CREDIT RATING

FINAL PROJECT REPORT ON

CREDIT RATING IN INDIA

CREDIT RATING

-----------------------------------------------------------------------------------------UNDER THE GUIDANCE OF

DIPTI PERIWAL
SUBMITTED BY
(NAME OF THE CANDIDATE)
(ROLL NO: B3)
(NAME OF THE DEGREE)
(BATCH)
_______________________________________________________

CREDIT RATING

TO
THE UNIVERSITY OF MUMBAI
IN PARTIAL FULFILMENT OF TWO YEAR FULL TIME
DEGREE
OF
( MASTERS IN MANAGEMENT STUDIES)
GURU NANAK INSTITUTE OF MANAGEMENT STUDIES
MATUNGA, MUMBAI 400 019.

CREDIT RATING

CREDIT RATING

Table of Contents
EXECUTIVE SUMMARY................................................................................................6
INTRODUCTION..............................................................................................................7
EVOLUTION...................................................................................................................11
TYPES OF RATING........................................................................................................13
BENEFITS OF CREDIT RATING................................................................................14
BENEFITS TO INVESTORS................................................................................................14
BENEFITS OF RATING TO THE COMPANY...................................................................17
BENEFITS TO BROKERS AND FINANCIAL INTERMEDIARIES...............................18

CREDIT RATING AGENCY.........................................................................................19

USES OF RATINGS BY CREDIT RATING AGENCIES...................................................19
FUNCTIONS OF A CREDIT RATING AGENCY...............................................................20

CREDIT RATING IN INDIA.........................................................................................22

CRISIL................................................................................................................................24
ICRA...................................................................................................................................35
ONICRA CREDIT RATING AGENCY OF INDIA.........................................................47
CREDIT ANALYSIS & RESEARCH LTD. (CARE).......................................................49
MOODY'S INVESTOR SERVICE...................................................................................56

DISADVANTAGES OF CREDIT RATING..................................................................66

IPO GRADING................................................................................................................69
CRISIL IPO GRADING....................................................................................................69

CONCLUSION................................................................................................................73
BIBLIOGRAPHY............................................................................................................74

CREDIT RATING

EXECUTIVE SUMMARY

The project entitled Credit Rating gives you an insight to the most important concept in any
industry, be it service oriented or a manufacturing firm i.e. working capital.
Credit rating is a qualified assessment and formal evaluation of companys credit history and
capability of repaying obligations. It measures the default probability of the borrower, and its
ability to repay fully and timely its financial debt obligations.
The main purpose of credit rating is to provide investors with comparable information on credit
risk based on standard rating scale, regardless of specifics of companies, separate sector of the
economy and country as a whole.
Credit rating has proven itself to be effective instrument of risk assessment in countries with
advanced economy since it demonstrates transparency of an enterprise. Credit rating reflects
financial, sectoral, operational, legal and organizational sides of companies, which characterize
ability and willingness duly and in full amount to repay obligations.
In world practice, credit rating can be assigned to sovereign governments, regional and local
executive bodies, corporations, financial organizations and etc.
Different Types of Credit Rating are explained in this project. Functions of Credit Rating are
highlighted.
Various advantages and limitation to Credit Rating are highlighted.
This project has also covered the Rating Process, Rating Symbols for short term debentures n
long term bonds, Rating Methodology, of various rating agencies like CRISIL, ICRA, SMERA,
ONICRA, CARE and International Rating Agency.
IPO Grading has also been included in this project.

CREDIT RATING

INTRODUCTION
Definition
CREDIT RATING
The evaluation of a people or businesses' ability and past performance in paying debts. A credit
rating is generally established by a credit bureau and used by merchants, suppliers, and bankers
to determine whether a loan should be granted or credit extended.
A rating is an opinion on the future ability and legal obligation of the issuer to make timely
payments of principal and interest on a specific fixed income security. The rating measures
the probability that the issuer will default on the security over its life, which depending on the
instrument may be a matter of days to 30 years or more. In addition, long term ratings
incorporate an assessment of the expected monetary loss should a default occur."

