Project Report On Credit Rating

Submitted by: Pulkit Garg Regn. No. 220610440/07/2008

INDEX
S.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 A B C D E 17 18 19 20 TOPIC Introduction Concept and overview Objectives of Credit rating Need for Credit rating Uses of credit rating Factors for success for Rating System Rating process Process Important issues in credit rating Determination Rating of manufacturing companies Rating of Financial Services companies Rating of Individual Credit Rating Agencies Credit Rating Agencies outside India Credit Rating Agencies in India CRISIL ICRA CARE FITCH ONICRA Criticism of Credit Rating SEBI regulations Code of conduct Conclusion PG.NO. 5 6 8 9 9 11 11 12 13 14 15 17 17 18 18 20 20 25 28 30 31 32 35 37 39

INTRODUCTION & EVOLUTION

Credit rating, in general sense, is the evaluation of the credit worthiness of an individual or of a business concern or of an instrument of a business based on relevant factors indicating ability and willingness to pay obligations as well as net worth. Credit ratings establish a link between risk and return. An investor or any other interested person uses the rating to assess the risk-level and compares the offered rate of return with his expected rate of return. Credit rating is a technique of credit risk valuation for the corporate debt instruments reflecting borrowers expected capability and inclination to pay interest and principal in a timely manner. Rating is a symbolic indicator of the current opinion on the relative capability of timely servicing of the debts and obligations. Lower rating does not mean lesser funds available rather it suggests higher risk level. Credit rating is extremely important as it not only plays a role in investor protection but also benefits industry as a whole in terms of direct mobilization of savings from individuals. Ratings also encourage discipline amongst corporate borrowers to improve their financial structure and operating risks to obtain a better rating for their debt obligations and thereby lower the cost of borrowing. Companies those get a lower rating are forewarned, as it were and have the freedom, if they desire, to take steps on their financial or business risks and thereby improve their standing in the market.

The history of Credit Rating starts in 1841 in Newyork. Its first ever ratings were issued in 1859 by Robert Dun. On the lines of Robert Dun another agency started its operation in year 1857. In 1933 these two agencies were merged to form Dun & Bradstreet. In 1962, Dun & Bradstreet acquired Moody & Investors Services. Standard & Poors were created in 1941 as a result of merger of Standard Statistic Company & Poors publishing company. In India CRISIL (Credit Rating and Information Services India Limited) was set up as the first credit rating agency in 1987. This was followed by ICRA Limited (Investment Information and Credit Rating Agency of India Limited) in 1991 and Care (Credit Analysis and Research Limited) in 1994 and Fitch Rating India Limited. These credit rating agencies are registered with the Securities and Exchange Board of India.

CONCEPT & OVERVIEW

Credit rating is a symbolic indication of the current opinion regarding the relative capability of a corporate entity to service its debt obligations in time with reference to the instrument being rated. It enables the investors to differentiate between debt instruments on the basis of their underlying credit quality. To facilitate simple and easy understanding, credit rating is expressed in alphabetical or alphanumerical symbols. A rating is specific to a debt instrument and is intended to grade different such instrument in terms of credit risk and of the company to service the debt obligations as per terms of contract namely principal as well as interest. A rating is neither a general purpose evaluation of a corporate entity, nor an over all assessment of the credit risk likely to be involved in all debts contracted or to be contracted by such entity.

It involves past performance as an assessment of its future prospects and entails judgement of the companys competitive position, operating efficiency, management evaluation, accounting quality, legal position, earnings, cash flow adequacy, financial flexibility, the quality of the product etc. Though credit rating is considered more relevant for gradation of debt securities, it can be applied for other purposes also. The diagram below depicts various types of credit ratings:

CREDIT RATING FINANCIAL INSTRUMENT RATING RATING CUSTOMER BORROWERS RATING

BOND RATING

EQUITY RATING

SHORT-TERM INSTRUMENTS RATING

SOVEREIGN RATING

The various purposes for which credit rating is applied are :

1) Long-term/Medium-term debt obligation such as debentures, bonds, preference shares or project finance debts are considered long-term and debts ranging from 1 to 3 years like fixed deposits are considered medium-term; 2) Short-term debt obligations the period involved is one year or less and cover money market instrument such as commercial paper, credit notes, cash certificates etc.;

3) Equity Grading and Assessment, structure obligations, municipal bonds, mutual fund schemes, plantation schemes, real estate projects, infrastructure related debts, ADR, GDR issues, bank securities etc.

