credit-rating

Introduction:

Journalist Thomas friedman once said, “ There are two superpowers in the world today.

There is the United States and there is Moodys bond rating service. The US can destroy

by dropping bombs and Moodys can destroy you by dropping your bonds.” Rating

agencies play a key role in the infrastructure of the modern financial system.

Rating agencies, by making information widely available at a low cost have increased

market efficiency radically over the last few decades. However, in the credit rating

business, unlike any other business, the users of information do not pay for it. Though

this mechanism genertes positive externalities, the business tradition is rather strange. It

is so because though iinvestors, financial intermediaries and other end users use the

results of the rating agencies they actually do not pay for it. The issuer of the financial

instrument whose information is disclosed by the rating agency actually pays it. This

aspect makes the rating business a different animal. The transaction is very peculiar

because the party who pays for the service does not use it and who uses it does not pay

for it.

Trafitionally the agencies used to gather and analyze all sorts of pertinent financial and

non-fianacial information. Then they used to utilize it to provide a rating of the intrinsic

value or quality of a security. This was considered as a convienent way for investors to

judge quality and make investment decisions.

Rating agencies sell information and survive based on their ability to accumulate and

retain reputational capital. Howevwe, once regulation is passed, it makes it mandatory for

the company to incorporate ratings; rating agencies begin to sell not only information but

also valuable property rights associated with compliance of regulation. Though the rating

agencies will never force any company to buy their information, the companies will

always try to oblige the rating agencies by buying them. As the sale of these products

generates revenue, the rating agencies will not be willin to loose them.

How did Credit Rating evolve?

The role of financial markets in a market economy is that of an efficient intermediator,

mediating between savers and investors, mobilizing capital on one hand and efficiently

allocating them between competing uses on the other. Such an allocative role hinges

crucially on the availability of reliable information. An investor in search of investment

avenues has recourse to various sources of information-offer documents of the issuer(s),

research reports of market intermediaries, media reports etc… in addition to these

sources, Credit Rating Agencies have come to occupy a pivotal role as information

providers, particularly for credit related opinions in respect of debt instruments; a role

that have been strengthened byt the perception that their opinions are independent,

objective, well researched and credible.

The impetus for the growth of Credit Rating came from the high levels of default in the

U.S. capital markets after the Great Depression. In particular was the 1970 default of $82

million of commercial paper by Penn Central, consequent to which investors in

commercial papers became panicky and started refusing to rolloverthe commercial paper

outstanding, which in turn, resulted in massive defaults and liquidity crises. The issuers

then felt the need of getting their commercial paper programmes rated by independent

credit rating agencies to give the required degree of comfort and reassurance to their

investors. Furtherimpetus for the growth came when regulatory agencies began to

stipulate that institutions such as Government Pension Funds and Insurance

Comapniescould not buy securities rated below a particular grade. In addition, investors

themselves became aware of the ratings mechanism and they started using ratings

extensively as a tool of risk assessment. Merchant bankers, underwriters and other

intermediaries involved in the debt market also found rating useful for planning and

pricing the placement of debt instruments.

The other factors leading to the growing importance of the Credit Rating Systems in

many parts of the world over the last two decades are:

(1) the increasing role of capital and money markets consequent to

disintermediation;

(2) increased securitization of borrowing and lending consequent to

disintermediation;

(3) globalization of credit market;

(4) the continuing growth of information technology;

(5) the growth of confidence in the efficiency of the market mechanism; and

(6) the withdrawal of government safety nets and the trend towards privatization.

It was this growing demand on rating services that enabled credit rating agencies to

charge issuers for their services. Tis was much in variance with the mode of

fianancing used hitherto- with no fees charged to the issuers, a credit rating agency

used to provide rating information through the sale of their publication and other

materials.

Credit rating: the concept

Rating, usually expressed in alphabetic or alphanumeric symbols, are a simple and

easy understood tool enabling the investor to differentiate between debt instruments

on the basis of their underlying credit quality.

The credit rating is thus a symbolic indicator of the current opinion of the relative

capability of the issuer to service its debt obligation in a timrly fashion, with specific

reference to the instrument being rated. It is focused on communicating to the

onvestors, the relative ranking of the default loss probability for a given fixed income

investment, in comparison with other rated instruments.

A rating is specific to debt instrument and is intended as a grade, an analysis of the

credit risk associated with the particular instrument. It is based upon the relative

capability and the willingness of the issuer of the instrument to service the debt

obligations(both principal and interest) as per the terms of contract. Thus a rating is

neither a general purpose evaluation of the issuer, nor an overall assessment of the

credit risk likely to be involved an all the debts contracted or to be contracted by such

entity.

The primary objective of rating is to provide guidance to the investors/creditors in

determining a credit risk associated with debt instrument/credit obligation. It does not

amount a recommendation to buy, hold or sell an instrument as it does not take into

consideration factors such as market prices, personal risk preferences and other

considerations which may influence an investment decision. The rating process is

itself based on ‘givens’. The agency does not perform an audit. Instead, it is required

to rely on the information that is provided by the issuer and collected by analyst from

different sources, including interactions in-person with various entities.

Consequently, the agency does not guarantee the completeness or accuracy of the

information on which the rating is based. The judgment is qualitative in nature and

the role of quantitative analysis is to help make the best possible overall qualitative

judgment because, ultimately, rating is an opinion.

What is credit rating?

Credit rating is an unbiased, objective and an independent opinion as to an issuers

capacity to meet financial obligations. Rating Agencies rating indicates their current

opinion as to the relative safety of timely payment of interest and principal on a particular

debt instrument. Usually, rating agencies ratings are applicable to a particular debt of a

company and are not a rating for the company as a whole. The rating does not constitute a

recommendation to buy or sell or hold a particular security.

MOODY’s

“A Rating is an opinion on the future ability and legal obligation of the issuer to make

timely payments of the 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 may be a matter of days to 30 yrs or more. tn

addition, long term ratings incorporate an assessment of the expected monetary loss

should a default occur.”

STANDARD & POOR’s

“Credit Rating helps the investors by providing an easily recognizable, simple tool that

couples a possible unknown issuer with an informative and meaningful symbol of credit

quality.”

A rating does not amount to recommendation to buy, sell or hold an instrument, as it does

not take into consideration factors such as market prices, personal risk preferences and

other considerations, which may influence an investment decision.

What credit rating is not?

It would be useful to explain what credit rating does not connote.

First, a Rating is specific to the issue , debt or instrument that is rated. A rating is neither

a general purpose evaluation nor overall assessment of credit risk associated in all debts

contracted by an issuer.

Second, it is not recommendation ot buy, hold or sell. It is an opinion, perhaps well

informed opinions.

Third, they are not predictors of default but opinions about the relative probability of

default or loss. Thus, the difference between the highest rated instrument and another

rated a rung lower is that the probability of default of interest and principal in case of the

former is lower than that of the latter.

Fourth, ratings are not guarantees against losses.onder no conditions do they or can they

predict losses due to ‘shocks’ or highly unexpected situations.

Fifth, Credit Ratings relate only to ‘Credit’ and thus for example has no relationship with

the risk preferences with the investors or attractiveness of equity. Hence, the perceptions

of different stake holders, thet is, creditors, lendors, shareholders, etc …… in responding

to ratings could be different.

Need for credit rating:

The process of rating is independent, external review of the management, its strategies

and corporate performance. The ratings are beneficial to both the issuers and the

investors.

Issuers:

• For the borrowing company, a rating assists in enhancing the the marketability of

the instrument. A Rating offers an issuer a wider range of funding alternatives as

well as the opportunity to raise money at a relatively lower cost and from a larger

body of lenders thus leading to a broader investor base.

• Highly credit worthy companies may not necessarily be well known in the

market. A rating can facilitate fund raising for such companies.

• For institutional investors who usually operate onder strict investment guidelines,

it is often necessary that the securities in which they invest, carry a credit rating

assigned by a recognized Rating Agency.

• A Rating also benefits an organization to differentiate itself in the market and

easteblish its financial standing any time required.

Investors:

• As ratings serve as an objective guide to the risk involved in a particular

investment, investors use Ratings to supplement their own credit evaluation

process. Ratings assist investors, particularly in instances where they do not have

th resources or access to the management, to perform a through credit risk

analysis of the borrower.

• Credit rating also facilitated comparison of relative value between competing

securities. By providing a measure of relative creditworthiness, a credit rating can

help the investors decide if they wish to lend or to invest in securities issued by a

particular issuer and to determain the return on the investment they should

demand, given the relative degree of credit risk involved.

The use of credit rating:

By investors:

For the investor, the rating is an information service, communicating the relative

ranking of the default loss probability for a given fixes income investment in

comparison with other rated instruments.

In absence of a credit rating system, the risk perception of a common investor vis-à-

vis instruments largely depend on his/her familiarity with the names of the promoters

or the collaborators. Such “name recognition”, often used to evaluate credit quality in

underdeveloped markets cannot be an effective surrogate for systematic risk

evaluation.

It is not true that every venture promoted by a well known name will be successful

and free from default risk. Nor is it true that every venture promoted by a relatively

lesser known entity is disproportionately risk prone. What is therefore required for an

efficient allocation of resources is systematic risk evaluation. It is rarely, if ever

feasible for the corporate issuer of the debt instrument to offer evry perspective

investor the opportunity to undertake detailed risk evaluation. It is even rarer for such

a heterogenous group of investors to arrive at a meaningful and consistent conclusion

as to the relative credit quality of the instrument, specially when they do not possess

the requisite skills of credit evaluation.

A professional credit rating agency is well equipped with the required skills, the

competence and the credibility,all of which eliminates the role of “name recognition”

and replaces it with well researched and scientifically analysed opinions as to the

relative ranking of different debt instruments in terms of credit quality. Moreover,

these ratings are symbolic and therefore easier to understand and use once their

definitions and meanings are clearly enunciated. These ratings seeks to eastablish a

link between risk and return. The investor uses the rating to access the risk level of

the instrument and compares the offered rate of return with his expected rate of return

to optimize his risk return preference.

A rating provided by a professional credit rating agency is of significance not just for

the individual/small investor but also for organized institutional investor. Rating for

them provides low cost supplement to their own in-house appraisal system. Large

investors could use the information provided by rating changes , by carefully

watching upgrades and downgrades and altering their portfolio mix by operating in

the secondary market. Banks in some developed countries use the ratings of other

banks and financial intermediaries for their decisions regarding inter banking lending,

swap agreements and other counter party risks.

The investor community, in general, also benefits from other services provided by

credit rating agencies, namely, research in the form of industry reports, corporate

reports, seminars and open access to the analysts of agencies for discussion.

By issuers:

The benefit of credit rating for the issuers stems from the faith placed by the market

on the opinions of the rating provided, and the widespread use of ratings as a guide

for investment decisions. The issuers of rated securities are likely to have access to

much wider investor base as compared to unrated securities as a large section of

investors, not having the required resources and skills to analyse each and every

investment opportunity, would prefer to rely on the opinion of the rating agency.the

opinion of a rating agency enjoying investor confidence could enable the issuers of

highly rated instruments to access the markets even under adverse market conditions.

Credit rating provides a basis for determining the additional return which the

investors must get inorder to be compensated for the additional risk that they bear.

By intermediaries:

Rating is a useful tool for merchant bankers and other capital market intermediaries in

the process of planning pricing, underwriting and placement of issues. The

intermediaries, like brokers or dealers in securities, could use rating as an input for

their monitoring of risk exposures. Regulators in some countries specify capital

adequacy rules linked to credit rating for pre-packaging of issues by way of asset

securitization/structured obligations.

By regulators:

Regulatory authorities worldwide, have promoted the use of credit rating by issuing

mandatory requirements by issuers. Specific rules, for instance, restrict entry to the

market of new issues rated below a particular grade, stipulate different margin

requirements for mortgage of rated and unrated instrument and prohibit institutional

investors from purchasing or holding of instrumens rated below a particular level.

Factors contributing to the success of the rating system:

The driving force behind the rating industry is essentially the question of reputation

for analytical credibility. Following are the ingredients essential for the rating system

to function effectively and serve the interests of all the market participants and

regulators.

(1) Creditable and independent structures and procedures:

To quote from Standard and Poor’s- “ ratings are of value only as long as thay

are credible. Credibility arises mainly from objectivity which results from the

rater being independent of the issuers business. The investor is willing to

accept the judgement of a particular rater, that rater gains recognition as a

rating agency.”

According to Moody’s-“ the rating agency must do all it can to preserve its

credibility and integrity in the market place. As a primary ingredient of

credibility, the agency must maintain independence from all the interested

market forces including issuers, security underwriters or the government.”

A few other critical factors that serve to enhance the credibility of a rating

agency

Objectivity and impartiality of opinions

Analytical integrity and consistency

Professionalism and relevant expertise across industry

Strict rules of confidentiality relating to the sensitive and confidential

information of the issuer

Timeliness of rating review and announcement of changes

Ability to reach a wide range of investors by means of press reports,

print or electronic publications and more investor friendly research

services.

(2) Reliance on the market mechanism:

Reliance on the capital market for resource allocation generates a strong

demand for investment related information. Rating agencies provide this

information. An investor would be willing to look at rating as an important

input for his investment decision only when there is a perceived default risk.

(3) Corporate disclosure and credit education:

Rating agencies are not and they should not assume the role of

regulators. They are mostly carrying out an assignment on the

mandate of an issuer and in some countries the issuer has an option

of publishing or not publishing the rating assigned. This may result

in investors not having all essential information required for his

decision. The regulatory guidelines for mandatory disclosure of

ratings could ensure that the information reaches the users.

However, it is not sufficient for the information to reach the

investor. He must be capable of arriving at meaningful conclusions by

interpreting the assigned rating. He should also be aware of the limitations of

credit rating and should not assume that the rating amounts to an insurance or

guarantee against default risk

(4) Creation of active debt market:

The continued growth and evolution of the credit rating business

would depend on the size and growth of the debt market. An

active primary and secondary debt market is crucial for rating

agencies to continue to provide their service

Rating process:

The rating process is similar for almost all the credit rating agencies. The figure above

shows the credit rating process for CRISIL which is also used by ICRA, CARE and all

other rating agencies.