"Credit ratings help investors by providing an easily recognizable, simple tool that couples a
possibly unknown issuer with an informative and meaningful symbol of credit quality."
Standard and Poors
Ratings, usually expressed in alphabetical or alphanumeric symbols, are a simple and easily
understood tool enabling the investor to differentiate between debt instruments based on 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 timely fashion, with
specific reference to the instrument being rated. It is focused on communicating to the
investors, the relative ranking of the default loss probability for a given fixed income
investment, in comparison with other rated instruments.

CREDIT RATING

In fact, the rating is an opinion on the future ability and legal obligation of the issuer to make
timely payments of principal and interest on a specific fixed income security. The rating
measures the probability that the issuer will default on the security over its life, which
depending on the instrument may be a matter of days to 30 years or more. In addition, longterm rating incorporates an assessment of the expected monetary loss should a default occur.
Credit rating helps investors by providing an easily recognizable, simple tool that couples a
possible unknown issuer with an informative and meaningful symbol of credit quality. Credit
rating can be defined as an expression, through use of symbols, of the opinion about credit
quality of the issuer of security/instrument. Credit rating does not amount to any
recommendation to purchase, sell or hold that security. It is concerned with an act of
assigning values by estimating worth or reputation of solvency, and honesty to repose trust in
a person's ability and intention to repay.
The ratings assigned are generally regarded in the investment community as an objective
evaluation of the probability that a borrower will default on a given security issue. Default
occurs whenever a security issuer is late in making one or more payments that it is legally
obligated to make. In the case of a bond, when any interest or principal payment falls due and
is not made on time, the bond is legally in default. While many defaulted bonds ultimately
resume the payment of principal and interest, others never do, and the issuing company winds
up in bankruptcy proceedings. In most instances, holders of bonds issued by a bankrupt
company receive only a part amount on his investments, invested, once the company's assets
are sold at auction. Thus, the investor who holds title to bankrupt bonds typically loses both
principal and interest. It is no wonder, then, that security ratings are so closely followed by
investors. In fact, many investors accept the ratings assigned by credit agencies as a substitute
for their own investigation of a security's investment quality.

CREDIT RATING

Credit Rating Function

1) Credit rating plays an important role in developed and developing capital markets
throughout the world.
2) The use of ratings fosters growth in local and international markets, and streamlines their
functioning.
3) Capital markets currently include bonds and other bond-like instruments guaranteeing a
fixed income amounting to an aggregate total of over $80 trillion.
4) Ratings serve a wide array of players in the capital market.
5) The service is designed first and foremost to provide reliable ratings to fulfill the needs of
investors interested in obtaining a reliable, independent estimate of a companys credit risk,
of issuers and borrowers seeking flexible sources of financing on the capital market and
brokering entities enjoying this service namely: savers, governments, economists, the
financial media and other observers.

Clients for Credit Rating

Clients comprise manufacturing companies, non-banking finance companies, nationalized and
private banks, financial institutions, public sector units, utilities, real estate developers, state
governments, municipal corporations, stock brokers and others.

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EVOLUTION OF CREDIT RATING AGENCIES

The origins of credit rating can be traced to the 1840's. Following the financial crisis of 1837,
Louis Tappan established the first mercantile credit agency in New York in 1841. The agency
rated the ability of merchants to pay their financial obligations. Robert Dun subsequently
acquired it and its first rating guide was published in 1859. John Bradstreet set up another
similar agency in 1849, which published a rating book in 1857. These two agencies were
merged together to form Dun and Bradstreet in 1933, which became the owner of Moody's
Investors Service in 1962.
The history of Moody's itself goes back about 100 years. John Moody (1868 - 1958) was a
self-taught reformer who had a strong entrepreneurial drive and a firm belief about the needs
of the investment community - as well as considerable journalistic talent. Relying on his
assessment of the markets needs, John Moody and Company published Moodys Manual of
Industrial and Miscellaneous Securities in 1900, the companys founding year. The manual
provided information and statistics on stocks and bonds of financial institutions, government
agencies, manufacturing, mining, utilities, and food companies. Within two months, the
publication had sold out. By 1903, circulation had exploded, and Moodys Manual was known
from coast to coast.
When the stock market crashed in 1907, Moodys company did not have adequate capital to
survive, and he was forced to sell his manual business. Moody returned to the financial
market in 1909 with a new idea. Instead of simply collecting information on the property,
capitalization, and management of companies, he now offered investors an analysis of
security values. His company would publish a book that analyzed the railroads and their
outstanding securities. It offered concise conclusions about their relative investment quality.
He expressed his conclusions using letter-rating symbols adopted from the mercantile and
credit rating system that had been used by the credit-reporting firms since the late 1800s.