OBJECTIVES OF CREDIT RATING

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

Improves a healthy discipline on borrowers, Lends greater credence to financial and other representations, Facilitates formulation of public guidelines on institutional investment, Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their Encourages greater information disclosure, better accounting standards, and May reduce interest costs for highly rated companies, Acts as a marketing tool

functions related to debt issues, improved financial information (helps in investors protection),

FUNCTIONS OF CREDIT RATING AGENCIES

Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment

NEED FOR CREDIT RATING

1. It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. 2. Maintenance of investors confidence, since defaults shatter the confidence of investors in corporate instruments. 3. Protect the interest of investors who can not go into merits of the debt instruments of a company. 4. Motivate savers to invest in industry and trade.

Uses of Credit Rating

Credit rating is useful to:1. INVESTORS 2. ISSUERS 3. INTERMEDIARIES 4. REGULATORS For investors: The main purpose of credit rating is to communicate to the
investors the relative ranking of the default loss probability for given fixed income investment, in comparison with other rated instrument. This is not a reliable method. Credit rating by skilled, competent and credible professionals eliminates or at least minimizes the role of name recognition and replaces it with a well researched and properly analyzed opinion.

This method provides a low cost supplement to investors. Large investors use information provided by rating agencies such as upgrades and downgrades and their portfolio mix by operating in the secondary market. Investors also use the industry reports, corporate reports, seminars and open access provided by the credit rating agencies.

For issuers: The market places immense faith in opinion of credit rating agencies,
hence the issuers also depend on their critical analysis. This enables the issuers of highly rated instruments to access the market even during adverse market conditions. Credit rating provides a basis for determining the additional return (over and above a risk free return) which investors must get in order to be compensated for the additional risk that they bear.

For Intermediaries: Rating is useful to intermediaries such as merchant bankers

for planning, pricing, underwriting and placement of the issues. Intermediaries like brokers and dealers in securities use rating as an input for monitoring risk exposures. Merchant bankers also use credit rating for pre-packaging issues by way of asset securitization/structured obligations.

For Regulators: Regulatory authorities in different countries such as US, Australia

and Japan have specified rules that restrict entry to the market of new issues rated below a particular grade, that stipulate different margin requirements for mortgage of rated below a particular grade, that stipulate different margin requirements for mortgage of rated and unrated instrument, that prohibit institutional investors for holding instruments rated below a particular level and so on.

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Factors for Success of a Rating System

a. Credible and independent structure and procedures; b. Objectivity and impartiality of opinion; c. Analytical research, integrity and consistency d. Professionalism and Industry related expertise; e. Confidentiality f. Timeliness of rating review and announcement of changes;

g. Ability to reach wide range of investors by means of Press reports, prints or electronic media and investor oriented research services;

RATING PROCESS

Rating process refers to the typical practices and procedures which a rating agency follows to gather information for evaluating the credit risk of specific issuers and issues, to analyze and conclude on the appropriate rating to monitor the credit quality of the rated issuers or security over time, deciding on timely changes in ratings, as and when companies fundamental change and to keep investors and the market players informed. All these are interrelated and going processes. The general principals followed all over the world are the same. The rating agencies in India have adopted the methodology of the major international credit rating agencies. As a sample we indicate ICRAs Rating Process in the form of a flow chart below:

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PROCESS

Mandate

Initial stage

Assign rating team Receive initial information Conduct basic research Meetings and visits Analysis and preparation of report Preview meeting Rating meeting Fresh inputs/clarifications

Fact findings and analysis

Rating finalization

clarifications
Communicate the rating and rationals Acceptance Surveillance Non acceptance Request for review

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Important Issues in Credit Rating

Investments and Speculative Grades: Securities rated below BBB (S & P),
Baa (Moodys) are called non-investment grade or speculative grade or junk bonds. Rating agencies do not recommend or indicate the rating levels of instruments up to which one should or should not invest.

