should the company want to present some additional information, it can do so at this stage.
The rating process ensures objective analysis and strict confidentiality of client information. The Board of Directors of CRISIL does not get involved in the rating process.
CRISIL offers companies the opportunity to be evaluated on a confidential basis. Once the company decides to use the rating, CRISIL is obligated to monitor the rating over the life of the debt instrument. In assigning a rating, CRISIL takes into account the effects of a normal business cycle, however, depending upon the new information or development concerning the company.
Benefits of CRISIL Ratings:
To Investors:
CRISIL ratings serve as an objective guide to the risk involved in a particular instrument. They can make risk evaluations on the basis of CRISIL’s independent and thorough analysis and not on the basis of the name of the company or its directors. Debt instruments not assigned an investment grade rating may be appropriate for an investor’s particular preferences; other investors may prefer only investment grade ratings. Further, investors get the benefit of CRISIL’s ongoing surveillance of the rating.
To Borrowing Company:
CRISIL ratings can enhance the marketability of the instrument. A high rating can help a company to raise money at a relatively lower cost and from a larger body of individuals, thus leading to a broader investor base. In case of debentures, ratings facilitate investors in measuring credit risk quickly and accurately.
CRISIL ratings can lead to greater liquidity in the secondary market, thereby ensuring for the company easier access to funds in the future. Highly creditworthy companies may be virtually unknown in the market; CRISIL rating can facilitate fund raising for such companies.
Instruments which have the same rating are of similar but not identical investment quality. This is because the number of rating categories is limited and hence cannot reflect small differences in the degree of risks.
For preference shares, the letters “pf’ are prefixed and for structured obligations letters (SO) are affixed to the debenture rating symbols. The fixed deposit rating symbols commence with “F” and the short-term instrument use the letter “P” from the concept of ‘prime’. The term ‘debentures’, includes all securities with an original maturity of more than one year. The term ‘short-term instruments’, refers to securities with an original maturity up to one year.
(A) Long Term Instruments:
For Example, Bajaj Auto Limited has a CRISIL AAA for its long term instruments.
Investment Grade Ratings:
AAA (Triple A) Highest safety
AA (Double A) High safety
A Adequate safety
BBB (Triple B) Moderate safety
Speculative Grade Ratings:
BB (Double B) Inadequate safety
B High Risk
C Substantial risk
D Default NM Not Meaningful
CRISIL assigns ratings to preference shares on its long-term rating scale.
(B) Fixed Deposit:
Investment Grade Ratings:
FAAA (F Triple A) Highest safety
FAA (F Double A) High safety
FA Adequate safety
Speculative Grade Ratings
FB Inadequate safety
FD Default
NM Not Meaningful
(C) Short Term Instruments:
P-1 Very Strong
P-2 Strong
P-3 Adequate
P-4 Minimal
P-5 Default
NM Not Meaningful
CRISIL may apply ‘+’ (plus) or ‘- ‘(minus) signs for ratings from AA to C to reflect comparative standing within the category.
2. Credit Analysis & Research in Equity (CARE) (CARE Ltd.):
CARE promoted by IDBI and several other banks and insurance companies and investment institutions in 1993. The three largest shareholders of CARE are IDBI bank, Canara Bank and State Bank of India. CARE, is set up with two divisions- CARE Ratings and CARE Research. Its headquarters is located at Mumbai having seven regional offices.
The various services offered by CARE are:
(i) Credit Rating
(ii) Information Services
(iii) Equity Research and
(iv) Other Services like Rating of parallel markets of LPG and kerosene, CARE Loan Rating, Credit Analysis Rating etc.
Credit rating includes all types of debt instruments, both short-term and long-term. Information services include information on any company, local body, industry or sector required by business enterprise. CARE also prepares ‘Credit reports’ on companies for the benefit of banks and other business counter parties.
Equity Research of CARE comprises of an extensive study of the shares listed in the major stock exchanges and identification of potential winners and losers among them on the basis of the fundamentals affecting the industry, economy market share, management capabilities, international competitiveness and other relevant factors. Rating services serves as a useful tool for different constituents of the capital market.
The beneficiaries of the services offered by CARE are:
a. Investors,
b. Issuers of Debt Instruments,
c. Financial Intermediaries,
d. Business counter parties and
e. Regulators.
In addition to debt ratings CARE ratings provides the following specialized grading/rating services:
(i) Corporate Governance Ratings IPO Grading
(ii) Mutual Fund credit quality ratings
(iii) Insurance claims paying ability ratings
(iv) Issuer ratings
(v) Grading of Construction entities
(vi) Grading of Maritime training Institute
(vii) Liquefied Petroleum Gas/Superior Kerosene Oil
CARE is recognized by SEBI, Government of India and RBI etc. It has also been recognized as an Eligible Credit Rating Agency (ECRA) for Basel II implementation in India.