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CREDIT RATING
Moody had now entered the business of analyzing the stocks and bonds of Americas
railroads, and with this endeavor, he became the first to rate public market securities. In 1909,
Moodys Analyses of Railroad Investments described for readers the analytic principles that
Moody used to assess a railroads operations, management, and finance. The new manual
quickly found a place in investors hands. In 1913, he expanded his base of analyzed
companies, launching his evaluation of industrial companies and utilities. By that time, the
"Moody's ratings" had become a factor in the bond market. On July 1, 1914, Moody's
Investors Service was incorporated. That same year, Moody began expanding rating coverage
to bonds issued by US cities and other municipalities.
Further expansion of the credit rating industry took place in 1916, when the Poor's Publishing
Company published its first rating followed by the Standard Statistics Company in 1922, and
Fitch Publishing Company in 1924. The Standard Statistics Company merged in 1941 to form
Standard and Poor's, which was subsequently taken, over by McGraw Hill in 1966. For
almost 50 years, since the setting up of Fitch Publishing in 1924, there were no major new
entrants in the field of credit rating and then in the 1970s, a number of credit rating agencies
commenced operations all over the world. These included the Canadian Bond Rating Service
(1972), Thomson Bankwatch (1974), Japanese Bond Rating Institute (1975), McCarthy
Crisani and Maffei (1975 acquired by Duff and Phelps in 1991), Dominican Bond Rating
Service (1997), IBCA Limited (1978), and Duff and Phelps Credit Rating Company (1980).
There are credit rating agencies in operation in many other countries such as Malaysia,
Philippines, Mexico, Indonesia, Pakistan, Cyprus, Korea, Thailand and Australia.
In India, the Credit Rating and Information Services of India Ltd. (CRISIL) was set up as the
first rating agency in 1987, followed by ICRA Ltd. (formerly known as Investment
Information and Credit Rating Agency of India Limited) in 1991, and Credit Analysis and
Research Ltd. (CARE) in 1994. The ownership pattern of all the three agencies is
institutional. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps
Credit Rating India (P) Limited in 1996.

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CREDIT RATING

TYPES OF RATING
Following are the different kinds of rating:
(1) Bond/Debenture Rating

Rating the debentures/ bonds issued by corporates, government etc. is called debenture
or bond rating.

(2) Equity Rating

Rating of equity shares issued by a company is called equity rating.

(3) Preference Share Rating

Rating of preference share issued by a company is called preference share rating.

(4) Commercial Paper Rating

Commercial papers are instruments used for short-term borrowing. Commercial
papers are issued by manufacturing companies, finance companies, banks and
financial institutions and rating of these instruments is called commercial paper rating.

(5) Fixed Deposits Rating

Fixed deposits programmes are medium term unsecured borrowings. Rating of such
programmes is called as fixed deposits rating.

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CREDIT RATING

(6) Borrowers Rating

Rating of borrowers is referred as borrower rating.

(7) Individuals Rating

Rating of individuals is called as individual's credit rating.

(8) Structured Obligation Rating

Structured obligations are also debt obligations and are different from debenture or
bond or fixed deposit programmes and commercial papers. Structured obligation is
generally asset-backed security. Credit rating agencies assessed the risk associated
with the transaction with the main trust on cash flows emerging from the asset would
be sufficient to meet committed payments, to the investors in worst case scenario.