Surveillance: The rating published by credit rating agencies is subjected to a

continuous surveillance during the life of the instrument or so long as any amount is outstanding against the specific instrument. The frequency of surveillance may range between quarterly or yearly. A formal and extensive written review I taken at least once in a year but where some specific concern arises about the industry or the issuing entity, the review is taken up immediately. Where the rating agency justified may change the rating by upgrading or downgrading depending on the debt servicing capability of the issuer. In other cases, the rating is retained at the same level.

Credit watch: when a major deviation from the expected trends of the issuers
business occurs, or when an event has taken place, it creates an impact on the debt servicing capability of the issuers and warrants a rating change, the rating agency may put such rating under credit watch till the exact impact of such unanticipated development is analyzed and decision is taken regarding the rating change. The credit watch listing may also specify Positive or negative outlooks. It should be noted that being under credit watch does not necessarily mean that there would be a rating change.

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

enhance the credit rating of an entity, unless there exist a strong barrier separating the activities of the parent and the 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 t influence the business of the other, and how important is the operation of the subsidiary to the owner.

Determination of credit rating

Credit ratings are determined differently in each country, but the factors are similar and may include:s

Payment record a record of bills being overdue will lower the credit rating. Control of debt lenders wants to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrowers after tax income.

Signs of responsibility and stability lenders perceive things such as longevity in the borrowers home and job as signs of stability. ReAging Through re-aging, a credit history is written and you are given a fresh start on that particular account.

Credit inquiries an inquiry is a notation on a credit history file. There are several kinds of notations that may or may not have an adverse effect on the credit score.

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Rating of manufacturing companies

The factors generally considered for rating manufacturing companies are as under: Industry Risk Operating efficiencies Accounting quality Financial flexibility Earning protection Financial leverage Cash flow adequacy Management evaluation

Industry Risk: It is defined as the strength of the industry within the economy
and relativity t the economic trends. It is evaluated on the basis of factors like business cyclicality, earnings volatility, growth prospects, demand supply projections, entry barriers and extent of competition and nature and extent of regulation.

Operating efficiencies: Ability to control costs, productivity efficiencies relative

to others, labour relationship, extent of forward and backward integration, access to raw materials/markets, and technology.

Accounting quality: These include analysis of auditors qualifications, revenue

recognition, depreciation policy, inventory evaluation, funding for pension liabilities, undervalued assets etc.

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Financial flexibility: Evaluation of the companys financing needs, plans and

alternatives, its flexibility to accomplish its financing programmes under stress without damaging creditworthiness.

Earning protection: The key measurements which indicate the basic long term
earning power of the company including return on capital, profit margins, earning growth, coverage ratios etc.

Financial leverage: Relative usage of debt and levels of debt appropriate to

different types of businesses, utilization of long and short term sources of funds, management of working capital.

Cash flow adequacy: It is the relationship of cash flows to leverage and the
ability to internally meet all cash needs of the business. It measures the magnitude and variability of future cash flows relative to debt servicing obligations and other commitments such as group company funding, BIFR packages and contingent liabilities.

Management evaluation: The record of achievement in operations and

financial results, strategic and financial planning, commitment, consistency and credibility, overall quality of management line of succession, strength of middle management and organization structure and its linkage with the operating environment and management strategies.

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Rating of Financial Services Companies

The rating methodology for non banking financial services companies is based on CAMEL model encompassing, Capital adequacy, Asset quality, Management Earnings and liquidity. The nature and accessibility of funding sources is also considered.