This process can be explaines as follows:

(1) Rating Agreement and Assignment of The Analytical Team:

The process of rating starts with the issue of the Rating Request Letter by

the issuer and the signing of the Rating Agreement. On receipt of the request, rating

agency assigns an analytical team comprising of atleast two analysts of whom one

could be the lead analyst and would serve as issuers primary comtact. The analysts

who have expertise in relevant business areas will be esponsible for carrying out the

rating assignment.

(2) Management meerting:

Before meeting with the issuer, the analytical team obtains and anaysis

information relating to the issuers financial statement, cash flow projections and

relevant information.

The analytical team then proceeds to have detailed meetings with the

company’s management. The Rating Agency and the Management dicuss topics such

as xompetitive position, strategies, financial policies, historical performance and

long-term fianacial and business outlook. Equal importance is placed on discussing

the issuers business risk profile and strategies, in addition to reviewing financial data.

The rating process ensures complete confidentiality of the provided by the

company. All information is kept strictly confidential by the ratings group and is not

used for any other purpose or any third party other than the rating agency.

(3) Rating Committee:

After the meeting with the management, the analysts present their report

to a Rating Committee that then decides on the rating. The Rating Committee

Meeting is the only aspect of the process in which the issuer does not participate

directly. The rating is arrived at after a composite assessment of all the factors

concerning the issuer, with the key issues getting greater attention from the Rating

Committee.

Rating reviews:

If the rating is not acceptable to the issuer, he has a right to appeal for a review of the

rating. There reviews are usually taken up only if the issuer provides fresh inputs on

the issues that were considered for assigning the rating. Issuer’s response is presented

to the Rating Committee. If the inputs are convincing, the committee can revise the

initial rating decision.

The Methodology of Rating by a Rating Agency:

The rating agency usually commences a rating exercise at the request of the company.

The rating methodology involves an analysis of the industry risk, the issuers business and

financial risk. The rating agency assigns a rating after assessing all the factors that could

affect the credit worthiness of the borrowing entity. Typically, the industry risk

assessment sets the stage for analyzing more specific company risk factors and

eastablishing the priority of these factors in the overall evaluation. For example, if an

industry is determined to be highly competitive, careful assessment of the issuers market

position is stressed. If the company has large capital requirements, examination of cash

flow adequacy assumes major importance.

The Ratings are based on the current information provided to the credit rating agencies by

the borrowing company, or facts obtained by the Rating Agencies from sources they

consider being reliable. In evaluating and monitoring the Ratings, the rating agencies

apply both qualitative and qualtitive criteria in accordance with the industry practices.

Some important issues in credit rating:

Investment and speculative grades: These two terms have been popularized by the

regulators. Securities rated below BBB(S&P)/Baa(Moody’s) are called non

investment grade or speculative grade or junk bonds. Rating agencies,howevwe,

donot recommend os indicate the rating levels of instruments upto which one should

or should not invest.

Surveillance:the ratings published by credit rating agencies are subjected to a

continuous surveillance during the life of the instrument till any amount is

outstanding against the specific instrument.in absence of any such development, such

reviews under surveillance are taken up periodically. A formal and extensive written

review is taken up atleast once a year. However in the event that there is some

specific concern avout the industry or the issuing entity, the review is taken up

immediately. As a result of such a review, if the rating agency feels that there is a

need for changing the rating, the rating is upgraded or downgraded according to the

likely impact of the changing circumstances

On the debt servicing capability of the issuer. In all other cases, the rating is retained

at the same level.

Creditwatch: when a major deviation from the expected trends of the issuer’s

business occurs, or when an event takes place which may have an impact on the debt

servicing capability of the issuer and may warrant a rating change, the rating agency

may put such ratings under creditwatch till the exact impact of such unanticipated

developments is analysed and the decision is taken regarding the rating change. The

creditwatch listing may also specify ‘ positive’ or ‘negative’ outlooks. However being

placed under creditwatch does not necessarily mean that there would be a rating

change.

Soverign rating ceiling: International credit rating agencies, while rating an issue

outside the issuers country or domicile , imposes a ceiling equal to the sovereign

rating assignes to the country of domicile. This implies that the rating of any

instrument of any issuer domiciled in that country would be above the sovereign

rating of the country of domicile. This concept may not ,however, be applicable when

domicile of the issuer in the country is wholly accidental to otherwise internationally

dispersed business operations.

Bank line coverage for commercial paper: According to Standard & Poor’s credit

overview international:” an evaluation of bank line policy is an essential component

of a commercial paper rating. It is not, however, part of the rating criteria and the

rating decision itself is not presicted on the strength or amount of bank lines.”

Ownership as a rating consideration:ownership by a strong concern may enhance

the credit rating of an entity, unless there exists a strong barrier separating the

activities of parent and subsidiary. The important issues involved in deciding the

relationship are the mutual dependence on each other, legal relationship, to what

extent one entity has the desire and ability to influence the business of the other and

how important is the operation of the subsidiary to the owner.

Credit Rating Agencies in India

The rating coverage in India is of recent origin, beginning 1988 when the first rating

agency, CRISIL-Credit Rating and Information Services was eastablished. At present

there are three rating agencies-

(1) CRISIL,

(2) ICRA(Investment Information and Credit Rating Agency of India Limited)

and

(3) CARE(Credit Analysis and Research).

(4) The fourth rating agency is a joint venture between Duff & Phelphs, US and

Alliance Capital Limited, Calcutta.

CRISIL: It was promoted by the financial institution,ICICI, nationalized and foreign

banks and insurance companies 1988. it went public in 1992 and is the only listed credit

rating agency in India. In 1995 it entered into a strategic alliance with Standard & Poor’s

to extend its credit rating services to borrowers from the overseas market.the services

offered are broadly classified as Rating, Information Services, Infrastructure Services and

Consultancy. Rating services cover rating of debt instruments- long, medium and short

term, securitized assets and builders. Information services offer corporate research reports

and CRISIL 500 index. The Infrastructure and Consultancy division provides assistance

such as Power, Telecom and Infrastructure financing.

ICRA limited: IT was promoted by IFCI and 21 other shareholders comprising

nationalized and foreign banks and insurance companies. Eastablished in 1991, it is the

second rating agency in India. The services offered can be broadly classifies as Analytical

Services, Advisory Services and Investment Information services. The analytical services

comprise of debt instruments and credit assessment. The advisory services include

strategic counseling, general assessment such as restructuring exercise and sector specific

services such as Power, Telecom, Ports Municipal ratings etc.. the information or the

research desk provides research reports on specific industry, sector and corporate. The

Information services also include equity related services, that is, euity grading and equity

assessment. In 1996, ICRA entered into strategic alliance with Fianancial Proforma Inc..

a Moody’s subsidiary to offer services on Risk Management Training and software.

Moody’s and ICRA has entered into a Memorandum of Understanding to support these

efforts.

CARE: incorporated in the year 1992, it is promoted by IDBI and several other banks and

insurance companies. The dervices offered cover rating of debt instruments and sector

specific industry reports from the research desk.

There are various other small agencies operating in the country but are not significant

players. The two- renowned organizations, which form a mojor chunk of the world credit

rating market Standard & Poor’s and Moody’s.

Regulation of Credit Rating Agencies in India:

In India, in 1998, SEBI constituted a committee to look into draft regulation for CRA’s.

the committee held the view that in keeping with the international practice, SEBI Act

1992 should be amended to bring CRA’s outside the purview of SEBI for variety of

reasons.

According to the committee, a regulator will not be in positionto objectively judge the

appropriateness of one rating over the other. The competency and the credibility of a

rating and CRA should by the market, based on th historical record, and not by a

regulator.

The committee suggested that instead of regulation, SEBI should recognize certain

agencies for particular purposes only, allowing ratings by CRA’s recognized by it for

inclusion in the public rights issue offer documents. In consultation with the government,

in July 1999, SEBI issued a notification bringing the CRAs under the regulatory ambit in

exercise of powers conferred on it by Section 30 read with Section 11 of the SEBI Act

1992.

The Act now requires all CRAS to be registered with SEBI. Since then all the CRAs

have been registered with SEBI. SEBI Act now defines “credit rating agency”, “rating”

and “securities”. Detaild of who could promote a CRA and their eligibility criteria has

been specified. The Act also mentions about agreements with clients, method of

monitoring of ratings, procedures for review of ratings, disclosure of ratings and

submission of details to SEBI and stock exchanges. Restrictions have now been placed on

CRAs from rating securities issued by promoters or companies connected with

promoters, that is, companies in which directors of CRAs are interested as directors.

CRISIL was promoted by the financial institution,ICICI, nationalized and foreign

banks and insurance companies 1988. It went public in 1992 and is the only listed credit

rating agency in India. In 1995 it entered into a strategic alliance with Standard & Poor’s

to extend its credit rating services to borrowers from the overseas market.the services

offered are broadly classified as Rating, Information Services, Infrastructure Services and

Consultancy. Rating services cover rating of debt instruments- long, medium and short

term, securitized assets and builders. Information services offer corporate research reports

and CRISIL 500 index. The Infrastructure and Consultancy division provides assistance

such as Power, Telecom and Infrastructure financing.

CRISIL has helped shape the evolution of the debt markets in India, by developing

criteria and standards to facilitate its dynamic growth. In its role as the pioneer in the

ratings business, CRISIL has always set the standards in rigour of analysis, transparency

and disclosure and has firmly eastablished its position as the provider of the “most

reliable opinion on risk.”

CRISIL has always set the highest standards in analytical rigour and transparency in the

ratings industry in India.

What crisil does?

CRISIL’s association with Standard & Poor’s, a division of The McGraw-Hill

Companies, dates back to 1996 when both companies started working together on rating

methodologies and joint projects. S&P is the world's foremost provider of independent

credit ratings, indices, risk evaluation, investment research, data and valuations. Since

then, we have significantly broadened this relationship, working together on critical,

cutting-edge assignments for global clients. This partnership has now culminated in

Standard & Poor’s acquiring a majority shareholding in CRISIL.

The following are the main functional areas of CRISIL:

(1) Ratings and Risk Assessment: CRISIL Ratings is the only ratings agency in

India to operate on the basis of sectoral specialisation. It reflects our sharpness

of analysis, the responsiveness of the process and the large-scale

dissemination of opinion. CRISIL Ratings plays a leading role in the

development of the debt markets in India. The Rating Criteria & Product

Development Centre, responsible for policy research, new product

development and ratings' quality assurance, has developed new ratings

methodologies for debt instruments and innovative structures across sectors.

(2) Policy, Regulatory and Transaction Advisory:

CRISIL Infrastructure Advisory: Our

Infrastructure Advisory enhances CRISIL's franchise in the

http://www.sandp.com/

areas of policy-making and economic development. Our

spectrum of activities includes catalysing economic

development through creation of appropriate policy

frameworks, sector reforms, regulatory support, project

structuring and global competitive bid process management for

large and complex projects.

Gas Information & Solutions: CRISIL has acquired UK’s

leading gas advisory and information company,

Gas Strategies Group Limited (earlier known as

EconoMatters limited) and its subsidiary companies. CRISIL

now has a significant presence in the international gas and LNG

markets.

Gas strategies is a leading global consulting firm in the domain

of natural gas and liquefied natural gas (LNG). The Company

focuses on market studies, project finance due diligence,

regulation and liberalisation of markets, pipeline financial and

demand studies, pricing and contracts.

Gas Strategies’ data provision service provides gas pricing and

supply/demand data and an LNG database to companies

worldwide. Gas strategies has a substantial resource base of

associates with over 100 years of cumulative consulting

experience.

Investment and Risk Advisory: The Risk Advisory business provides integrated risk

management solutions and advice to Banks and Corporates by leveraging the

experience and skills of CRISIL in the areas of credit and market risk. Taking

cognisance of the market needs for integrated solutions that quantify and

manage complex risks, the Risk Advisory Group uses cutting-edge research

and methodologies. Also, the Group brings together the experience of all

business teams to offer modular or integrated solutions and advisory services

that are customised to meet client needs.

(3) Crisil research: 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.

CRISIL Research leverages on its unique, integrated research platform and

capabilities spanning the entire economy-industry-company spectrum to

deliver superior perspectives and insights to its clients, through both,

subscription products and customised solutions.

(4) Financial news: CRISIL’s MARKETWIRE is CRISIL's cutting-edge financial

market newswire.

A "Wire" agency with a strong India understanding and an unparalleled

combination of news, views, analytics and tools, CRISIL MarketWire enables

clients to take pricing and investment decisions to stay ahead of the curve. It is

widely acknowledged to provide unmatched expert coverage on India's money

and fixed income markets. Backed by the experienced team of the erstwhile

Bridge News, CRISIL MarketWire spearheads CRISIL's offerings in the

market place with real-time news on multi-delivery platforms.

Credit rating at crisil:

Crisil provides rating and risk assessment services to manufacturing services, banks, non

banking financial institutions, financial institutions, housing finance companies,

municipal bodies and companies in the infrastructure sector.

CRISIL rates all rupee denominated debt obligations. Its comprehensive offerings include

ratings for long term instruments such as debentures/bonds, preference shares, structured

obligations (including asset backed securities), fixed deposits and short term instruments

such as commercial paper programmes and short term deposits. CRISIL undertakes credit

assessments of various entities including state governments. CRISIL also assigns

financial strength ratings to insurance companies.

CRISIL through the years has continued to innovate and play the role of a pioneer in the

development of the Indian debt market. CRISIL has pioneered the rating of subsidiaries

and joint ventures of multinationals in India and has rated several multinational entities,

both start-up entities as well as players with a well established track record in India. Over

the years, CRISIL has also developed several structured ratings for multinational entities

based on Guarantees and Letters of Comfort from the parent as well as Standby Letter of

Credit arrangements from bankers. The rating agency has also developed a methodology

for credit enhancement of corporate borrowing programmes through the use of partial

guarantees. In essence, CRISIL is uniquely placed in its experience in understanding the

extent of credit enhancement arising out of such structures.

Credit rating process:

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 . Each team has at

least two members. CRISIL's analysis is based on issuer meetings and an understanding

of the business environment. The analysis is carried out within the framework of clearly

spelt-out rating criteria.

Specific process safeguards that ensure independence from individual or organizational

bias include:

1. Multi-member rating teams

2. Multi-tier rating process

3. Rating committee comprising experienced, competent and reputed professionals

to assign all ratings

4. Organisation-wide internal transparency. Each stage of the rating process for all

ratings, including the final rating committee discussions, is open to all analytical

staff in CRISIL's rating division

5. Rating methodologies and criteria are clearly spelt out, published and

consistently applied

CRISIL ensures confidentiality of the information obtained for the rating exercise by

putting in place appropriate process safeguards. All CRISIL employees are required to

sign a confidentiality agreement. CRISIL does not disclose confidential information that

it has obtained for the purpose of credit rating to anyone (other than market regulators or

law enforcement authorities, if required).