(9) Sovereign Rating

Is a rating of a country, which is being considered whenever a loan is to be extended,
or some major investment is envisaged in a country.

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BENEFITS OF CREDIT RATING`

For different classes of persons different benefits accrue from the use of rated instruments.
The benefits directly accruing to investors through rated instruments are:
(A) BENEFITS TO INVESTORS
Investors are benefited in many ways if the corporate security in which they intend to invest
their saving has been rated. Some of the benefits are:
(1) Safeguards Against Bankruptcy
Credit rating of an instrument done by a credit rating agency gives an idea to the investors
about the degree of financial strength of the issuing company, which enables him to decide
about the investment. A highly rated instrument of a company gives an assurance to the
investors of the safety of that instrument and a minimum risk of bankruptcy.
(2) Recognition Of Risk
Credit rating provides investors with rating symbols that carry information in easily
recognizable manner for the benefit of investors to perceive the risk involved in the
investment. It becomes easier for the investors by looking at the symbol to understand the
worth of the issuing company. The rating symbol gives them the idea about the risk involved
or the expected advantages from the investment.
(3) Credibility Of Issuer
Rating gives a clue about the credibility of the issuing company. The rating agency is quite
independent of the issuer company and has no business connections or any relationship with it

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or its Board of Directors, etc. Absence of business links between the rater and the rated firm
establishes ground for credibility and attract investors.
(4) Easy Understandability Of Investment Proposal
An investor needs no analytical knowledge on his part and can understand the rating symbol.
The investor can take quick decisions about the investment to be made in any particular rated
security of a company.
(5) Saving Of Resources
Investors rely upon credit rating. This relieves investors from the hassle of acquiring
knowledge about the fundamentals of a company, its actual strength, financial standing,
management details, etc. The quality of credit rating done by professional experts of the credit
rating agency repose confidence in him to rely upon the rating for taking investment
decisions.
(6) Independence Of Investment Decisions
For making investment decisions, investors have to seek advice of financial intermediaries,
the stockbrokers, merchant bankers, the portfolio managers etc. about the good investment
proposal. For rated instruments, investors need not depend upon the advice of these financial
intermediaries as the rating symbol assigned to a particular instrument suggests the credit
worthiness of the instrument and indicates the degree of risk involved in it.
(7) Choice Of Investments
Several alternative credit rating instruments are available at a particular point of time for
investing in the capital market and the investors can make choice depending upon their own
risk profile and diversification plan.

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(8) Benefits Of Rating Surveillance

Investors get the benefit of the credit rating agency's on-going surveillance of the rating and
rated instruments of different companies. The credit rating agency downgrades the rating of
any instrument if subsequently the company's financial strength declines or any event takes
place, which necessitates consequent dissemination of information on its position to the
investors.
(9) Other Advantages
The investor can quickly understand the credit instrument and weigh the ratings with
advantages from instruments; and make quick decisions to invest or sell or buy securities to
take advantages of market conditions; or, perceiving of default risk by the company.

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(B) BENEFITS OF RATING TO THE COMPANY

Company which had its credit instrument or security rated by a credit rating agency is
benefited in many ways as summarized below:
(1) Lower Cost Of Borrowing
A company with highly rated instrument has the opportunity to reduce the cost of borrowing
from the public by quoting lesser interest on fixed deposits or debentures or bonds as the
investors with low risk preference would come forward to invest in safe securities though
yielding marginally lower rate of return.
(2) Wider Audience For Borrowing
A company with a highly rated instrument can approach the investors extensively for the
resource mobilization using the press media. Investors in different strata of the society could
be attracted by higher rated instrument, as the investors understand the degree of certainty
about timely payment of interest and principal on a debt instrument with better rating.
(3) Rating As Marketing Tool
Companies with rated instruments improve their own image and avail of the rating as a
marketing tool to create better image in dealing with its customers feel confident in the utility
products manufactured by the companies carrying higher rating for their credit instruments.
(4) Reduction Of Cost In Public Issues
A company with higher rated instrument is able to attract the investors and with least efforts
can raise funds. Thus, the rated company can economize and minimize cost of public issues

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by controlling expenses on media coverage, conferences and other publicity stunts and
gimmicks. Rating facilitates best pricing and timing of issues.
(5) Motivation For Growth
Rating provides motivation to the company for growth as the promoters feel confident in
their own efforts and are encouraged to undertake expansion of their operations or new
projects. With better image created though higher credit rating the company can mobilize
funds from public and instructions or banks from self-assessment of its own status, which is
subject to self-discipline and self-improvement, it can perceive and avoid sickness.