Rating of Individual
An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks. The factors which may influence a person's credit rating are:

ability to pay a loan interest amount of credit used saving patterns spending patterns debt

In India, Credit Information Bureau of India Ltd. (CIBIL) is the one of the main agency working in the area of Personal verification as well by banks. Most of the banks are using the services of CIBIL for verifying the credentials of an Individual before approving loans.

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CREDIT RATING AGENCIES

A CREDIT RATING AGENCY (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. Credit Rating Agencies: 1. Outside India 2. In India Credit Rating Agencies outside India are-

1. A.M. Best (U.S.):- A.M. Best Company, Inc., headquartered in New Jersey.
It is founded in 1899 in New York City. It also maintains offices in London and Hong Kong and a news bureau in Washington, D.C. This rating agency designated as a Nationally Recognized Statistical Rating Organization (NRSRO) by the United States Securities and Exchange Commission.. A.M. Best issues financial-strength ratings measuring various sectors. Unlike fellow rating organisation which issue ratings for a broad range of business sectors -- A.M. Best historically has specialized exclusively on the insurance marketplace.

2. Dominion Bond Rating Service (Canada):- DBRS is a credit rating

agency headquartered in Toronto, Ontario. It is founded in 1976 by its current owner and president, Walter Schroeder, it is the largest rating agency in Canada.

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It is one of ten Nationally Recognized Statistical Rating Organizations in the United States, though significantly smaller than market leaders Moody's, Standard & Poor's and Fitch Ratings. It has also received ECAI recognition from several European countries.

3. Moody: performs financial research and analysis on commercial and

government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. The company has a 40% share in the world credit rating market. Moody's Corporation is the holding company for Moody's Investors Service. Moody's was founded in 1909 by Grant Morby. Top institutional owners of Moody's include Berkshire Hathaway and Davis Selected Advisers.

4. Standard & Poor's (S&P) is a division of McGraw-Hill that publishes

financial research and analysis on stocks and bonds. It is well known for the stock market indexes, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. Standard & Poor's, as a credit rating agency (CRA), issues credit ratings for the debt of public and private corporations. It is one of several CRAs that have been designated a Nationally Recognized Statistical Rating Organization by the U.S. Securities and Exchange Commission. It issues both short-term and long-term credit ratings.

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Credit Rating Agencies in India:

India is first among the third world countries to set up a CR agency in 1988 Credit Rating Information Services of India Ltd. (CRISIL), promoted by ICICI, UTI & Others. Following are few of the Credit rating agencies: 1. CRISIL 2. ICRA 3. CARE 4. FITCH 5. ONICRA

Credit Rating Information Services of India Ltd . (CRISIL)

CRISIL is the First Credit Rating Floated in India on January 1, 1988. CRISIL is the started by ICICI and UTI with an equity capital of Rs. 4 crores as public Ltd. company. CRISIL enjoys the position of NUMERO UNO in the Indian Credit Rating Industry, further it is the fourth largest in the world with over a 60% share of the Indian Ratings market. CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Indias leading rating, research, risk and policy advisory company. CRISIL delivers opinions and solutions that help clients mitigate and manage their business and financial risks, make matters function in a better way and help shape public policy. CRISIL provides rating and risk assessment services to manufacturing companies, banks, non-banking financial companies, financial institutions, housing finance companies, municipal bodies and companies in the infrastructure sector CRISILs majority shareholding stake is with Standard & Poors, the worlds foremost provider of independent credit rating, indices, risk evaluation, investment research and data.

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Objective of CRISIL

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

Credit Rating Committee

CRISIL's rating process and rating committee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor. The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis that underlies the rating, and have no interest in the entity being rated. A team of analysts carries out the credit analysis.