The process of Rating starts with the issue of the Rating request by the issuer and signing

of the Rating agreement. CRISIL employs a multi-layered decision making process in

assigning a rating. It assigns a team of at least two analysts who interact with the

company's management.

Integrity of rating:

CRISIL Ratings and all its employees shall comply with all applicable laws, rules and

regulations governing CRISIL Ratings' activities, maintaining high standards

of integrity.

» CRISIL Ratings and all its employees shall deal fairly and honestly with

Issuers, investors, other market participants, and the public.

» CRISIL Ratings and all its employees shall adhere to the highest ethical

standards. Rating mandates shall not be solicited by promising specific ratings

to Issuers.

» CRISIL shall designate an appropriately qualified and experienced person as

the Compliance Officer. Such designation shall be notified to all CRISIL

Ratings employees. The Compliance Officer shall be responsible for

compliance with the provisions of the Code of Conduct, and with applicable

laws and regulations. The Compliance Officer shall not be a part of CRISIL

Ratings.

» Any CRISIL Ratings employee who comes to know about any unethical

conduct or breach of any law, regulation, or the Code of Conduct, by any other

CRISIL Ratings employee, is required to report such matter to the Compliance

Officer immediately. The Compliance Officer shall promptly take appropriate

action.

Quality of rating process in India (crisil)

» All rating decisions in CRISIL Ratings shall be based on well-documented and clearly

specified processes and criteria. The rating process shall be designed to ensure that all

assigned ratings are based on the highest standards of independence and analytical rigour.

The rating practices and policies followed shall be kept updated and made available to the

public free of charge.

» The rating criteria and processes shall be comprehensive and rigorous, and shall take all

the relevant factors impacting the rating into account.

» The rating criteria shall be regularly reviewed and updated. CRISIL Ratings shall

ensure that criteria are developed by a team with appropriate qualifications, skills and

experience in the relevant field.

» To ensure that all ratings are assigned objectively and after taking into account all the

relevant issues having a bearing on the credit quality of the issue being rated, each rating

shall be assigned by a committee (known as the Rating Committee in CRISIL)

comprising competent and experienced professionals. The composition of the Rating

Committee shall be appropriate to meaningfully assess the credit risk that underlies the

rating.

» Staffing and allocation of responsibilities shall duly take into account the qualifications,

training and experience of ratings personnel.

» To ensure that there is always a second opinion and that individual biases do not

influence the analysis, the rating exercise shall be carried out by a team comprising at

least two analysts.

» The rating team shall make all reasonable efforts to collect all the relevant public and

non-public information on issues which may have a bearing on the rating

Only information that is relevant or likely to be relevant for arriving at an objective rating

is to be sought from the entity being rated (hereinafter referred to as 'the Issuer').

Although analysts shall assess the information gathered based on their existing

knowledge, they are not required to perform the role of auditors or investigators.

» When information sufficient to arrive at a rating is collected and analysed within the

framework of clearly spelt out parameters, the rating team shall make a presentation to

the Rating Committee covering all relevant information and analysis.

» The Rating Committee shall deliberate and carefully consider all the relevant issues

before arriving at the rating. The proceedings of the Rating Committee shall be minuted.

However, in order to maintain the integrity and objectivity of the rating processes and the

robustness of internal deliberations, the minutes of the meetings and details of the

discussions are to be kept strictly confidential and not disclosed to outsiders.

» The rating assigned by the Rating Committee shall be communicated to the Issuer along

with the rationale underlying the assigned rating.

» CRISIL Ratings must clearly establish and document a rigorous process to be followed

during the entire rating exercise, and the surveillance period. The process shall also

clearly indicate the rights and duties of the Issuers. The Issuer shall have a right to accept

or not accept the rating. CRISIL Ratings will also entertain appeals based on material

new information or clarifications. The entire rating, surveillance and appeal process shall

be published and be freely available in public domain.

» In the event of an appeal, the rating team will present the new information and analysis

along with the Issuer's views to the appropriate Rating Committee, which will decide on

the appeal.

» CRISIL Ratings shall institute appropriate procedures and quality control mechanisms

to ensure objective, consistent, and timely rating actions, and compliance with existing

processes and criteria.

» Default and transition studies shall be regularly conducted using empirical ratings data.

Default and transition analysis will provide an objective assessment of the efficacy of the

rating criteria and processes.

» Default and transition rates derived through such studies shall be published on a regular

basis. This would provide the market participants an objective tool to assess the reliability

of CRISIL's ratings.

» CRISIL Ratings shall also institute, document, and publish well-structured surveillance

and appeal processes.

Rating scales:

Long term instrument:

High investment grades:

AAA

(Triple A) Highest

Safety

AA

Debentures rated ÀAA' are judged to offer highest safety of 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 strong position of such issues.

Debentures rated 'AA' are judged to offer high safety of timely

payment of interest and principal. They differ in safety from ÀAA'

(Double A) High

Safety

issues only marginally.

Investment grades:

A

Adequate Safety

BBB

(Triple B)

Moderate Safety

Debentures rated À' are judged to offer adequate safety of timely

payment of interest and principal; however, changes in

circumstances can adversely affect such issues more than those in

the 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 debentures in

higher rated categories.

Speculative grades

BB

(Double B)

Inadequate Safety

B

High Risk

C

Substantial Risk

D

In Default

Debentures rated `BB' are judged to carry inadequate 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 payments are met,

adverse business or economic conditions 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 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 reorganisation or liquidation

Note:

1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to reflect

comparative standing within the category.

2) 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 rating outlook is not necessarily a precursor of a rating

change.

3) The contents within parenthesis are a guide to the pronunciation of the rating symbols.

4) Preference share rating symbols are identical to debenture rating symbols except that

the letters "pf" are prefixed to the debenture rating symbols, e.g. pfAAA ("pf Triple A").

Medium term instruments:

Note:

FAAA

("F Triple A")

Highest Safety

FAA

("F Double A") High

Safety

FA

Adequate Safety

FB

Inadequate Safety

FC

High Risk

FD

Default

This rating indicates that 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

degree of safety is not as high as for fixed deposits with "FAAA"

rating.


payment of interest and principal is satisfactory. Changes in

circumstances can affect such issues more than those in the higher

rated categories.

This rating indicates inadequate safety of timely payment of interest

and principal. Such issues are less susceptible to default than fixed

deposits rated below this category, but the uncertainties that the

issuer faces could lead to inadequate capacity to make timely

interest and principal payments.


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 is expected

to be in default upon maturity.

1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from FAA to FC to

indicate the relative position within the rating category of the company raising fixed

deposits.

2) CRISIL may assign rating outlooks for ratings from 'FAAA' to 'FB'. Ratings on Rating




change.


Short Term Instruments Rating Scale:

P-1

P-2

P-3


payment on the instrument is very strong.


payment on the instrument is strong; however, the relative degree of

safety is lower than that for instruments rated "P-1".


payment on the instrument is adequate; however, the instrument is

more vulnerable to the adverse effects of changing circumstances

than an instrument rated in the two higher categories.

P-4

P-5


payment on the instrument is minimal and it is likely to be adversely

affected by short-term adversity or less favourable conditions.

This rating indicates that the instrument is expected to be in default

on maturity or is in default.

Credit Quality Rating Scale

Rating Definition

Bond fund credit quality ratings, which range from ‘AAAf’ to ‘C-f’, are based on the

overall creditworthiness of the securities in a fund’s portfolio. The ratings are broadly

classified into two categories: secure and vulnerable. Ratings from ‘AAAf’ to ‘BBB-f’

are classified as ‘secure’ ratings, indicating the relative safety of the fund’s portfolio

against credit defaults of underlying securities. Ratings from ‘BB+f’ to ‘C-f’ are

classified as vulnerable ratings, indicating the portfolio’s relative vulnerability to losses

from credit defaults of the underlying securities.

A credit quality rating is not a recommendation to purchase, sell or hold a security in as

much as it is not a comment on the market price, yield or suitability for a particular

investor. The ratings are based on current information furnished by the fund or obtained

from other sources that CRISIL considers reliable. The ratings may be changed,

suspended or withdrawn as a result of changes in or unavailability of such information or

based on other circumstances. The rating symbols and definitions are as follows:

Secure Ratings:

AAAf

AAf

Af

BBBf

The fund’s portfolio holdings provide very strong protection against

losses from credit defaults

The fund’s portfolio holdings provide strong protection against


The fund’s portfolio holdings provide adequate protection against


The fund’s portfolio holdings provide moderate protection against


Vulnerable Ratings:

BBf

Bf

Cf

The fund’s portfolio holdings provide uncertain protection against


The fund’s portfolio holdings exhibit vulnerability to losses from

credit defaults

The fund’s portfolio holdings make it extremely vulnerable to losses

from credit defaults

Note:The ratings from ‘AAf’ to ‘Cf’ may be modified by the addition of a plus (+) or

minus (-) sign to show the relative standing within the major rating categories.

Fund Governance and Process Quality Ratings Scale:

CRISIL Fund House

Level-1

CRISIL Fund House

Level-2

CRISIL Fund House

Level-3

CRISIL Fund House

Level-4

CRISIL Fund House

Level-5

Asset Management Companies rated Fund House Level 1 are

judged to possess Highest governance levels and process quality in

fund management practices


judged to possess High governance levels and process quality in

fund management practices.


judged to possess Average governance levels and process quality in



judged to possess Below Average governance levels and process

quality in fund management practices.


judged to possess Poor governance levels and process quality in


Bond Fund Portfolios Rating Scales:

AAAf

AAf

Af

BBBf

Bf

Cf

The fund’s portfolio holdings provide very strong protection against

losses from credit defaults.

The fund’s portfolio holdings provide strong protection against


The fund’s portfolio holdings provide adequate protection against


The fund’s portfolio holdings provide moderate protection against


The fund’s portfolio holdings provide inadequate protection against


The fund’s portfolio holdings have factors present which make them

vulnerable to credit defaults.

Composite Performance Ranking (CPR):

Based on percentile of number of schemes considered in each category:

CRISIL CPR~1

CRISIL CPR~2

CRISIL CPR~3

CRISIL CPR~4

CRISIL CPR~ 5

Top 10% Very Good Performance

Next 20% Good Performance

Next 40% Average Performance

Next 20% Below Average Performance

Last 10% Poor Performance

Non Credit Risk Rating Scale:

AAAr

(Triple A r)

Highest Safety

AAr

(Double A r)

High Safety

Ar

(Single A r)

Adequate Safety

BBBr

(Triple B r)

Moderate Safety

Debentures rated AAAr are judged to offer highest safety of timely

payment of interest and/ or 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 strong position of such issues.

Debentures rated AAr are judged to offer high safety of timely

payment of interest and/ or principal. They differ in safety from

AAAr issues only marginally

Debentures rated Ar are judged to offer adequate safety of timely

payment of interest and/ or principal; however, changes in

circumstances can adversely affect such issues more than those in

the higher rated categories.

Debentures rated BBBr are judged to offer sufficient safety of timely

payment of interest and/ or principal for the present; however,

changing circumstances are more likely to lead to a weakened

capacity to pay interest and repay principal than for debentures in

higher rated categories.

Speculative grades:

BBr

(Single B r)

High Risk

Br

(Single B r)

High Risk

Cr

(Single C r)

Substantial Risk

Dr

(Single D r)

In Default

Debentures rated BBr are judged to carry inadequate safety of timely

payment of interest and/ or 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 Br are judged to have greater susceptibility to

default; while currently interest and/ or principal payments are met,

adverse business or economic conditions would lead to lack of

ability or willingness to pay interest or principal.

Debentures rated Cr are judged to have factors present that make

them vulnerable to default; timely payment of interest and/ or

principal is possible only if favourable circumstances continue

Debentures rated Dr are in default and in arrears of interest and/ 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 reorganisation or liquidation

Note: 1) CRISIL may apply "+" (plus) or "-" (minus) signs for ratings from AA to C to

reflect comparative standing within the category.

2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'. Ratings on Rating




change.


4) The 'r' symbol attached to the rating indicates that the instrument has an element of

non-credit risk (such as market risk). The risk represented by the 'r' symbol would be

specific for each instrument.

5) In situations where there is any arrangement for payment on the instrument by an

obligor other than the issuer or any means of enhancing credit including arrangements

such as guarantees, letters of credit, etc., CRISIL can add the structured obligations rating

symbol '(so)' to this rating scale.

Risk Adjusted Return Ranking (RRR): In RRR, for each category, CRISIL ranks

schemes on a numerical scale (RRR1, RRR2, RRR3 and so on) to cover all schemes.

Bond Funds:

CRISIL Vb1+

CRISIL Vb1

CRISIL Vb2+

CRISIL Vb2

CRISIL Vb3+

CRISIL Vb3

Scheme's NAV volatility is comparable to the volatility of G-sec

Portfolios of Maturity less than 4.0 years

Scheme 's NAV volatility is comparable to the volatility of G-sec

Portfolios of Maturity between 4.0 to 4.5 years








Portfolios of Maturity more than 6.0 years

Gilt Funds:

CRISIL Vg1+

CRISIL Vg1

CRISIL Vg2+

CRISIL Vg2

CRISIL Vg3+

CRISIL Vg3


Portfolios of Maturity less than 8 years


Portfolios of Maturity between 8 to 9 years






Portfolios of Maturity 12 to 15 years


Portfolios of Maturity more than 15 years

ICRA Limited formerly known as INVESTMENT INFORMATION AND CREDIT

RATING AGENCY OF INDIA LIMITED was incorporated in 1991 by the lending

financial/investment institutions, commercial banks and financial service companies as an

independent and professional Investment Information and Credit Rating Agency. ICRA is

a leading provider of investment information and credit rating services in India.

Alliance with moodys investors service:

The Intenatinal Rating Agency MOODY’s INVESTOR SERVICE has taken up

stake in the equity capital of ICRA and is currently ICRA’s largest share holder. The

other shareholders include banks and other financial institutions.

The ICRA factor

(1) Facilitating efficiency in business……

ICRA information products, ratings and solutions reflect independent

professional and impartial opinions which aid business to enhance the quality of their

decisions and help issuers to access a broader anvestor base and even lesser known

companies to access money and capital markets.