(6) Unknown Issuer

Credit rating provides recognition to a relatively unknown issuer while entering into the
market through wider investor base who rely on rating grade rather than on 'name
recognition'.
(C) BENEFITS TO BROKERS AND FINANCIAL 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 and dealers in securities, could use rating as an input for their monitoring of risk
exposures. The merchant bankers are also using credit ratings for pre-packing of issues by
way of securitisation/ structured obligations. Highly rated instruments put the brokers at an
advantage to make less efforts in studying the company's credit position to convince their
clients to select an investment proposal. This enables brokers and other financial
intermediaries to save time, energy, costs and manpower in convincing their clients about
investment in any particular instrument.

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CREDIT RATING AGENCY

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types
of debt obligations. In most cases, these issuers are companies, cities, non-profit organizations,
or national governments issuing debt-like securities that can be traded on a secondary market. A
credit rating measures credit worthiness, the ability to pay back a loan, and affects the interest
rate applied to loans. (A company that issues credit scores for individual credit-worthiness is
generally called a credit bureau or consumer credit reporting agency.)
Interest rates are not the same for everyone, but instead are based on risk-based pricing, a form
of price discrimination based on the different expected costs of different borrowers, as set out in
their credit rating. There exist more than 100 rating agencies worldwide.

USES OF RATINGS BY CREDIT RATING AGENCIES

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and by
governments. For investors, credit rating agencies increase the range of investment alternatives
and provide independent, easy-to-use measurements of relative credit risk; this generally
increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn
increases the total supply of risk capital in the economy, leading to stronger growth. It also opens
the capital markets to categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals and universities.

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FUNCTIONS OF A CREDIT RATING AGENCY

Credit rating serves the following functions:

(1) Provides Superior Information:

It provides superior information on credit risk for three reasons:
(i)

It is an independent rating agency, and is likely to provide an unbiased opinion;

unlike brokers, financial intermediaries and underwriters who have a vested interest in the
issue,
(ii)

Due to professional and highly trained staff, their ability to assess risk is better,

and finally,

(iii)

The rating firm has access to a lot of information, which may not be publicly available.

(2) Low Cost Information

A rating firm gathers, analyses, interprets and summarizes complex information in a simple
and readily understood formal manner. It is highly welcome by most investors who find it
prohibitively expensive and simply impossible to do such credit evaluation of their own.

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(3) Basis For A Proper Risk And Return

If an instrument is rated by a credit rating agency, then such instrument enjoys higher
confidence from investors. Investors have some idea as to what is the risk that he/she is likely
to take, if investment is done in that security.

(4) Healthy Discipline On Corporate Borrowers

Higher credit rating to any credit investment tends to enhance the corporate image and
visibility and hence it induces a healthy discipline on corporates.

(5) Greater Credence To Financial And Other Representation

When a credit rating agency rates a security, its own reputation is at stake.
Therefore, it seeks high quality financial and other information. As the issue complies with
the demands of the credit rating agency on a continuing basis, its financial and other
representations acquire greater credibility.

(6) Formation Of Public Policy

Public policy guidelines on what kinds of securities are eligible for inclusions in different
kinds of institutional portfolios can be developed with greater confidence if debt securities are
rated professionally.