VALUES

1. Analytical Rigour - Our service offerings are underlined by analytical rigour. We

blend in-depth conceptual understanding the science of building analytical frameworks with the art of evaluation. CRISIL combines an extensive knowledge base, understanding of the dynamics of business and the market place, expertise, judgment and experience to offer world-class solutions to clients. Our Policy level assignments in the area of Infrastructure Advisory are but one example of this.

2. Independence - We pride on being non-partisan and unbiased. Our culture fosters

objectivity and neutrality of views and opinions. Independence and objectivity are ingrained in our processes and call for a participatory approach, individual thinking and transparency for arriving at logical conclusions.

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3. Integrity - Our credibility in the market place is the result of unimpeachable integrity,
honesty and transparency in our work and dealings. Our people are characterized by a strong sense of fairness and ethics. CRISIL seeks to become the benchmark on integrity by adopting the best professional practices regarding client confidentiality, integrity of analysis and lack of bias.

4. Innovation - Our dedicated Centres of Excellence provide thought leadership. The

core teams lead the way by developing and sharing insights from the extensive corpus available, building innovative analytical frameworks and developing new methodologies and products in line with requirements of the market place.

5. Commitment - We are committed to Setting standards for integrity, analytical rigour

and best practices in the marketplace, consistently providing value to constituents through analytically relevant and reliable opinions and solutions, Upholding independent evaluation processes and a non-partisan, unbiased and fearless approach to functioning.

RATING METHODOLOGY OF CRISIL Key factors considered for rating are: 1. Business Analysis, 2. Financial Analysis, 3. Management evaluation, 4. Regulatory and competitive environment, and 5. Fundamental analysis.

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1. Business Analysis Industry risk, market position and operating efficiency of

the company, legal position.

2. Financial Analysis Accounting quality, earnings position, adequacy of cash

flows, and financial flexibility.

3. Management Evaluation Goals, philosophy, strategies, ability to overcome

adverse situations, managerial talents and succession plans, commitment, consistency and credibility.

4. Regulatory and Competitive Environment Regulatory and competitive

environment, Political situations, government policies, Economic atmosphere, subsidies etc.

5. Fundamental Analysis Liquidity management, assets quality, profitability

and financial position, interest and tax sensitivity.

Rating symbols of CRISIL CRISIL Debenture Rating Symbols

(a) High Investment Grades AAA AA (b) Investment Grades A BBB Adequate safety Moderate safety Highest Safety High Safety

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(c) Speculative Grades BB B C D Inadequate safety High risk Substantial risk Default

CRISIL Fixed Deposit Rating Symbols

FAAA FAA FA FB FC FD Highest safety High safety Adequate safety Inadequate safety High risk Default

CRISILs rating for Short-term Instruments

P-1 P-2 P-3 P-4 P-5 Degree of safety is very strong Degree of safety is lower Degree of safety is adequate Degree of safety is minimal Instrument is in default

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

ICRA incorporated in 1991 is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moodys Investors Services and leading Indian financial institutions and banks. In addition to being a leading credit rating agency ICRA has broad based its services for the corporate and financial sectors, both in India and overseas.

RATING METHODOLOGY OF ICRA

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

Services Offered1. Credit rating 2. Information services 3. Equity research, and 4. Advisory services

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Rating symbols of ICRA Long-term including debentures, bonds and preference shares
LAAA LAA+ LAA LAALA+ LA LALBBB+ LBBB LBBBLBB+ LBB LBBLB+ LB LBLC+ LC LCLD Default Substantial risk Risk prone Inadequate safety Moderate safety Adequate safety High safety Highest safety

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Medium-term including fixed deposit program

MAAA MAA+ MAA MAAMA+ MA MAMB+ MB MBMC+ MC MCMD Default Risk prone Inadequate safety Adequate safety High safety High safety

Rating Sale for Insurance Company

iAAA iAA iA iBBB iBB iB iC Highest claims paying ability High claims paying ability Adequate claims paying ability Moderate claims paying ability. Inadequate claims paying ability. Weak claims paying ability. Lowest claims paying ability

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Credit Analysis and Research Ltd.(CARE)

CARE incorporated in 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. There are 14 shareholders in CARE.