(2) The research factor……

ICRA strongly believes that the quality and the authenticity of information

are derivatives of the organizations research base.they have dedicated teams for

Monetary, Fiscal, Industry and Sector research, and a panel of advisors to enhance our in-

house capabilities.our research base equips usto maintain the highest standards of quality

and credibility.

(3) Committed to development of the financial market…….

The focus of ICRA in the coming years will continue to be on developing

innovative concepts and products in a dynamic market environment, generating and

promoting wider investor education and interest, enhancing efficiency and transparency

in the financial market, and providing a healthies environment for market participants and

regulators.

ICRA products and services are designed to:

• Provide information and guidance to institutional and individual investors or

creditors.

• Enhance the ability of the borrowers or issuers to access the money market and

the capital market for tapping a larger volume of resources from a wider range of

the investing public.

• Assist the regulators in promoting transparency in the financial markets

• Provide intermediaries with a tool to improve efficiency in the funds raising

process.

With the growth and globalisation of the Indian capital markets leading to an

exponential surge in demand for professional credit risk analysis, ICRA has been

proactive in widening its service offerings, executing assignments including credit

ratings, equity gradings, specialised performance gradings and mandated studies

spanning diverse industrial sectors. In addition to being a leading credit rating agency

with expertise in virtually every sector of the Indian economy, ICRA has broad-based its

services for the corporate and financial sectors, both in India and overseas, and currently

offers its services under the following banners:

(1 ) Rating services:

As an early entrant in the credit rating business, ICRA is one of the most

experienced credit rating agencies in the country today. ICRA rates rupee dominated debt

instruments issued by manufacturing companies, commercial banks, non banking finance

companies, fianancial institutions, public sector undertakings and municipalities, among

others. The obligations include long term instruments such as bonds and debentures,

medium term instruments such as fixed deposit programmes and short term instruments

such as commercial paper programmes and certificate of deposit. ICRA also rates

structured obligations ans 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, Rating of claims

payable ability of Insurance companies, Project Finance Ratingand Line of Credit Rating.

(2) Information:

The Information Services Division focuses on providing authentic data and

value- added products used by intermediaries, financial institutions, banks, asset

managers, institutional and individual investors and others. The division portfolio of

pproducts include sector/industry- specific studies/ publications, corporate reports and

mandate based studies(customized research). These products, covering a diverse

spectrum of industrial sectors besides the economy, seek to facilitate investment decision

making while providing a perspective on underlying micro variables.

(3)Grading services:

The Grading services offered by ICRA’s Information Services Division employ

pioneering concepts and methodologies and include grading of:

(a) Construction entities(ICRA and Construction Industry Development Council seek

to provide lenders with an independent opinion on the quality of entities graded);

(b) Real Eastate Developers & Projects: (ICRA and The National Real Eastate

Development Council seek to make property buyers aware of the risks associated with

real eastate projects and with the developers ability to deliver according to terms ).

(c) Mutual Fund Schemes: (These seek to provide an independent opinion on the

credit risk associated with investing in various mutual fund schemes).

(d) Healthcare Entities: (present an independent opinion on the quality of care

provided by healthcare entity).

(3) Advisory services:

The advisory Services Division offers wide ranging management Advisory

Services covering the areas of Strategic Practice, Risk management Practice, Regulatory

Practice and Content. While Strategy Practice focuses on improving the organizations

competitiveness across its value chain, Regulatory Practice advises clients like

Governments and Regulators on formulation of economic and financial policies. ICRA

Advisory provides consulting service at transaction level to infrastructure projects, while

under Risk Management Practice is offered on the efficient management of risks to banks

and other lenders. On the content side, ICRA advisory provised customized and

diagnostic reports for diverse entities including governments, investors, project

developers and e-commerce websites.

THE RATING PROCESS:

ICRA’s rating process is initiated on receipt of a formal request (or mandate)

from the prospective issuer. A rating team, which usually consist of two analyst, with the

expertise and skills required to evaluate the business of the issuer, is involved with the

rating assignment. An issuer is provided a list of information requirements and a broad

framework of discussions. These requirements are derived from ICRA’s experience of

the issuer’s business, and broadly cover all aspects that have a bearing on the rating.

ICRA also draws on secondary sources of information, including its own

research division. The rating involves assessment of qualitative factors with a view to

estimating the future earnings of the issuer. This requires extensive interactions with the

issuer’s management, specifically on subjects related to plans, outlook, competitive

position and funding policies.

Plant visits are made to gain a better understanding of the issuer’s production

process, make an assessment of the state of equipment and main facilities, evaluate the

quality of technical personnel and form an opinion on the key variables that influence the

level, quality and the cost of production. These visits also help in assessing the progress

of projects under implementation.

After completing the analysis, a Rating Report is prepared, which is presented

to the ICRA Rating Committee. A presentation on the issuer’s business and management

is also made by the Rating Team. The Rating Committee is the final authority for

assigning ratings.

The assigned rating, along with the key issues, is communicated to the

issuer’s top management for acceptance.the ratings that are not accepted may be

reviewed.. the non- accepted ratings are not disclosed and complete confidentiality is

maintained on them.

If the issuer does not find the rating acceptable, it has the right to appeal for

review. Such reviews are usually taken up only if the issuer provides certain fresh inputs.

During a review, the issuer’s response is presented to the Rating Committee.if the inputs

and/or fresh clarifications are impressive, the Rating Committee would revise the initial

rating decision.

As pat of mandatory surveillance process, ICRA monitors the accepted

ratings over the tenure of the rating instrument. The ratings are generally reviewed once

every year, unless the circumstances of the case warrant an earlier review. The rating

outstanding amy be retained or revised(that is, upgraded or downgraded) on surveillance.

The rating methodology:

ICRA considers all the relevant factors that have a bearing on the future cash generation

of the issuer’s. these factors include:

• Industry characteristics

• Competitive position of the issuer

• Operational efficiency

• Management quality

• Commitment to new projects and other associate companies

• Funding policies of the issue

A detailed analysis of the pat financial statements is made to assess the performance

under the “real world” business dynamics. Estimates of future earnings under various

sensitivity scenarios are drawn up and evaluated against the claims and obligations that

require servicing over the tenure of the instrument being rated. Primarily, it is the relative

comfort level of the issuer’s cash flows to service obligations that determine the rating.

ICRA’s Issuer Ratings

ICRA’s Issuer Rating Scale- for assessing the general creditworthiness of the rated

entitiesrelation to their senior unsecured obligations. ICRA’s Issuer ratings are not

specific to any particular debt

instrument issued by the rated entities.

IrAAA : The highest-credit-quality rating assigned by ICRA. The rated entity carries the

lowest credit risk. Therating is only an opinion on the general creditworthiness of the

rated entity and not specific to any particular debt instrument.

IrAA: The high-credit-quality rating assigned by ICRA. The rated entity carries low

credit risk. The rating is only an opinion on the general creditworthiness of the rated

entity and not specific to any particular debt

instrument.

IrA: The adequate-credit-quality rating assigned by ICRA. The rated entity carries

average credit risk. The rating is only an opinion on the general creditworthiness of the

rated entity and not specific to any particular

debt instrument.

IrBBB: The moderate-credit-quality rating assigned by ICRA. The rated entity carries

higher than average credit risk. The rating is only an opinion on the general

creditworthiness of the rated entity and not specific

to any particular debt instrument.

IrBB: The inadequate-credit-quality rating assigned by ICRA. The rated entity carries

high credit risk. The rating is only an opinion on the general creditworthiness of the rated

entity and not specific to any particular

debt instrument.

IrB: The risk-prone-credit-quality rating assigned by ICRA. The rated entity carries very

high credit risk. The rating is only an opinion on the general creditworthiness of the rated

entity and not specific to any particular

debt instrument.

IrC: The lowest-credit-quality rating assigned by ICRA. The rated entity carries

extremely high credit risk. The rating is only an opinion on the general creditworthiness

of the rated entity and not specific to any particular debt instrument.

Note:

For the Rating categories IrAA through to IrC the sign of + (plus) or – (minus) may be

appended to the Rating

symbols to indicate their relative position within the Rating categories concerned. Thus

the Rating of IrAA+ is

one notch higher than IrAA, while IrAA- is one notch lower than IrAA.

IC

Rating scale:

Long term (including debentures, bond preference share)

LAAA

LAA+

LAA

LAA-

LA+

LA

LA-

Highest safety. Indicates fundamentally strong position. Risk factors are

negligible. There mat be circumstances adversely affecting the degree of

safety but such circumstances, as may be visualized, are not likely to affect

the timely payment of principal and interest as per terms.

Highest safety. Risk factors are modest and may vary slightly. The protective

factors are strong and the prospect of timely payment

Of principal and interest as per terms under adverse circumstances , as may be

visualised, differs from LAAA only marginally.

Adequate safety. Risk factors are more variable and greater in periods of

economis stress. The protective factors are average and any adverse change in

circumstances, as may be visualised may alter the fundamental strength and

affect the timely payment of the principle and interst ad per the terms.

LBBB+

LBBB

LBBB-

LBB+

LBB

LBB-

LB+

LB

LB-

LC+

LC

LC-

Moderate safety. Considerable variability in risk factors. The protective

factors are below average. Adverse changes in business/economic

circumstances are likely to affect the timely payment of principle and interest

as per the terms,

Inadequate safety. The timely payment of interest and principle are more

likely to be affected by present or prospective changesin the business or

economic circumstances. The protective factors fluctuate in case of changes

in economy or business conditions.

Risk prone. Risk factors indicate that obligations may not be met when

due.the protective factors are narrow.adverse changes in business and

economic conditions could result in inability or willingness to service debts

on time as per the terms.

Substantial risk. There are inherent elements of risk and timely servicing of

debts or obligations could be possible only in case of continued existence of

favourable circumstances.

LD Default. Extremely speculative. Either already in default in payment of

interest and/ or principal as per terms or expected to default. Recovery is

likely only on liquidation or re-organisation.

Medium term (including certificated of deposit and fixed deposit programmes)

MAAA

MAA+

MAA

MAA-

MA+

MA

MA-

MB+

Highest safety. The prospect of timely servicing of the interest and the

principal as per the terms is the best

Highsafety. The prospect of timely servicing of the interest and the principal

as per the terms is high but not as high as MAAA rating.

Adequate safety. The prospect of timely payment of the interest and the

principal as per the terms is adequate. Howewer, the debt servicing maybe

affected by adverse changes in the business or economic conditions.

Inadequate safety. The timely payment of interest and principal are more

MB

MB-

MC+

MC

MC-

MD

likely to be affected by future uncertainities.

Risk prone. Susceptibility to default is high. Adverse changes in the business

or economic conditions could result in inability or willingness to service debts

on time and as per the terms.

Default. Either already in default or expected to be in default in the near

future.

Short term(including commercial paper)

A1+

A1

A2+

A2

A3+

Highest safety. The prospect of timely payment of debt or the obligation is the

best

High safety. The relative safety is marginally lower than in ‘A1’

Rating.

Adequate safety. The prospect of timely payment of interest and installment is

adequate, but any adverse change in the business or economic conditions may

A3

A4+

A4

A5

affect the fundamental strength.

Risk prone. The degree of safety is low. Likely to default in case of adverse

changes in business or economic conditions.

Default. Either already in default of expected of default in the near future.

Claims paying ability(of insurance companies):

ICRA’s claims paying ability ratings (CPR’s)for insurance companies are ICRA’s

opinion on the ability of the insurers concerned to honour policy holders claims and

obligations on time.in other words, a CPR is ICRA’s opinion on the financial strength of

the insurer, from a policy holders perspective.

Following deregulation, a paradigm shift is expected in the domestic insurance

sector as newer playersand products enter the market. Given this scenario, ICRA expects

its CPRs to be an important input, influencing the consumers choice of insurance

companies and products. ICRA’s rating process involves analysis of an insurers business

fundamentals and its competitive position and focuses mainly on the insurers franchise

value, its management, organizational structure/ ownership and underwriting and

investment strategies. Besides, the analysis include an assessment of the insurance

companies profitability, liquidity, operating and financial leverage, capital adequacy and

asset/liability management method.

iAAA

iAA

iA

iBBB

iBB

Highest claims paying ability. Indicates fundamentally strong position.

Prospect of meeting policyholders obligations is the best.

High claims paying ability. Risk factors are modest and may vary slightely.

Prospect of meeting policyholders obligations is high and differs from iAAA

only marginally.

Adequate claims paying ability. Prospect of meeting policyholders obligations

is adequate. The risk factors are more variable and greater in periods of

economic stress and any adverse changes in business/economic circumstances

as may be visualised, may alter the fundamental strength.

Moderate claims paying ability. The protective factors are below averageand

adverse changes in business and economic circumstances are likely to affect

the prospect of meeting policyholders obligations.

Inadequate claims paying ability. The protective factors fluctuate in case of

changes in business or economic conditions and prospects of meeting

policyholders obligations are more likely to be affected by such changes.

Weak claims paying ability. Risk factors indicate that policyholders

iB

iC

obligations may not be met when due. Adverse changes in business or

economic conditions could result in inability or unwillingness to receive

policyholders obligations.

Lowest claims paying ability. Indicates fundamentally poor position. Such

companies may often be in default on policyholders obligations and may be or

are likely to be placed under supervision of insurance regulators.

Corporate governance rating scales:

ICRA's Corporate Governance Rating (CGR) is meant to indicate the relative level to

which an organisation accepts and follows the codes and guidelines of corporate

governance practices. Corporate Governance practices prevalent in a company reflect the

distribution of rights and responsibilities among different participants in the organisation

such as the Board, management, shareholders and other financial stakeholders and the

rules and procedures laid down and followed for making decisions on corporate affairs.

The emphasis of ICRA rating is on corporate's business practices and quality of

disclosure standards that addresses the requirements of the regulators and is fair and

transparent for its financial stakeholders The variables, which are analysed for arriving at

the rating, are the shareholding structure, executive management processes, board

structure and processes, stakeholder relationship, transparency and disclosures and

financial discipline. Each of these variables is evaluated with respect to a set of attributes

and a composite score is computed using a proprietary model developed by ICRA. The

rating process also looks at compliance with statutory regulations as laid down in Clause

49 of the Listing Agreement. The focus, however, is on substance over form and

compliance with regulations is only the starting point. The ICRA opinion, is , however

not a certificate of statutory compliance or a comment on company's future financial

performance, credit rating or stock price.