CARE ratings has completed over 3850 rating assignments having aggregate value of about Rs. 8071 billion (as on December 2007) since its inception in April 1993.
The analytical frame work for CARE’s rating methodology is divided into two interdependent segments. The first deals with operational characteristics and the second with financial characteristics. Besides quantitative and objective factors, qualitative aspects like assessment of management capabilities play a very important role in arriving at the rating for an instrument. The relative importance of qualitative and quantitative components of analysis varies with the type of issuer.
Key areas considered in a rating analysis include the following:
1. Business Risk:
Industry characteristics, performance and outlook, operating position (capability, market share, distribution system, marketing networks etc.), technological aspects, business cycles, size and capital intensity are analyzed in this area.
2. Financial Risk:
This include financial management, capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, interest coverage, projections with particular emphasis on the components of cash flow and the claims there on, accounting policies and practices, with particular reference to practices of providing for depreciation, income recognition, inventory valuation, off-balance sheet claims and liabilities, amortization of intangible assets, foreign currency transactions etc.
3. Management Assessment:
This area is centred on background and history of issue, corporate strategy and philosophy, organizational structure, quality of management and management capabilities under stress, personnel policies including succession planning.
4. Environmental Analysis:
This area comprises of 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.
(A) Long/ Medium Term Instruments:
CARE AAA Highest safety
CARE AA High safety
CARE A Adequate safety
CARE BBB Moderate safety
CARE BB Inadequate safety
CARE B Low safety – susceptible to default
CARE C Inadequate safety – high degree to default
CARE D Default or is likely to be in default soon
(B) Short term Instruments:
PR1 Highest safety
PR2 High safety
PR3 Adequate safety
PR4 Inadequate safety
PR5 Default or is likely to be in default on maturity
3. The Investment Information and Credit Rating Agency of India (ICRA) – (ICRA Ltd.)
:
ICRA was registered on January 16, 1991 by the IFCI (Industrial Finance Corporation of India) and a number of other financial institutions as a public limited company with its headquarters at Delhi. Like CRISIL, the ICRA also rates only debt instruments, namely, debentures/ bonds, fixed deposits and commercial papers. It is the second rating agency in India.
The services offered by ICRA can be broadly categorized into:
i. Rating Services
ii. Advisory Services, and
iii. Investment Information Services.
Rating services include rating of debt instruments and credit assessment. Advisory services are comprising of strategic counseling, general assessment such as restructuring exercise and sector specific service such as for power, telecom, ports, municipal rating etc. Investment Information services include reports on specific industries, sectors and corporates; Equity related services like equity rating, equity assessment etc. In September 2001 Moody’s Investors Service became the largest shareholder in ICRA.
Moody’s is a strategic partner in the company having 28.5% stake. Moody’s provides ICRA with technical services and also outsources certain services to ICRA. ICRA has wholly owned subsidiaries viz., ICRA Management Consultancy Services (IMaCs), ICRA Techno Analytics (ICTEAS) and ICRA online that provide management consulting services, business solutions and computer aided engineering services and information services and outsourcing services respectively.
The company has signed MoU with Indian Overseas Bank, State Bank of India and Indian Bank for assigning ratings to the bank loans. It also has MoUs with Vijaya Bank, Corporation Bank, UCO bank and Canara Bank for assigning ratings to Small Scale Industries (SSIs) and Small and Medium Enterprises (SMEs).
ICRA rating emanates from an evaluation of the background strengths and weaknesses of the borrowing entity. ICRA ratings are based on inherent protective factors, marketing strategies, competitive edge, level of technological development, operational efficiency, competence and effectiveness of management.
The other factors like HRD policies and practices, hedging of risks, cash flow trends and potential liquidity, financial flexibility, asset quality and past records of servicing debts and obligations as well as the government policies and statutes affecting the industry and the unit are looked into.
Credit Rating of Debt Instruments:
The rating symbols group together similar (but not necessarily identical) entities in terms of their relative capacity of timely servicing of debts/obligations, as per terms of contract, i.e., the relative degree of safety/risk.
The suffix of + or – may be used with the rating symbol to indicate the comparative position of the instrument within the group covered by the symbol. Thus, MAA + lies one notch above MAA.
The rating symbols for different instruments of the same Company need not necessarily be the same.
1. Rating Request:
This is initiated by the issuer requesting to make rating of a specific issue of the company. On such a request, the rating agency makes out a detailed agreement inscribing terms and conditions of such assignment. This includes rating of an issue and subsequent surveillance. This is called mandate.
2. Rating Team:
Rating team usually comprises of two members based on the expertise and skills required for evaluating the business of the issuer.
3. Information Requirements:
Information is provided by issuers who are containing a detailed list of information and broad framework for discussions. Issuer is to supply all requirements, data-and information.