Rating symbols of CARE Long term and Medium-term Instruments

CARE AAA/ CAREAAA(FD)/ (CD)/ (SO)/CCPS CARE AA/ CARE AA (FD)/ (CD)/ (SO)/CCPS CARE A/ CARE A (FD)/ (CD)/ (SO)/CCPS CARE BBB/ CARE BBB(FD)/ (CD)/ (SO)/CCPS Instruments are considered to be of best quality, carrying negligible investment risk Instruments are considered to be of high quality, classified as high investment grade. Instruments are considered of upper Medium Grade Instruments are considered to be of Investment Grade. Indicate sufficient safety for payment of interest and principal CARE BB/ CARE BB(FD)/ (CD)/(SO)/CCPS Instruments are considered to be Speculative within adequate protection for interest and principal payments CARE B/CARE B(FD)/ (CD)/(SO)/CCPS Instruments with such ratings are generally classified susceptible to default. While interest payments are likely to default

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CARE D/CARE C (FD) CARE C(FD)/(CD)/(SO) CCPS CARE D/CARE D(FD) (CD)/(SO)/CCPS

Instruments carry high investment risk with likelihood of default in the payment of interest and principal. Instruments are of lowest category either in default or are likely to be in default soon.

Short-term instruments
PR1 PR2 PR3 PR4 PR5 Instruments would have superior capacity for repayments Instruments would have strong capacity for repayments. Instruments have an adequate capacity for repayments. Instruments have minimal degree of safety. Instruments is in default or likely to be in default.

Long-term Loans
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 are considered to be of best quality. Loans are considered to be of high quality. Loans are considered to be of upper medium grade. Loans are considered to be of investment grade. Loans are considered to be speculative. Loans are considered to be susceptible to default. Loans carry high investment risk. Loans are of lowest category.

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Short-term loans
PL-1 PL-2 PL-3 PL-4 PL-5 Superior capacity Strong capacity Adequate capacity Minimal degree of safety regarding timely payment. The loan is in default or likely to be in default.

FITCH INDIA
Fitch rating is a leading global rating agency committed to providing the worlds credit market with accurate, timely and prospective credit opinions. Fitch currently maintains coverage of over 5,700 financial institutions, which includes 3000 banks and 2500 insurance companies. Fitch currently rates over 1400 corporate issues, 100 sovereigns, and 140 sub-sovereigns and maintains surveillance on over 84000 municipal transactions. Fitch Ratings is an international credit rating agency dual-headquartered in New York City and London. It was one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975, together with Moody's and Standard & Poor's.

Rating symbols of Fitch India Long term (12 months and above) Investment grade
AAA (ind) AA (ind) A (ind) BBB (ind) Highest credit quality. High credit quality. Adequate credit quality. Moderate credit quality.

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Speculative grade
BB (ind) B (ind) C (ind) D (ind) Speculative. Highly speculative. High default risk. Default.

Short term (less than 1 year)

F1(ind) F2(ind) F3(ind) F4(ind) F5(ind) Highest credit quality. Good credit quality. Fair credit quality. Speculative Default

ONICRA It is the Indias first individual credit rating system. It brings to India the internationally established concept of providing credit rating of individuals, for the use of lending institutions. ONICRA takes up credit rating for individuals customer at the request of a lending firm/institution. In the process customer is required to fill the form given by ONICRA. Benefit of Rating: It is beneficial to lenders because it saves time, and helps in concentrating on core area of interest. ONICRA credit rating systems is based on the sophisticated software developed in collaboration with James Martin & Co, that has provided to ONICRA the most comprehensive methodology that addresses the needs of a mega credit rating system 31

CRITICISMS OF CREDIT RATING:

Credit rating agencies have been subject to the following criticisms: 1. Credit rating agencies do not downgrade companies promptly enough . For example, Enron's rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company's problems for months. 2. Bias - Large corporate rating agencies have been criticized for having too familiar a relationship with company management , possibly opening themselves to undue influence or the vulnerability of being misled. These agencies meet frequently in person with the management of many companies, and advise on actions the company should take to maintain a certain rating. 3. Vicious Cycle -The lowering of a credit score by a CRA can result in more finance costs and decrease in credit worthiness. In some cases, large loans to companies contain a clause that makes the loan due in full if the companies' credit rating is lowered beyond a certain point (usually a "speculative" or "junk bond" rating). (Rating Triggers) 4. Amount of Fees Charged- The fees charged by credit rating agencies is very high. While many times results are not up to desired level.

5. Entry Barriers: Agencies are sometimes accused of being oligopolists,

because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized).

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6. Credit Rating Agencies have made errors of judgment in rating structured products, particularly in assigning AAA ratings to structured debt, which in a large number of cases has subsequently been downgraded or defaulted. 7. Conflict of Interest with companies: - Ratings agencies, in particular Fitch, Moody's and Standard and Poors have been implicitly allowed by the government to fill a quasi-regulatory role, but because they are for-profit entities their incentives may be misaligned. Conflicts of interest often arise because the rating agencies are paid by the companies issuing the securities an arrangement that has come under fire as a disincentive for the agencies to be vigilant on behalf of investors. 8. Many of the structured financial products that they were responsible for rating, consisted of lower quality 'BBB' rated loans, but were, when pooled together into CDOs, assigned an AAA rating. 9. Lengthy Process: - Credit rating is a lengthy process. It takes long time to complete the Credit rating. 10. No secrecy: - A company desirous to obtain credit rating has to divulge the details of operation and other confidential details. The personnel can use such confidential information for their benefits. 11. Lack of Positive Reporting: -All too often a borrower sees a negative report from a creditor who has never reported a positive score. For example, if you fail to pay your electric bill for even one month, the utility company can send the debt to collections and knock your credit score substantially. 12. Lack of Power for Borrower: - A borrower has very little power to create positive credit; lenders reserve almost all the power in credit reporting. One common scenario that may occur happens when a borrower works with an unethical lender. A strong example is a high risk lender who provides car loans to the unemployed. There is a very high rate of default in this business, but the lender assesses such high interest rates he or she may still come out with a profit despite many defaults. A borrower who defaults on one of these loans, though, will end up bearing the brunt of the bad practices. That borrower will see the default on her record and will also face repossession.

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13. Lack of Oversight: - There is no day-to-day oversight on the credit rating industry. Borrowers are charged with the responsibility of watching their own credit scores and reporting misinformation. It is very common for a credit bureau to get bad information about a debt. For example, some collections agencies will attempt to recover funds from borrowers even if they do not have a legal right to do so.

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SEBI (CREDIT RATING AGENCIES) REGULATIONS

SEBI regulations for Credit rating agencies (CRAs) cover rating of securities only and not rating of fixed deposits, foreign exchange, country rating, real estates etc. CRAs can be promoted by public financial institutions, scheduled commercial banks, foreign banks operating in India, foreign credit rating agencies recognized in the country of their incorporation, having at least five years experience in rating, or any company or a body corporate having continuous net worth of minimum Rs. 100 crore for the previous five years. CRAs would be required to have a minimum net worth of Rs. 5 crore. A CRA can not rate a security issued by its promoters. No Chairman, Director or Employee of the promoters shall be Chairman, Director(s) or Employee(s) of CRA or its rating committee. A CRA can not rate securities issued by any borrower, subsidiary, an associate promoter of CRA, if there are common Chairman, Directors and Employees between the CRA and its rating committee and these entities. Credit rating agencies can not rate a security issued by its associate or subsidiary if the CRA or its rating committee has a Chairman, Director or Employee who is also a Chairman, Director or Employee of any such entity. CRAs would have to carry out periodic reviews of the rating given during the lifetime of the rated instrument. For ensuring that corporate provide correct/ adequate information to CRAs, a clause would be incorporated in the listing agreement of the stock exchanges requiring the companies to co-operate with the rating agencies in giving correct and adequate information. Issuers coming out with public/rights issues of debt securities would be required to incorporate an undertaking in the offer document