CGR1

CGR2

Implies that in ICRA’s current opinion, the rated company has adopted and

follows such practices, conventions and codes as would provide its financial

stakeholders the highest assurance on quality of corporate governance.

ICRA opinion, howewer, is not a certificate of statutory compliance or a

comment on the rated companys future financial performance, credit rating

or stock price.

Implies that in ICRAs current opinion, the rates compant has adopted and

follows such practices, conventions and codesn as would provide its

financial stakeholders a high level of assurance on the quality of corporate

governance. ICRA opinion, howewer, is not a certificate of statutory

compliance or a comment on the rated company’s future financial


Implies that in ICRAs current opinion, the rated company has adopted the

and follows such practices, conventions and codes as would provide its

financial stakeholders adequate level of assurance on the quality of

CGR3

CGR4

CGR5

corporate governance. ICRA opinion, however, is not a certificate of

statutory compliance or a comment on the rated company’s future financial




financial stakeholders moderate level of assurance on the quality of






financial stakeholders inadequate level of assurance on the quality of




CGR6



financial stakeholders low level of assurance on the quality of corporate

governance. ICRA opinion, however, is not a certificate of statutory

compliance or a comment on the rated company’s future financial


ICRA’s stakeholders value and governance ratings:

The emphasis of ICRA’s Stakeholder Value and Governance (SVG)rating, is on value

creation and value management for all stakeholders of a company, besides the companys

corporate governance practice. The SVG rating considers the companys actual

performance and the accrual of the benefits of such performance among all its

stakeholders, apart from the quality of the comapanys corporate governance practices. It

is the combines assessment of stakeholder value creation and management and the quality

of corporate governance practices that determines the SVG rating.

ICRAs CGR and SVG ratings help the rated corporate entity in raising funds, listing on

stock exchange, dealing with third parties like creditors providing comfort to regulators,

improving image/credibility, improving valuation and bettering corporate governance

practices through benchmarking.

SVG1

SVG2

SVG3

Implies that in ICRAs current opinion, the rated company belongs to the

Highest category on the composite parameters of stakeholders value

creation and management, as also corporate governance practices. ICRA’s

opinion is , however, is not a certificate of statutory compliance or a

comment on the rated company’s future financial performance, credit rating

or stock price.






or stock price.






or stock price.


SVG4

SVG5

SVG6





or stock price.






or stock price.






or stock price.

Project fianance ratings:

The envisages demand for private sector investments in infrastructure projects,

particularly in the energy and road sectors, suggests considerable potential for adequately

structured project finance transactions. Growth in such transactions would also be driven

by the inability of many potential project sponsers to implement such capital intensive

and highly leveraged projects on their balance sheet without having their own credit risk

profile materially impacted. Project financing usually involves seetiing up of a special

purpose vehicle(SPV) , bound by a contractual matrix to various project participants,

which raises debt and services it from its own cash flows, without recourse from its

sponsors. ICRA’s rating approach emphasizes the importance carefully assessing the

risks that characterize such transactions and suitably structuring the projects to mitigate

the risks.

It may be noted that if a project entity proposes to issue a debt instrument that requires a

Credit Rating, ICRA would assign the Credit Ratingon its conventional Credit Rating

scale.the Project Finance rating(PFR) service is essentially a project risk assessment

exercisewhich may be useful to project enetity and its lenders or investors.

ICRA would also provide a detailed assessment report on the project without assigning a

formal PFR if lenders or project entities require only that.

The rating methodology invo,lves an assessment of three broad areas:

(1) sponsor strength

(2) project risks

(3) cash flow adequacy

The ratings given are as follows:

PFR1

PFR2

PFR3

PFR4

Projects classifies as PFR1 have adequate attributes of investment grade

credit. The protective factors are satisfactory.







CARE

Credit Research

and

Analysis

CARE- Credit Research And Analysis

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating,

information and advisory services company promoted by Industrial Development Bank of

India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and

financial services companies. In all CARE has 14 shareholders.

CARE assigned its first rating in November 1993, and upto March 31, 2006, had

completed 3175 rating assignments for an aggregate value of about Rs 5231 billion.

CARE's ratings are recognised by the Government of India and all regulatory authorities

including the Reserve Bank of India (RBI), and the Securities and Exchange Board of

India (SEBI). CARE has been granted registration by SEBI under the Securities &

Exchange Board of India (Credit Rating Agencies) Regulations,1999.

The rating coverage has extended beyond industrial companies, to include public utilities,

financial institutions, infrastructure projects, special purpose vehicles, state governments

and municipal bodies. CARE's clients include some of the largest private sector

manufacturing and financial services companies as well financial institutions of India.

CARE is well equipped to rate all types of debt instruments like Commercial Paper,

Fixed Deposit, Bonds, Debentures and Structured Obligations.

CARE's Information and Advisory services group prepares credit reports on specific

requests from banks or business partners, conducts sector studies and provides advisory

services in the areas of financial restructuring, valuation and credit appraisal systems.

CARE was retained by the Disinvestment Commission, Government of India, for

assistance in equity valuation of a number of state owned companies and for suggesting

divestment strategies for these companies.

The following is the scope of activities foe CARE:

Credit Reports

CARE offers credit reports on companies based on published information and CARE's

in-house data base. These confidential credit reports are useful to entities considering

financing options, joint ventures, acquisitions and collaborations with Indian companies

.

Sector Studies

CARE from time to time conducts studies on select sectors of the Indian economy,

particularly those which were largely government controlled and funded till recently, but

have been thrown open for private investment.

Studies on the Indian Power Sector, Fertilizer Industry and Municipal Finances have been

completed. These studies examine the legal framework and the rules and regulations

under which these sectors function. They also discuss the opportunities for private sector

investment, the risks and returns on these investments and the financing options.

CARE has also prepared reports on twelve of the larger states of the Indian Union, which

account for the bulk of foreign direct investment into India. These reports have been used

by investors setting up infrastructure projects in India and by domestic and international

banks to determine the strength of guarantees and other credit enhancements provided by

the state governments for these projects.

CARE also regularly prepares reports on important segments of the Indian economy.

These reports are used by industry participants, financial intermediaries and also by

analysts in CARE for their rating reports.

Project Advisory Services

For financing its infrastructure, India is increasingly relying on private sector

participation. CARE uses the expertise gained in evaluating the credit risk of projects in

areas such as roads, ports, power and telecom to advise investors and banks about the

regulatory framework, the specific project risks and the ways of risk mitigation. CARE

has helped independent power producers in India understand the functioning of the

principal power purchasers, the State Electricity Boards and evaluate options for

mitigating purchaser risk. CARE has also worked closely with project sponsors to

structure their debt securities based on estimates of cash flows.

Financial Restructuring

The business risk faced by Indian companies increased following the liberalisation of

Indian economy in 1991. To compete in the changed environment, companies have had

to reassess their capital structures. CARE uses its knowledge about various industry

sectors to advise companies about the optimal capital structure and the financial

restructuring options.

Valuation

CARE carries out enterprise valuations for company managements, prospective and

exisiting business partners or large investors. The Disinvestment Commission,

Government of India, has used CARE's services for valuing 20 state owned enterprises

Credit Appraisal Systems

CARE helps banks and non banking finance companies to set up or modify their credit

appraisal systems.

Rating services:

CARE's Credit Rating is an opinion on the relative ability and willingness of an issuer to

make timely payments on specific debt or related obligations over the life of the

instrument. CARE rates rupee denominated debt of Indian companies and Indian

subsidiaries of multinational companies.

CARE undertakes credit rating of all types of debt and related obligations. These include

all types of medium and long term debt securities such as debentures, bonds and

convertible bonds and all types of short term debt and deposit obligations such as

commercial paper, inter-corporate deposits, fixed deposits and certificates of deposit.

CARE also rates quasi-debt obligations such as the ability of insurance companies to

meet policyholders obligations. CARE's preference share ratings measure the relative

ability of a company to meet its dividend and redemption commitments.

CARE has a strong structured finance team and has been instrumental in developing

rating methodologies for innovative asset backed securities in the Indian capital market.

The term 'structured financing' refers to securities where the servicing of debt and related

obligations is backed by some sort of financial assets and/ or credit support from a third

party to the transaction. The securities are termed 'structured' because through specific

choices relating to the type and amount of assets and particular structural features, these

securities may be structured to achieve a desired rating level. CARE assigns the suffix

(SO) to denote that the rating has been achieved by suitably structuring the transaction to

enhance the credit quality of the securities and not on the basis of the credit quality of the

issuer alone.

Rating process:

The rating process takes about three to four weeks, depending on the complexity of the

assignment and the flow of information from the client. Rating decisions are made by the

Rating Committee.

Requests for rating 1. Assigns rating team

Submits information and detailed

schedules

2. The team analyses the

information.

Interacts with the team, responds to

queries raised and provides any

additional data necessary for the

analysis

3. The team interacts with clients,

undertakes site visits, and analyses

data submitted by the client

4. Internal committee previews

analysis.

5. RATING COMMITTEE awards

rating to client

Accepts rating * , ** 6. Notification in press

7. Periodic Surveillance

* : Client may ask for a review of the rating assigned and furnish

additional information for the purpose.

** : Client has option not to accept the final rating in which case, CARE

will not publish the rating or monitor it.

The rating process for structured financing differs from the traditional rating process.

Issuers of structured financings aim to structure appropriate credit protections to achieve

a 'desired' credit rating. The role of CARE is to arrive at the level of credit enhancements

required to achieve the desired rating

Frequency of rating actions:

The rating assigned is communicated to the client along with a detailed rationale. Only

ratings accepted by the clients are published and then monitored on a continuous basis

over the life of the instrument. CARE has a comprehensive in-house data base which

facilitates surveillance of the various industries and companies operating in these

industries.

Each rating is reviewed formally at least once a year, when analysts meet the issuer's

management. A review can also be triggered by a major development in the company or

in the industry, which may have a significant bearing on the credit-worthiness of the

company. As a part of the review exercise, actual financial performance is analysed in the

light of the estimates made earlier and deviations are examined.

CARE puts the rating under Credit Watch, when any event or deviation from the

expected trend has occurred or is expected and additional information is necessary to take

rating action. The rating may be retained, upgraded or downgraded based on the changed

prospects for the issuer. A rating change is at the absolute discretion of CARE, without

concurrence of the client.

Rating methodology:

CARE undertakes rating exercise based on information provided by the company, in-

house database and data from other sources that CARE considers reliable. CARE does

not undertake unsolicited ratings. The primary focus of the rating exercise is to assess

future cash generation capability and their adequacy to meet debt obligations in adverse

conditions. The analysis therefore attempts to determine the long-term fundamentals and

the probabilities of change in these fundamentals, which could affect the credit-

worthiness of the borrower. The analytical framework of CARE's rating methodology is

divided into two interdependent segments. The first deals with the operational

characteristics and the second with the financial characteristics. Besides quantitative

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 the analysis vary with the type of issuer.

Rating determination is a matter of experienced and holistic judgement, based on the

relevant quantitative and qualitative factors affecting the credit quality of the issuer.

What ratings do not measure?

It is important to emphasise the limitations of credit ratings. They are not

recommendations to invest. They do not take into account many aspects which influence

an investment decision. They do not, for example, evaluate the reasonableness of the

issue price, possibilities for capital gains or take into account the liquidity in the

secondary market. Ratings also do not take into account the risk of prepayment by issuer.

Although these are often related to the credit risk, the rating essentially is an opinion on

the relative quality of the credit risk.

Issuer ratings:

CARE’s Issuer Ratings (CIR) is issuer specific assessment of credit risk. CIR is similar to

long term instrument ratings except for the fact that they are specific to an issuer and not

specific to any of the issuers instruments. Issuer rating factors in expected performance of

the entity over an intermediate time horizon of around three years and reflects the overall

debt management capability of the entity as regards to its senior unsecured debt

obligations. Once accepted, the ratings will be subject to periodic reviews. The rating

company will have to provide a rating requeat to CARE giving a notice of period of one

year for withdrawal of an accepted rating. The rating will mainly be applicable to

organized type of business enterprises, that is, public and private ltd. Companies.

CARE AAA

CARE AA

CARE A

CARE BBB

CARE BB

Issuers with this rating are considered to be of the best credit quality,

offering highest safety of timely servicing of debt obligations. Such

issuers carry minimal credit risk.

Issuers with this rating are considered to be of the high credit quality for

timely servicing of debt obligations. Such issuers carry very low credit

risk.

Issuers with this rating are considered to be of the adequate credit quality

for timely servicing of debt obligations. Such issuers carry low credit risk.

Issuers with this rating are considered to be of the moderate safety for

timely servicing of debt obligations. Such issuers carry moderate credit

risk.

Issuers with this rating are considered to be of the inadquate safety for

timely servicing of debt obligations. Such issuers carry high credit risk.

CARE B

CARE C

CARE D

Issuers with this rating are considered to be of the low safety for timely

servicing of debt obligations. Such issuers carry very high credit risk.

Issuers with this rating are considered to be having very high likelihood of

default in the payment of interest and principal.

Issuers with this rating are of the lowest category. They are either in

default or likely to be in default soon

Rating scale:

Rating symbols for long and medium term instruments

CARE AAA

(FD)/(CD)/(SO)

CARE AA

(FD)/(CD)/(SO)

Instruments carrying this rating are considered to be of the best quality,

carrying negligible investment risk. Debt service payment are protected by

stable cash flows with good margin. While the underlying assumptions

may change, such changes can be visualized are most unlikely to impair

the strong position of such instruments.

Instruments carrying this rating are to be judged of high qualiy by all

standards. They are also classified as high investment grades. They are

rated lower than CARE AAA securities because of somewhat lower

margins of protection. Cjanges in assumptions may have greater impact or

the long-term risks may be somewhat larger. Overall, the difference with

CARE AAA rated securities is somewhat marginal.

CARE AA

(FD)/(CD)/(SO)

CARE BBB

(FD)/(CD)/(SO)

CARE BB

(FD)/(CD)/(SO)

CARE B

(FD)/(CD)/(SO)

Instruments with this rating are considered upper medium grade

instrumentsand have many favourable investment attributes.safety for

principal and interest are considered adequate. Assumptions that do not

materialize may have a greater impact as compared to instruments rated

higher.