4. Secondary Information:
This is drawn by the credit rating agency from its own research division. The agency has a panel of industry experts who provide guidance on specific issuer to the rating team. The secondary sources usually provide data and trends including policies about the industry.
5. Management Meetings and Plant Visit:
These are necessary for assessment of number of qualitative factors with a view to estimating future earnings of the issuer. A thorough discussion on various matters like- management of plants and units, future outlook, competitive position and funding positions etc., Plant visits facilitate understanding of the production process; assess the state of equipment, quality of technical personnel, quality of goods, cost of production etc.
6. Preview Meetings:
This is convened after completing the analysis. Findings are discussed at length in the internal committee. Internal committee is consisting of senior analysts. In this stage all issues relating to rating are discussed and opinions are formed.
7. Rating Committee Meeting:
This is convened by rating agency. It is the final authority for assigning ratings. Based on discussions, views of internal committee, data, etc., rating is assigned.
8. Rating Communication:
This is made by the agency to the issuer in detail. If the rating is not acceptable by the issuer, he has a right to appeal for a review of the rating. These reviews are taking place provided the issuer puts some fresh inputs on the issue. Again rating process is reviewed considering fresh inputs and additional information.
9. Surveillance:
Surveillance is a monitoring of credit rating agency over the tenure of the rate instrument. Ratings are reviewed, generally, every year. In such review, initial rating may be upgraded or downgraded or kept unchanged considering various factors by the rating agency.
4. Fitch Ratings India Pvt Ltd.:
(Formerly Duff and Phelps Credit Rating India):
The joint venture between Duffs and Phelps, an inter-national credit rating agency and J. M. Financial and Alliance Group resulted in the formation of DCR India Pvt. Ltd. In 2000, July Fitch Rating, a leading international credit rating agency has acquired 33% stake in Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India Pvt. Ltd). The merged entity has been renamed as Fitch Ratings India Pvt. Ltd. Fitch Ratings India will continue to maintain its existing rating and use the same rating definitions being used by DCR India.
Fitch India (Fitch Ratings India Pvt. Ltd) is now a 100% subsidiary of Fitch Group. Fitch has four offices in India located at Mumbai, Delhi, Chennai and Kolkata. Fitch India is recognized by RBI, SEBI and National Housing Bank.
The Rating methodology of Fitch includes the use of both qualitative and quantitative analysis to assess the business and financial risks of fixed income issuers. The ratings assigned by Fitch are comparable across industry groups and countries. Analysis typically involves at least five years of operating history and financial data as well as company and rating agency forecasts of future performance.
To achieve a clearer perspective on relative performance, a company’s performance is compared with that of others in its peer group. In addition, a. sensitivity analysis is performed through several, what if scenarios to assess a company’s capacity to cope with changes in its cooperating environment. A key rating factor is financial flexibility which depends on the company’s ability to generate cash from operations.
Rating Symbols of Fitch India:
The suffix ‘(Ind)’ refers to National Rating Assigned by Fitch India. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an indentifier for the country concerned, such as ‘Ind AAA’ for National ratings in India.
5. ONICRA (ONIDA Individual Credit Rating Agency)
:
ONICRA is the first individual credit rating agency in India promoted by ONIDA group. It is incorporated in 1993. ONICRA defines individual credit rating as- “an objective assessment of the risk attached to a financial transaction with respect to an individual at a given point of time”. They have a rating system for various types of credit extension. They make a detailed study of all aspects of the behaviour of credit seekers. The credit worthiness of the individual is measured on various parameters. ONICRA uses a 100 point scale to rate the individual on various parameters. ONICRA takes up the rating of individuals at the request of lending institutions. The rated individuals will be provided with a certificate which helps him in obtaining a loan.
The parameters are:
1. Age
2. Qualification
3. Occupation
4. Stability at work.
5. Savings
6. Extend of payment i.e., the amount of loan that an individual can avail of
7. History of repayment.
The various services offered by ONICRA include:
(a) Credit Rating
(b) Associate Rating
(c) Employee Screening
(d) SSI/SME
(e) Customer verification
(f) Life Style Analysis
(g) Royalty Retention
The clients ONICRA are from major business segments such as Telecom, Banking, Automobile, Consumer finance, IT and other service industries.
6.
Credit Information Bureau (India) Ltd (CIBIL):
CIBIL is India’s first credit information bureau established in 2000. It is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of Credit Information Reports (CIR). CIBIL’s equity was held by State Bank of India, Housing Development Finance Corporation Limited, Dun & Bradstreet Information Services India Private Limited and Trans Union International Inc.
CIBIL is a composite Credit Bureau, which caters to both commercial and consumer segments. It covers credit availed by individuals while the Commercial Credit Bureau covers credit availed by non-individuals such as partnership firms, proprietary concerns, private and public limited companies, etc. Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies and Credit Card Companies are Members of CIBIL.