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Promoter of credit rating agency

SEBI should not consider an application unless the applicant is promoted by a person belonging to any of the following categories, namely: i. ii. iii. iv. v. vi. A public financial institution; A scheduled commercial bank; A foreign bank operating in India; A foreign credit rating agency recognized under Indian law and having at India; A foreign credit rating agency recognized under Indian law and having at least five years experience in rating securities; Any company or body corporate, having continuous net worth of minimum rupees one hundred crore as per its audited annual accounts for the previous five years in relation to the date on which application to SEBI is made seeking registration.

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Code of conduct
Every credit rating agency is required to abide by the code of conduct as per SEBI Regulations: 1) A credit rating agency in the conduct of its business should observe high standards of integrity and fairness in all its dealings with its clients. 2) A credit rating agency should fulfill its obligation in an ethical manner. 3) A credit rating agency should render at times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. It shall wherever necessary, disclose to the clients, possible sources of conflict of duties and interests, while providing unbiased services.

4) The credit rating agency should avoid any conflict of interest of any member of its rating committee participation in the rating analysis. Any potential conflict of interest shall be disclosed to the client. 5) A credit rating agency should not indulge in unfair competition nor do they wean away client of any other rating agency on assurance of higher rating. 6) A credit rating agency should not make any exaggeration statement, whether oral or written, to the client either about its qualification or its capability to render certain services or its achievements in regard to services rendered to other clients. 7) A credit rating agency should always endeavor to ensure that all professional dealings are affected in a prompt and efficient manner.

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8) A credit rating agency should not divulge to other clients, press or any other party any confidentiality information about its client, which has come to its knowledge, without making disclosure to the concerned person of the rated company/client. 9) A credit rating agency should not make untrue statement or suppress any material fact in any document, reports, papers or information furnished to SEBI or to public or to stock exchange. 10) A credit rating agency should not generally and particularly in respect of issue of securities rated by it be a party a) to certain of false market b) passing of price sensitive information to brokers, members of the stock exchanges, other players in the capital market or to any other person or take any other action which is unethical or unfair to the investors.

11) A credit rating agency should maintain an arms length relationship between its credit rating activity and any other. A credit rating agency or any of his employees should not render directly or indirectly any investment advice about any security in the publicly accessible media, whether real time or non real time, unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice, he should also disclose the interest of his dependent family members and the employers including their long or short in the said security, while rendering such advice. 12) A credit rating agency is required to abide by the provisions of the Act, regulations and circulars which may be applicable and relevant to the activities carried on by the credit rating agency.

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CONCLUSION
It has been concluded that a credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit rating is extremely important as it not only plays a role in investors protection but also benefits industry as a whole in terms of direct mobilization of savings from individuals. Rating also provides a marketing tool to the company and its investment bankers in placing companys debt obligations with a investor base that is aware and comfortable with the level of risk. Unlike abroad, unsolicited rating is still not done in India. In India, credit rating is undertaken after the company requests whereas in U.S.A. and other western countries the rating process is undertaken even if the company does not approach them. Credit rating does not bind the investors to decide whether to hold or sell an instrument. It does not create any fiduciary between the rating agency and the user of the rating. In determining a rating, both qualitative and quantitative analysis is employed. The judgment is qualitative in nature and the role of the quantitative analysis is to help make the best possible overall qualitative judgment or opinion. The reliability of the rating depends on the validity of the criteria and the quality of analysis. The quality of credit rating mainly depends upon and quality of the rating agency, rating elements also. The agency should have good reputation, personal competence, independence, qualified and experienced staff.

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