Such instruments are considered to be of investment grade. They indicate

sufficient safety for payment of interest and principal, at the time of

rating. Howewer, adverse changes in assumptions are most likely to

weaken the debt servicing capability compared to higher rated instruments

.

Such instruments are considered to be speculative, with inadequate

protection for interest and principal payments.

Instruments with such rating are generally classified susceptible to default.

While interest and principal payments are being met, adverse changes in

business conditions are likely to lead to default.

Such instruments carry high investment risks with the likelihood of

CARE C

(FD)/(CD)/(SO)

CARE D

(FD)/(CD)/(SO)


Such instruments are of lowest category. They are either in default or

likely to be in default soon.

(FD)- Fixed Deposit

(CD)- Certificate of Deposit.

(SO)- Structured Obligations

Rating symbols for short term instruments:

PR-1

PR-2

PR-3

Instruments would have superior capacity for the repayment of short term

promissory obligations. Issuers of such instruments will normally be

characterized by leading market positions in established industries, high

rates of return on funds employed etc….

Instruments would have strong capacity for repayment of short term

promissory obligations. Issuers would have most of the characteristics as

for those with PR-1 instruments.

Instruments have an adequate capacity for repayment of short- term

promissory obligations. The effect of industry characteristics and market

composition may be more pronounced. Variability in earnings and

profitability may result in changes in the level of debt protection.

Instruments have minimal degree of safety regarding timely payment of

short term promissory obligations and the safety is likely to be adversely

PR-4

PR-5

affected by short term adversity or less favourable conditions.

The instrument is in default or is likely to be in default on maturity.

Long Term Loans: CLR is an opinion on the ability and willingness of a borrower to

make timely payments on specific loan obligations, over its life. CLR is aimed at

providing an additional input in the decision making process of banks, financial

institutions, and non-bank financial services companies. in addition, the ratings assist

lenders in making quick credit decisions, determining the risk premium to be charged and

in portfolio monitoring. Borrowers benefit from wider access to potential lenders and

reduced cost of borrowing. The rating process is initiated either by a bank or institution,

with the consent of the borrower or by the borrowing entity itself. The ratings are kept

confidential from third parties

CARE AAA(L)

CARE AA(L)

CARE A(L)

CARE BBB(L)

CARE BB(L)

CARE B(L)

CARE C (L)

CARE D(L)

Loans with this rating are considered to be of the best credit quality,

offering highest safety for timely servicing of loan obligations. Such loans

carry minimal credit risk.

Loans with this rating are considered to be of the high safety for timely

servicing of loan obligations. Such loans carry very low credit risk.

Loans with this rating are considered to be of the quality, adequate safety

for timely servicing of loan obligations. Such loans carry low credit risk.

Loans with this rating are considered to be of moderate safety for timely

servicing of loan obligations. Such loans carry moderate credit risk.

Loans with this rating are considered to be of inadequate safety for timely

servicing of loan obligations. Such loans carry high credit risk.

Loans with this rating are considered to be of low safety for timely

servicing of loan obligations. Such loans are susceptible to default.

Loans with this rating are considered to having very high likelihood of


Loans with this rating are of the lowest category. They are either in

default or are likely to be in default soon.

Short term loans:.

Performance rating of parallel marketers:

These ratings are on a scale of 1 to 4 as notified by Govt. of India

.

1-Good

2-Satisfactory

3-Low Risk

Pl 1

PL 2

PL 3

PL 4

PL 5

Loans with this rating would have strong capacity for timely payment of

short-term loan obligations and carry lowest credit risk. Within this

category, loans with relatively better credit characteristics are assigned

PL1+ rating.

Loans with this rating would have adequate capacity for timely payment

of short-term loan obligations and carry higher credit risk as compared to

loans rated higher.

Loans with this rating would have moderate capacity for timely repayment

of short term loan obligations at the time of rating and carry higher credit

risk as compared to loans rated higher.

Loans with this rating would have inadequate capacity for timely payment

of short-term loan obligations and carry very high credit risk. Such loans

are susceptible to default.

The loan is in default or is likely to be in default on maturity.

4-High Risk

Collective investment schemes:

CARE 1 (CIS)

CARE 2 (CIS)

CARE 3 (CIS)

CARE 4 (CIS)

Schemes carrying this rating are considered to be very strong, with high

likelihood of achieving their objectives and meeting the obligations to

investors.

Schemes carrying this rating are considered to be strong, with adequate

likelihood of achieving their objectives and meeting the obligations to

investors. They are rated lower than CARE 1 (CIS) rated schemes because

of relatively higher risk.

Such schemes are considered to have adequate strengths for achieving

their objectives and meeting the obligations to investors. They are

considered to be investment grade

Schemes carrying this rating are considered to have inadequate capability

to achieve their objectives and meet the obligations to investors. They are

considered to be speculative grade

Such schemes are considered weak and are unlikely to achieve their

objectives and meet their obligations to investors. They have either failed

or are likely to do so in the near future.

CARE 5 (CIS)

Credit Rating criteria Manufacturing Companies:

CRISIL:

CRISILS framework for assessing credit quality covers the four broad areas of Business

risk, Financial risk, Management risk and Project risk.

Business risk:

Business risk analysis covers the business fundamentals of the rated companies, the

characteristics of the industry in which it operates, its competitive and market position in

the industry and operational efficiencies.

The analysis begins with the fundamental assessment of the company’s environment in

terms of the industry in which it operates, the risks attached to that industry and the

government policies affecting that industry. The evaluation extends to an assessment of

the companys market position and its operational efficiencies.

(1) Industry risk: assessing the industry risk is fundamental to evaluating a

company’s business risks. Some key factors pertinent across industries are its

size, growth prospects, competitive scenario and the demand-supply dynamics

in the industry, its importance to the economy, government policies, entry

barriers, profitability & cyclicality. The rating also considers other critical

industry factors such as its vulnerability to technology change and to

regulatory/political interference. The industry rating broadly determines the

median rating for corporates in that industry.

(2) Government policies: the impact of government policies on various industries

is an important parameter in analyzing the business risk. In evaluating this, the

following factors are considered-

(i)The importance ogf the industry to the Indian Economy

(ii)Tariff barriers(both quantitive and qualitative)

(iii)Excise duties and taxes

(iv)Domestic price controls

(v) Incentives for new investments and incentives for exports.

(vi)Legislation regarding pollution control measures

(vii)Laws with respect to foreigh exchange.

(3) Market Position: An anlysis of the rated companys market position provides

insights into its current strengths in the market place and its ability to sustain

its competitive advantage. CRISIL undertakes a detailed analysis of both the

degree of competition in each market segment and the competitive dynamics

amongst different players to evaluate the rated entitiesmarket position. Entry

barriers to the industry and the capacity expansions of existing players are

analysed to understand the dynamics of demand and supply. CRISIL also

analyses regional demand-supply balances as some products exhibit diverse

characteristics in different markets.

An analysis of the companys products categories on the basis of their

size, features, price rangs and consumer segments gives

Crisil an insight into the company’s positioning strategy. The market postion of

companies in dynamic industries such as software, drugs, pharmaceuticals and

consumer durables is analysed in terms of their track record and their ability ti

innovate and launch products and achieve commercial success.

(4) Operating Efficiency: operating efficiency is a critical parameter in

evaluating a company’s business risk. The risk factors considered while

evaluating operational efficency vary from industry to industry. Some of the

key factors common across industries are:

(i) Technology

(ii) Access to resources

(iii) Human resources

(iv) Capacity utilization and flexibility

(v) Level of integration

(vi) Research and development

Financial risk analysis:

Financial risks anaysis includes an assessment of the companys past financial

performance, its future performance and its financial flexibility with particular

emphasis on its cash flows.

(1) Accounting Quality: the financial ratios and statements used by CRISIL to

analyse a companys financial performance are derived from the audited

financial statements. Consequently, CRISIL commences its financial risk

analysis by assessing the company’s accounting quality. Some of the ey areas

analysed include:

(i) overstatement/ understatement of profits

(ii) qualifications made by autditors.

(iii) Method of income recognition and depreciation

(iv) Inventory valuation policies.

(v) Off-balance sheet items/contingent liabilities.

(2) Earnings Protection: An evaluation of the company’s past and

Future profit potential is performed to analyse the level of credit protection available

and sustainability of the same. CRISIL evaluates the profitability of the company’s

operations and its sensitivity to price fluctuatiuons and downturns in the industry. The

operational cost structure is also analysed and a comparison is made with other

players in the industry.

Since a credit rating is an assessment of the company’s ability to meet its debt

obligations in future, CRISIL places greater emphasis on the company’s future

earning capacity.

(3) Adequacy of cash flows: An analysis of cash flows is undertaken to

evaluate the company’s debt servicing capability. The evaluation is important

as “earnings” is an accounting concept and only cash flows reveal a

company’s actual financial position and its ability to service interest and

principal payments. Cash flows are analysed with respect to their stability and

adequacy in relation to debts and working capital needs and capital spending

requirements.

(4) Financial Flexibility: CRISIL evaluates a companys ability to generate funds

through alternative sources in case of nay financial distress. The companys

contingency plans and its abilityto deal with various adverse scenarios are

analysed. The company’s ability to raise funds through internal

sources(internal accruals, saleable assets) and external sources(relationship

with bankers, liquidity back-ups) to cover temporary shortfalls is evaluated.

An anlysis of the capitalization ratios is undertaken to evaluate if the company

is overly reliant on debt funding as this would limit its ability to raise

resources from the debt market. Additionally; a companys flexibility to defer

its capital expenditure plans in case of a weakening financial positon is also

analysed. The external support that the rated entity can receive from the parent

company or group companies is also analysed at great length and factored in

the overall rating.

Management Evaluation:

An evaluation of the company’s management, its philosophies, strategies/policies and

risk appetite is undertaken in assessing management risk.

CRISILS evaluation of a company’s management entails understanding the goals,

philosophies and strategies that drive the company’s business and financial

performance. An evaluation of the management involves several aspects such as

understanding the organizational and reporting structur, the management experience

and the track record , the level of commitment and integrity of its personnel and

adequacy of its planning and control systems.

The managements past success in introducing new products and its ability to manage

chamge in the external environment such as regulatory or technological changes is

also analysed. A high-risk appetite manifested in high leveraging or a propensity to

take up projects that are larger than the existing operations is viewed negatively by

CRISIL.

Succession is another key area concern in case the company’s operation are

dependent on a single promoter or manager. Corporate governance principals

followed by the management in it sdaily operations and transparency in management

actions are also evaluated.

Project risk evaluation:

If the company is implementing any large project, the risks associated

implementation, is funding and marketing risks are also evaluated.

In case of companies implementing a project, CRISIL evalutes the risk associalte

with that project and factors in these risks while assigning the overall rating. The

relative size of th new project compared to the existing operations indicated the

significance of the project risk in the overall rating.

Implementation risks such as time and cost 0ver- runs and technology risks and the

impact of these on the projects viability, and funding risks in terms of the projects

capital structure and funding arrangements are also evaluated.

The projects market risks in relation to the companys existing product line and the

companys trach record in implementing such projects are given adequalte importance

in assigning the rating.

Care:

CARE also follows the same criteria for rating the manufacturing companies, with

some changes. The only difference between the two is that CARE does not take into

consideration the project risk but on the other hand conducts the economy and

industry risk analysis.

• Economy and Industry Risk Analysis:

CARE’S analysis of industry risks focuses on the prospects of the industry

and the competitive factors affecting the industry. The economic/industry

environment is assessed to determine the degree of operating risks faced by the

company in a given business. Investment plans are the major players in the

industry, demand supply factors, price trends , changes in technology,

international/domestic competitive factors in the industry, entry barriers, capital

intensity, business cysles etc… are the key ingredients of the industry risk. CARE

also takes into account economy iwde factors which have a bearing on the

industry under consideration. The strategic nature of the industry in the prevailing

policy environment, regulatory oversight governing industries etc… are also

analysed.

CARE also conducts the Business risks analysis, the fianacial risks anaysis and

the management evaluation which is similar to CRISIL.

Credit Rating Criteria For Banks And Financial Institutions

CRISIL:

The objective of CRISILs analysis is to form an opinion on the types of risks that may

affect the relative ability of banks and financial institutionsto service the interests and

principal payments on the rated instruments in a timely manner.

The exercise incorporated the review of the overall economy, th financial sector and the

banking industry. CRISIL also analyses the changing regulatory environment and

increased competition arising out of liberlisation. Over the past decade, the Indian

economy had been liberalized and the financial sector, deregulated. Both the opening up

of the economy and the gradual lowering of the tariff barriershas exposed the corporate

sector to risk of foreign competition.some of the risks have manifested in certain sectors

where the domestic industry has been rendered uncompetitive.

The financial sector is going through a phase of trandformation and convergence and

there has been increasing blurring of boundaries between the role of banks and financial

institutions, which is likely to set up competitive pressures in future. This transformation

is evident on both assets and liability side. On the asset side, banks are shifting from their

historical business model of providing finance to corporates to aggressively focus on

financing retail assets such as housing, automobiles and commercial vehicles. This is

driven both by weak demand from corporates as well as the paucity of clients with good

creditquality. On the liability side, the transformation is from a passive retail strategy to a

very active retail thrust to attract the retail customers and increase the deposit base. The

entry of the new private sector banks and marketing strategy adopted by them has

precipitated this transformation.Apart from this transformation, banks are also going

through the phase of convergence wherein almost all the banks are offering the entire

gamut of products and services on the asset and liability side to both retail as well as

wholesale customers.

An entry- specific analysis of the risk profile is don’t through the qualitative cum

quantitative approach following a structures methodology called the CRAMEL model.

Apart from this, CRISIL also evaluates the market position of the bank/FI being rated and

its strategy in the emerging competitive scenario.

The following is the criteria based on which CRISIL rates the banks and financial

institutions:

CRISIL fators in the size of an entity in the financial sector and looks at its positioning in

the industry. A larger size enables the entity to with stand systematic shocks ans

determines the extent of system support that can be expected for the entity. Diversity in

the product portfolio, business lines and customer base are also positively factored in by

CRISIL.

The CRAMEL model comprises of the following:

C- Capital Adequacy.

R- Resource- Raising Ability.

A- Asset Quality.

M- Management and systems evaluation

E- earnings potential.

L- liquidity/asset liability management.

