CREDIT RATING AGENCIES IN
INDIA
METHODOLOGIES OF CREDIT
RATING
CREDIT RATING
What Is a Credit Rating?
A credit rating is a quantified assessment
of the creditworthiness of a borrower
A credit rating can be assigned to any
entity that seeks to borrow money—an
individual, corporation, state or
provincial authority, or sovereign
government.
CREDIT RATING AGENCY
A credit rating agency(CRA, also
called a ratings service) is a company
that assigns credit ratings, which rate a
debtor's ability to pay back debt by
making timely principal and interest
payments and the likelihood of default.
Some of the Top Credit Rating
Agencies in India are:
Credit Rating Information Services
of India Limited (CRISIL).
ICRA Limited.
Credit Analysis and Research limited
(CARE).
CRISIL
CRISIL stands for Credit Rating Information
Services of India Limited and it was the first
credit rating agency set up in India in 1987.
Today, CRISIL has become a global analytical
company that rates companies, researches the
markets and provides risk and policy advisory
services to its clients. At the time of
incorporation, the agency was promoted by
ICICI Limited, AXIS bank and many such
financial institutions. The agency started
operations in 1988. CRISIL is headquartered in
Mumbai.
CARE
Credit Analysis and Research limited was
established in 1993 and since then it has
gone on to become India’s second largest
credit rating agency. It was promoted by
Industrial Development Bank of India
(IDBI), AXIS Bank, Canara Bank and other
financial institutions. CARE has its
headquarters in Mumbai
CARE has the primary function to perform
rating of debt instruments, credit analysis
rating, loan rating, corporate governance
rating etc.
ICRA
Originally named as Investment
Information and Credit Rating Agency, the
organisation was set up in 1991. It was a
joint venture of Moody’s and Indian
financial and banking service organisations.
It was renamed to ICRA Limited and was
listed in the Bombay Stock Exchange and
National Stock Exchange. It is
headquartered in Gurugram, Haryana.
ICRA continues….
ICRA has a major focus on the MSME
sector. To cater to its clients, the dedicated
team of professionals have developed a
linear scale for the concerned sector.
ICRA ratings are used to analyse the credit
risk in India. It does not cater to the
international companies and organisations.
Methodology of Credit Rating
1. Business Analysis or Company Analysis
This includes an analysis of industry risk,
market position of the company, operating
efficiency of the company and legal position of
the company.
•Industry risk: Nature and basis of competition,
key success factors; demand supply position;
structure of industry; government policies, etc.
• Market position of the company within the
Industry: Market share; competitive
advantages, selling and
distribution arrangements; product and
customer diversity etc.
• Operating efficiency of the
company: Locational
advantages; labor relationships; cost structure
and manufacturing as compared to those of
competition.
• Legal Position: Terms of prospectus; trustees
and then responsibilities; system for timely
payment and for protection against fraud etc.
2. Economic Analysis
In order to evaluate an instrument an
analyst must spend a considerable time in
investigating the various economic activities
and also analyze the characteristics peculiar
to the industry.
It will be an error to ignore these factors as
the individual companies are always
exposed to changing environment
3. Financial Analysis
Accounting
Quality: Overstatement/under statement of profits;
auditors qualification; methods of
income recognition’s inventory valuation and
depreciation policies, off balance sheet liabilities
etc.
Earnings Protection: Sources of future earnings
growth; profitability ratios; earnings in relation to
fixed income changes.
Adequacy of cash flows: In relation to dept and
fixed and working capital needs; variability
of future cash flows; capital spending
flexibility working capital management etc.
Financial Analysis
continues…
Financial Flexibility: Alternative financing
plans in ties of stress; ability to raise funds
asset redeployment.
4. Management Evaluation
Track record of the management planning
and control system, depth of managerial
talent, succession plans.
Evaluation of capacity to overcome adverse
situations
Goals, philosophy and strategies.
5. Geographical Analysis
Location advantages and disadvantages
Backward area benefit to the
company/division/unit
6. Fundamental Analysis
Liquidity Management: Capital structure;
term matching of assets and liabilities policy
and liquid assets in relation to financing
commitments and maturing deposits.
Asset Quality: Quality of the company’s
credit-risk management; system for
monitoring credit; sector risk; exposure to
individual borrower; management of
problem credits etc.
Fundamental Analysis continues…
Profitability and financial
position: Historic profits, spread on fund
deployment revenue on non-fund based
services accretion to reserves etc.
Interest and Tax sensitivity: Exposure to
interest rate changes, hedge against interest
rate and tax low changes, etc.