This CRAMEL model can be explained as follows:

Capital adequacy: An entitys capital provides it with the necessary cusion to with stand

credit risks and other risks in its business. While assigning a rating, CRISIL analysis the

capital adequacy level and its sustainability in the medium to long term. This assessment

is significantly influenced to relative profitability, the entity’s risk profile and its asset

quality. This analysis encompasses the following factors:

(1) Size of the capital: the absolute size of capital imparts flexibility to the banks

or FI to withstand shocks and thus, an entity with higher absolute capital is

viewed favourably.

(2) Quality of capital: the proportion of core capital is the primary indicator of the

quality of a bank or FI’s capital. CRISIL also analysis other issues,like the

presence of hidden reserves and the percentage of the investment portfolio

that is marked to the market.

(3) Sustainability of capital ratios and flexibility:a bank or FI’s ability to support

the increased asset base through earnings is an important parameter in

assessing the sustainability of its capital adequacy. Such an entity is viewed

favourably.

(4) Growth plans:CRISIL factors the rated bank or FI’s future growth plans while

analyzing its capital adequacy. Its capital adequacy would be regarded as

unsustainable if the entity pursues a high growth strategy.

Resource- raising ability:CRISIL analyses the resources position of the bank or FI

in terms of its ability to maintain a low cost stable resource base. Banks are

significantly deposit funded and FI’s have to depend on wholesale funds. FI’s do raise

retail funds but as compared to banks, they are at a disadvantage while doin so in

terms of restrictions on the minimum tenure and interest rates etc….

The following issues are considered while analizing the resource position of a

bank…..

(1) Size of the deposit base: A large deposit base provides stability to a bank’s

resource position by diversifying the depositor base and ensuring a continuous

stable source of funds.

(2) Diversity in deposit base: The number of branches and their geographical

spread lend diversity to its deposit base. Thus, a bank with a large number of

branches dispersed all over India and with an optimal rural/urban is viewed

favourable.

(3) Deposit mix: A bank’s deposit mix has an impact on its costs of deposits. A

high proportion of savings and current deposit leads to a low cost resource

base. CRISIL also analyses the trends in deposit mix to form an opinion on

future stability and costs.

(4) Growth in deposit: accretion to deposits is the main source of funding asset

growth and managing liquidity risks in banks. CRISIL compares the growth in

deposits of a bank with industry trends to make relative judgements.

(5) Cost of deposit: Banks that have low cost of resources not only benefit

through higher profitability but also have greater flexibility to increase deposit

rates in order to maintain their resources position.

The following issues are considered while analyzing the resource position of a

financial institution……..

(1) Diversity of investor base: given that FI’s are predominantly wholesale

funded., the diversity of the investor population does not mitigate an FI’s risk

profile to some extent. FI’s that are dependent on few investors are viewed

less favourably.

(2) Funding mix and cost of funds: The funding mix between domestic and

foreign currency funding is also examined to determine the FI’s overall

profile.FI’s that tend to have higher proportion of foreign currency funding

carry the risk of a foreign currency borrower defaulting on payment

obligations and thus exposing the FI to increased currency risk. This risk

assumes greater significance at times when the economy is slowing down or

there is a greater instance of corporate defaults.

(3) Retail penetration: Some of the leading FI’s have started tapping the retail

market for bonds and deposits. These funds do impart stability to the funding

mix and the trends in raising retail sources are favourably factored into

CRISIL’s risk evaluation.

Asset quality:A bank or FI’s asset quality is a measure of its ability to manage credit

risks. Besides studying the banks credit appraisal mechanisms, portfolio monitoring

procedures and problem asset resolution strategies, CRISIL analyses asset quality on

the basis of the following parameters:

(1) Geographical diversity and diversity across industries: Geographical diversity

of asset base and diversity across industries, alonwith single risk concentration

limits, are important inputs in determining the asset quality of banks and FI’s.

Regional banks with limited operations and branch network have lesser

flexibility to diversify their advances portfolio than banks with a national

presence and are thus susceptible to adverse economic conditions in a

particular region.

(2) Client profile or corporate asset portfolio: CRISIL analysis the profile of

clients in the asset portfolio to make a judgement on portfolio quality. The

ability of a bank or FI to attract bettr credit quality clients is an important

indicator of future credit quality.also, a bank or FI’s ability to attract and

retain good quality clients by providing value-added services would enhance

asset quality in future.

(3) Quality of non-industrial lending: CRISI:L analysis the quality of non-

industrial portfolio in arriving at a judgement of the overall asset quality of a

bank.the credit quality of the asset portfolio is also indicated by the segment

wise non-performing asset levels of the portfolio, revealing the performance

of the bank in each segment. In recent times, both the banks and FI’s are

focusing on retail customer loans particularly housing and vehicle loans.

CRISIL aso looks at the quality of retail customer growth levels, underwriting

standardsand the recovery mechanisms.

(4) NPA(non-productive asset)levels: The gross NPA levels help to benchmark

the banks or FI’s ability to manage its asset portfolio on a relative scale. Net

NPA levels are an indicator of the balance-sheet strength of the bank, the

proportion of earning assets held by it and the potential credit loss. The

proportion of earning assets and the potential credit loss would have a bearing

on the banks future earnings capability.

(5) Movement of provision and write-offs:average positioning including write

offs, over a five year timframe is an indicator of the level of cleaning up done

by a bank over a period of time. This average positioning level and its

movement is an indicator of the portfolios credit risk and the expected future

write-offs and provisioning, which would further affect the bank’s earnings

capability.

(6) Growth in advances: CRISIL closely analyses the pattern and the nature of

such growth, studying entities with higher growth rates more carefully to look

into the nature of the growth, the reasons for it and the implications on the

asset quality. An entity that has grown by attracting good quality clients from

its competitors would be viewed more favourably than one that has grown just

by increasing its geographical presence or diluting credit criteria.

Management and Systems Evaluation: CRISIL believes that the quality of

management can be an important differentiating factor in the future performance of a

bank/FI.the management is evaluated on the following parameters:

(1) Goals and strategies: A banks future goals and strategies are evaluated to take

a view on its managements vision. The banks ability to adapt to the changing

environment and its ability to mange credit and market risks, especially in a

scenario of increasing deregulation of the financial markets, assumes critical

importance. CRISIL also has extensive discussions with the banks

management on their philosophy with regars to diversification, asset growth

and maintainence of capital, provisioning and liquidity levels.

(2) Systems and monitoring: CRISIL studies credit appraisal systems and the

systems for managing and controlling credit and market risks at a portfolio

level. Significant emphasis is laid on the risk monitoring systems. CRISIL

attaches significance to the operating systems for data capturing and MIS

reporting in a bank. CRISIL also analyses expenses made on technology

during the recent period and the banks strategy of using technology effectively

as a delivery platform to reduce cost and improve service levels.

(3) Appetite of risk: CRISIL also analyses the bank managements attitude

towards risk and the level of interest rates, foreign exchange and equity risks

in the balance sheet. A high-risk propensity typically reflects in high volatility

in earnings in both the fund based ans fee businesses. A management with

high propensity to take risks is viewed cautiously.

(4) Motivation levels of staff: Employee motivation levels should be a function of

remuneration, management involvement and job satisfaction. Such motivation

levels would directly affect a banks service levels, which is the key service

factor in a market-driven environment.

Earnings potential: CRISIL analyses a banks/FI’s earnings on the basis of the level,

diversity and stability in earnings.

(1) Level of earnings: the levelof earnings as measured by the return on total

assets(ROTA) provides the bank or FI a cushion for its debt servicing and also

increases its ability to cover its asset risk. ROTA is a function of interest

spreads, expense levels, provisioning levels and the non-interest income

earned by the bank. The size of the net profit is also factored in while rating

the entities earnings.

(2) Diversity of income sources: Diversity of income sources is an important

input in analyzing the stability of earnings. CRISIL reviews the compostion of

interest revenue streams while analyzing the earnings position of a bank or FI.

It also analyses the composition of the i=non-interest income while evaluating

the earnings which includes income from trading activities, which tend to be

volatile. A closer analysis of the composition of revenue treams helps in

formaing an opinion on the sustainability of the earnings.

(3) Efficiency measures: CRISIL looks at the level and the trend of operating

expenses and degree of automation in the bank/FI. CRISIL looks at salary

expenses and total non-interest expenses as a proportion of total income and

average assets.

Liquidity/asset liability management: CRISIL assess the asset liability maturity

profile of the rated entity to form an opinion on the liquidity risk as well as the

interest rate risk.

Liquidity risk: CRISIL views mos of the public sector banks favourably on this

patameter due to the stable accretion to deposited and the liquidity support available

to them. An FI’s liquidity position is a function of its management’s policy of main

taining treasury portfolios to meet asset and liability side liquidity demands.

Howewer, on account of their significance to the domestic financial sector FI’s enjoy

a high degree of financial flexibility that reduces liquidity risks to fairly low levels.

The specific liquidity parameters analysed by CRISIL are:

(1) Liquid assets/ Total assets: to arrive at this ratio, CRISIL looks at the

percentage of sovereign investments in an entitys books to its total assets.this

can also be roughly derived from the credit deposit ratio.

(2) Proportion of small deposit: CRISIL looks at the proportion of deposit below

rs. 150 million to the banks total deposit base. These small sized retail

deposits tend to be inherently more stable.

(3) Interest rate risk: The rating factors are in the volatility to the bank or FI’s

earnings to interest rate changes. CRISIL analyses the entity’s asset liability

maturity profile to judge the level of interest rate risk.

ICRA:

An ICRA's financial sector debt ratings include the major entities, one of which is, the

Banks and Financial Institutions. ICRA's ratings factor the entire gamut of risks that can

possibly affect the operations of a finance company - operating risks, financial risks and

management risks. The key determinants of operational risk include volatility in revenues

and expenses, regulatory risks, risk of administrative expenses going out of hand, and

deterioration in asset quality. The financial risk is driven by capital adequacy, asset

liability management, solvency, financial flexibility and also the accounting quality. The

management risks include management quality and efficacy of systems.

In the context of globalization of the Indian economy, progressive de-regulation of the

banking and financial sector, increasing volatility in the economy and the financial sector,

and raising competition, most banks are having a re-look at their strategies, structure

process and systems. Faced with rapid changes in the competitive and regulatory

landscape, banks are focusing on a variety of initiatives, such as, re-jigging strategic

positioning, broadening product portfolio, strengthening risk management systems, using

technology as a competitive weapon, enhancing skills of human resources, improving

customer relationship management and reducing transaction costs. IMaCS works with

regulatory bodies, banks, financial services firms, insurance companies and clearing

agencies in a variety of ways to help them accomplish their objectives.

Risk management:

IMaCS is one of the leading solution providers in the area of Risk Management. ICRA

believes that better risk measurement leads to better risk management. Better risk

measurement helps risk managers understand fully the nature and magnitude of their

exposures, which improves the risk adjusted return on capital. A major part of ICRA’s

work focuses on translating these risk concepts into practical tools that can be integrated

into business processes. ICRA works closely with clients to ensure that our experience is

translated into tangible results.

Specifically, ICRA offers the following services in the banking and financial services

sector:

(1) Implementing credit risk management system: IMaCS has designed and

developed a Credit Risk Management software, IMaCS Risk Scorer that

comprehensively addresses business and regulatory issues with respect to risk

management. The solution helps banks in complying with the requirements of

the accord. The solution provides risk scoring of obligors, regulatory and

economic capital calculators and portfolio analysis. The solution is web-

enabled and browser based with the user interface developed using ASP.NET.

(2) Designing and implementing risk models:

(I) Credit Risk Models: We have validated models for measuring in

virtually every segment that a lender would like to focus on - Large

Corporate Segment, SME Segment, SBS (Small Business &

service) Segment, Retail (Home Loan and Personal Loan)

Segment, Banks, NBFCs, Project Finance, Sub-Sovereign

Exposures, and Broker Finance.

(II) Portfolio risk models: for estimating probability of defaults, loss

given defaults, economic capital for credit risk and RAROC.

(III) Market Risk Models: For Asset-Liability Management and

Calculating VaR for Estimating Economic Capital for Market risk.

Derivative Models: For Pricing Rupee and Foreign Currency

Options, Futures and Exotics,.

(IV) Operations Risk Model: For Estimating Capital for Operations

Risk.

(3) Process development and organization structure:

ICRA works with clients to develop appropriate processes across various

functions. These include limit setting, monitoring processes, and reporting

processes in the area of risk management.

ICRA understands design and help clients implement all customer related

processes across all channels – sales, customer care & complaints handling

across branch, call centre & web. This helps banks and financial institutions in

improving customer loyalty while optimising costs. ICRA also help banks in

the area of operational processes like treasury, credit etc. This helps reduce

costs and improve productivity. ICRA conducts organisational design studies.

These studies address issues such as developing appropriate organisational

structure, identifying HR requirements, and formulating roles and

responsibilities of key executives and committees.

(3) Business Strategy: ICRA works with clients in formulating business

strategies and/or fine-tuning the organisation structure to implement the

chosen strategies. Strategy formulation spans a variety of areas such as M&A,

organic growth, entry strategy, profit improvement plans, channel

management, product development strategies, cost reduction strategies, and

the like. On request, ICRA also assists clients in the implementation of

strategies.

ICRA believes that structure should follow strategy, rather than the other

around. Many banks/financial services organisations review their business

models and/or organization structure every few years so as to remain

contemporary and competitive in the market. IMaCS works closely with

clients to help them successfully navigate the difficult terrain of strategic

planning and restructuring.

(4) NPA management: ICRA works with clients in designing appropriate

strategies for improving recovery from non-performing assets. ICRA studies

the underlying obligor, reasons for accounts turning non-performing, the

actual and potential recovery patterns, the security details, and other germane

factors that enable us to recommend the best possible recovery options that

maximise recovery or improve the chances of a successful rehabilitation.

(5) Mergers/De-mergers and Portfolios Transactions: ICRA undertakes

economic valuation and formulate merger/de-merger strategies for banks and

financial institutions. The scope of work extends to evaluating the strategic

reasons for a merger/de-merger, undertaking economic valuation, evaluating

technological constraints and integrating Human resources to ensure strategic

fit. ICRA also works with clients on buying & selling of corporate & retail

portfolios. It conduct due-diligence and economic valuation and assist clients

during negotiations and deal closure.

(6) Training: ICRA conducts a variety of training programmes in the areas of

Risk Management. These Programmes span the functional areas Credit Risk,

Market Risk and Operations Risk. These include "User Training" and "Train

the Trainer Programmes". Several banks and institutions that need superior

risk management skill sets have used IMaCS to enhance their skill levels thus

enabling them to evaluate complex forms of risk that frequently arise in

business transactions today.

CARE:

CARE’s ratings are an opinion on the relative ability and the willingness of an issuer

to make timely payments on the specific debt obligations over the life of the

instrument. CARE has developes a comprehensive methodology for credit rating of

debt instruments issued by the banks.

Some of the factors considered in CARE’s rating analysis are described below:

(1) Quantitive factors

(2) Qualitative factors

Quantitive factors: The starting point in reaching a rating decision is a detailed

review of key measures of financial performance and stability. These factors resemble

the CRAMEL model of CRISIL. It includes all factors like capital adequacy, asset

quality,resources,. Earnings and liquidity.

Qualitative factors: In addition to the quantitative factors, certain qualitative factors

are also taken into consideration by CARE, which are as follows:

(1) Ownership: An assessment of ownership pattern and shareholder support in a

crises is significant. In case of public sector banks, the willingness of the

government to support the bank is an important consideration.

(2) Management quality: The composition of the board, frequency of the change

of CEO, organization structure of the bank, strategic objectives, adequacy of

information systems, extent of frauds committed in the bank etc… are

considered. CARE focuses on the modern banking practices and systems,

degree of computerization, capabilities of senior management etc..

(3) Risk management: credit risk management is evaluated by examining tha

appraisal, monitoring and recovery systems and the prudential lending norms

of the bank.CARE assesses the extent to which the banks has assets

dominated in one currency and liabilities dominated in another currency. The

derivatives and other risk management products are also analysed.

(4) Compliance with statutory requirements: CARE examines the track record

of the bank in complying with SLR/CCR and priority sector lending norms as

specified by the RBI.

(5) Accounting quality: Policies for income recognition, provisioning and

valuations of investments are examined.

(6) Size and the market presence: The fund base and the branch networkof the

bank may have a bearing on the banks competitive position. While both large

and small banks have successfully co-existed in India, in the rapid changing

competitive banking environment, the nich strategy of smaller banks against

the scale advantage of larger banks would be carefully examined to

understand the business model of each bank.

Thus it can be seen as to how the three major credit rating agencies rate the

banking and the financial institutions.

Rating criteria for

Non-Banking Financial Companies(NBFC’s)

And

Housing Finance Companies(HFC’s).

CRISIL:

The broad analytical framework used by CRISIL to rate financial companies is the same

as that is used for banks and financial institutions. In addition, CRISIL also addresses

certain issues that are specific to finance companies.

The industry can be broadly classified into Non Bnaking Finance Companies(NBFC’s)

and Housing Finance Companies(HFC’s). typically NBFC’s finance vehicles( cars,

commercial vehicles and two- wheelers), consumer durables, plant and machinery.

NBFC’s are registered with the RBI and HFC’s with the National Housing Bank(NHB).

The NBFC’s exhibited high growth rates in the first half of 1990’s esoecially in the

corporate finance portfolio even though many of them lacked the credit appraisal,

monitoring and recovery skills required for the same. When subsequent recessionand

tight liquidity conditions saw several companies defaulting, it affected the solvency of

several NBFC’s as well.the high profile collapse of a large NBFC, which ushered in

tighter prudential norms and regulatory changes, led to a period of rationalization and

consolidation, with several small players existing in the business.

The NBFC’s industry is dominated by handful of players today. These include MNc

players, captive finance companies and a few large stand-alone companies. Banks ,

especially, private sector banks, have also increased their presence in the retail finance

sector.

On the other hand, HfC industry has been more stable and has traditionally been

dominated by the Housing Development Finance Corporation(HDFC). Of late thr private

sector banks have become more aggressive in this arena because of the segments good

asset quality experience which has intensified the competition.

The consolidation of the industry has resulted in some trends, which CRISIL believes are

structurally positive for the finance companies. These are:

(i) Strengthening of credit appraisal and monitoring systems: industry players

have increased their focus on controlling asset quality costs and expanse

levels to maintain overall profitability. Such efforts have significantly

strengthened the industry’s credit origination and monitoring systems and

consequently the performance of contracts.

(ii) Increasing relaiance on capital markets for meeting resource

requirement:the industries funding profile has shifted in the favour of

capital market instruments. Indian players have reduced their reliance on

bank funding and fixed deposits.

(iii) Increased use of securitization: securitization is gaining popularity with

the finance companies having strengths in origination.securitisatin began

in early 1990’s and even today is the most dominant asset class securitized

continues to be retail assets.

CRISIL has evolved the rating criteria that are specific to the business characteristics

of NBFC’s and HFC’s. these include:

(1) Market position: The aspects assessed by CRISIL are the company’s brand

equity, service standard’s, track records,customer relationship, product

portfolio, companys distribution network etc…. he housing finance segment is

grown at over 30% a year in recent times on the back of low interest rates,

stable property prices, demand supply gaps and governemtn initiatives in the

form of greater tax benefits on housing loans.the key determinant og HFC’s

market position is availability and the cost of funds. CRISIL believes that the

finance companies have a weaker market position in this segment than the

banks and financial institutions, which have the size and cost of funds

advantage.

(2) Management: CRISIL’s analysis of the quality of the companys management

, its business strategies and its ability and track recors=d in responding to the

changes in the market comditions from a central input in the credit

assessment. CRISIL laso analysis the management ridk appetite in terms of its

growth nad divbersification philosophy, provisioning and capitalization

policies. CRISIL evaluates the managements starategies of balancing business

and finanacial risks.

(3) Asset quality: In analyzing the asset quality, CRISIL reviews a companys

credit risk management strengths, portfolio quality, underwriting standards,

aprovel authorities, collection procedured,amangement information

systemsetc… the quantitive analyses encompasses asset diversity in terms of

asset classes and geographic distribution, delinquency trends, NPA levels,

write off and recovery levels.

(4) Capital adequacy: CRISIL’s analysis of a companys capital adequacy

incorporates the absolute quantum and the quality of capital, risk adjusted

capital levels and its management capitalization philosophy. It also views the

leveraging ability of a housing loan portfolio to be higher than that of a

commercial vehicle, construction equipment or a corporate finance

portfolio. .CRISIL considers the capital position of most finance companies to

be weakon accpunt of the small capital base and weak recapitalization

prospects. CRISIL also factors in the growth outlook of the companys asset

abse and its ability to generate capital internally or by accessing capital

markets. CRISIL’s ratings for some large finance companies contitnue to be in

high safety categories despiteof the significant change in their operating

environment and profitability. CRISIL believes that finance companies

securitizing their assets retail significant risks with themselves.hence, an

assessment of capital levels of a particular finance company includes a study

od all its outstanding securitization transactions.

(5) Resource raising ability: Since funds are a finance companys raw material,

its ability to generate them is essential for its operating model.CRISIL’s

analysis of a finance companies resource peofile incorporates the cost of

resources, diversity of the resource profile and the appropriateness of the

funding strategy in the light of asste types being financed. CRISIL notes that

the resurce raising ability of a finance company is constrained compare to

banks due to the lack of extensive branch network and inability to provide

cheque issuing facilities. The resource raising ability of the smaller NBFC’s

and the HFC’s is a constraining factor in their ratings.

(6) Earnings: CRISIL views profitability as an outcome of the companys

management strategy as reflected in the business position, funding structure,

operational efficiencies and portfolio quality. CRISIL evaluated the strability

and the sustainability of the companys profits. Its analyses is forward looking

and relevance of past profitability performance is the only base for estimating

future profitability. CRISIL notes that the increasing competiton in retail asset

financing due to the entry of strong players(MNC’s) has been most viable

impact on the players profitability. CRISIL assess the managements ability to

respond to such changes in the operating environment.

(7) Liquidity/ asset liability management: In the recent past several NBFC’s

faced a liquidity crunch as a result of asset quality problems. Systematic

illiquidity and negative shifts in sentiment towarde companies and sectors also

tend to suck out liquidity. CRISIL evaluates a finance companies contingent

liquidity plans to take care of such eventualities. It also assesses the maturity

profile of assets and liabilities to form an opinion on the companys liquidity

and interest rate risks.

ICRA:

ICRA has broken down a finance companies fund based operations into its bare

essentials and can be explaines as follows:

(i) Sourcing funds at the lowest possible cost

(ii) Packaging it for its customers at an appropriate price

(iii) Effecting the collecions over the tenure of the contract as envisaged

(iv) Starting the cycle all over again.

The rating methodology is as follows:

The credit rating agency’s ratings factor the entire gamut of risks that can be possibly

affect the operations of a finance company. These riske can be broadly classified as

under:

(1) Operating risks: Major determinants of operating risks are:

(a) Votatility in revenues and expenses: The operating risks for a

finance company manifest in the form of fluctuatios in the income

and/or expanses ans consequently and affect the profitability and the

financial position. Votality in the revenue stream of the company can

arise out of the intrinsic nature of the operation and/ or fluctuations in

the economy.

(b) Regulatory risks: Since the financial sector is fairly regulated in India

a finance companys operations are governed by the changes in

regulation that occur from time to time some of which can be udden

and unpleasant. Also a recent deregulationof interest rates for the

NBFC sector is likely to have far reaching effects on several

companies. The effect of these changes in regulation on the industry

and the individual companies while assigning its ratings are also

evaluated by ICRA

(c) Risk of administrative expenses going out of hand: A finance

company needs to keep a close watch on the administrative expenses

that it incurs in the course of its operations. If the proportion of earning

assets is low in relation to its expenses,that is, there is insufficient

volume of business to spread the fixed cost over, the company runs the

risk of not being able to cover its cost.

(d) Deterioration in asset quality: The potential asset quality by

analyzing the concentration risks, by evaluating the appraisal and

monitoring systems in place for the kind of business the company is

in , and examining the safeguards taken by the company to ensure that

its monet comes back, as scheduled, are evaluated.

(2) Financial risk: major determinants of financial risks are:

(a) Capital adequacy: Capital adequacy refres to the quantum of

shareholder’s funds in the business in relation to the risk-weighted

assets that the company has. Different businesses have different risks

depending on the variedty of factors such as location of operation,

sizw of clients, competition etc….. which would mandate a higher

level of capital adequacy for some of them. Thus, it is recognized that

there are differences in risks associated with different types of asstes,

although they may carry the same risk weight for computation of

capital adequacy.

(b) Asset/liability management:In the recent past several NBFC’s faced a

liquidity crunch as a result of asset quality problems. Systematic

illiquidity and negative shifts in sentiment towarde companies and

sectors also tend to suck out liquidity. CRISIL evaluates a finance

companies contingent liquidity plans to take care of such eventualities.

It also assesses the maturity profile of assets and liabilities to form an

opinion on the companys liquidity and interest rate risks.

(c) Financial flexibility: The financial flexibility is an important

determinant of credit quality of any borrower. Financial flexibility

refers to the ability of the company to raise financial resources from

any source under conditions of financial duress. The ability of a

company enables it to dip into its pockets or borrow from lenders who

are willing to finance it despite of its crunch, and help meet its

immediate obligations.

(d) Accounting quality: Different companies follow different accounting

policies to draw up their financial performances. These can cause

significant changes to the bottom line or to the baalne sheet of the

company, significant enough to change the views of a credit analyst.

(3) Management risks:

(a) Management quality: ICRA’s analysis of the quality of the companys

management , its business strategies and its ability and track recors=d

in responding to the changes in the market comditions from a central

input in the credit assessment. CRISIL laso analysis the management

ridk appetite in terms of its growth nad divbersification philosophy,

provisioning and capitalization policies. CRISIL evaluates the

managements starategies of balancing business and finanacial risks.

(b) Evaluation of systems: The extent of automation is a reflection of

several factors such as the scale of operations, the attitude of the

management,and the economics of automating the operations.in its

assessment process, more emphasis is laid on the appropriateness of

the systems with reference to the operations of the company. The

appropriateness of the policies and the procedures of the company are

evaluated with reference to the projected nature and level of business

for the company.While ICRA does not conduct an audit during the

rating exercise, it relies on several methods of cheking the adequacy

of the systems, such as, meeting with statutory and internal auditors,

sample chcks of critical records, scrutinizing statutory returns filed

with different regulatory authorities and analysis of internal review

reports.

CARE:

CARE’s ratings are an opinion on the relative ability and the willingness of an issuer to

make timely payments on the specific debt onbligations over the ife of the instrument.

CARE has developed a comprehensive methodology for credit rating of debt instruments

issued by NBHC’s and HFC’s.

Some of the factors considered in the rating analysis are described below:

(1) Quantitive factors

(2) Qualitative factors

The quantitative factors are similar to the CRISIL’s criteria of rating. These include:

(1) Capital adequacy

(2)Asset quality

(3) Resources

(4) Liquidity

(5) Earnings quality.

The qualitative factors which form a part of the rating criterial is as follows:

(1) Ownership: Ownership pattern and track record of the promorters or the

group companies is examined. Strong promorters are more likely to provide

support to the company in times of crises.

(2) Management quality: The compostion of the board, credentials of the CEO

and the organizational structure of the company, the starategic objectives and

initiatives of the company, its ability to identify opportunities and track down

in maangeing stress situations, adequacy of information systems used by the

management etc …… are evaluated. CARE focuses on modern practices and

systems, degree of computerization, capabilities of senior management,

personal policies and the extent of delegation of powers.

(3) Risk management: Credit risk management is evaluated by examining the

appraisal, monitoring and recovery systems and the prudential lending norms

of the company. The company’s policy and exposure to interest rate and

foreign currency risk is examined. The derivatives and the other risk

management products used in the past and the implication of these deals are

also analysed.

(4) Compliance with statutory requirements:CARE examines the track record

of the company in complying with the regulatory requirements of RBI/NHB.

(5) Accounting quality: Rating relies heavily on audited data. Policies for

income recognition, provisioning and valuation of investments are examined.

Suitable adjust,ments to reported figures are made for consistency of

evaluation and meaningful interpretation.

(6) Size and market presence: The fund base and the branch network of the

company may have a bearing on the company’s competitive position. While

both large nad small companies have successfully co-existed in India in the

rapidly changing competitive environment, the niche strategy of smaller

compaies against the scale advantages of larger players/banks would be

carefully examined to understand the business model of each company.

Economy & Finance

credit-rating