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CREDIT RATING IN INDIA

In the Indian context, the scope of credit rating is limited generally to debt, commercial paper,
fixed deposits, mutual funds and of late IPOs as well. Therefore, it is the instrument, which is
rated, and not the company. In other words, credit quality is not general evaluation of issuing
organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated
BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company
gets strength and credibility with the grade of rating awarded to the credit instrument it
intends to issue to the public to raise funds. Rating, in a way, reflects the issuer's strength and
soundness of operations and management. It expresses a view on its prospective composite
performance and the organizational behaviour based on the study of past results.
Further, the rating will differ for different instruments to be issued by the same company,
within the same time span. For example, credit rating for a debenture issue will differ from
that of a commercial paper or certificate of deposit for the same company because the nature
of obligation is different in each case. Credit rating has been made mandatory for issuance of
the following instruments

(1) As per the regulations of Securities and Exchange Board of India (SEBI) public issue of
debentures and bonds convertible/ redeemable beyond a period of 18 months need credit
rating.

(2) As per the guidelines of Reserve Bank Of India (RBI), one of the conditions for issuance
of Commercial Paper in India is that the issue must have a rating not below the P2 grade from
CRISIL/A2 grade from ICRA/PR2 from CARE.

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(3) As per the guidelines of Reserve Bank of India (RBI), Non

Banking Finance Companies (NBFCs) having net owned funds of more than Rs.2 core must
get their fixed deposit programmes rated. The minimum rating required by the NBFCs to be
eligible to raise fixed deposits are FA (-) from CRISIL/ MA (-) from ICRA/BBB from CARE.
Similar regulations have been introduced by National Housing Bank (NHB) for housing
finance companies also

(4) As per the regulations of the Ministry of Petroleum, the parallel marketers of Liquefied
Petroleum Gas (LPG) and Superior Kerosene Oil (SKO) in India are also subjected to
mandatory rating. The three rating agencies have a common approach for such rating and the
dealers are categorized into four grades between 1 to 4 indicating good, satisfactory, low risk
and high risk

(5) There is a proposal for making the rating of fixed deposit programmes of limited
companies, other than NBFCs also mandatory, by amendment of the companies Act 1956.
CRAs registered with SEBI.
Name of the CRA
CRISIL

Year of commencement
of Operations
1988

ICRA

1991

CARE

1993

Fitch India

1996

Brickworks

2008

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CRISIL
Credit Rating Information Services Of India Limited (CRISIL) has been promoted by
Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India
Ltd. (UTI) as a public limited company with its headquarters at Mumbai. CRISIL,
incorporated in 1987, pioneered the concept of credit rating in India and developed the
methodology for rating of debt in the context of India's financial, monetary and regulatory
system. It was the first rating agency to rate Commercial Paper Programme in 1989, debt
instruments of financial institutions and banks in 1992 and asset-backed securities in 1992.
The main objective of CRISIL has been to rate debt obligation of Indian companies. Its rating
provides a guide to the investors as to the risk of timely payment of interest and principal on a
particular debt instrument. Its rating creates awareness of the concept of credit rating amongst
corporations, merchant bankers, brokers, regulatory authorities, and helps in creating
environment that facilitates the debt rating.
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.

CRISIL's comprehensive offerings include ratings for long-term instruments such as

debentures/bonds and preference shares, structured obligations (including asset-backed
securities) and fixed deposits; it also rates short-term instruments such as commercial paper
programmes and short-term deposits. As part of bank loan ratings, CRISIL also rates credit
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CREDIT RATING
facilities extended to borrowers by banks. In addition, CRISIL undertakes credit assessments
of various entities including state governments. CRISIL also assigns financial strength ratings
to

insurance

companies.

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CREDIT RATING

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 startup 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 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.

CRISIL's Rating Process

CRISIL'S Ratings Processes In As Given Below:

(1) Request Of The Company

The rating process beings at the request of a company desirous of having its issue obligations
under proposed instrument rated by CRISIL.

(2) Assignment To Analytical Team

On receipt of the above request, CRISIL assigns the job to an analytical team that will be
responsible for carrying out the rating assignment.

(3) Obtaining And Processing Of Data

The analytical team, which generally contains two experts, obtains requisite information from
the client company and analyses the same. To obtain clarification and better understanding of
the client's operations, the team meets and interacts with company's executives.

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(4) Findings Presentation

The findings of the team completion of investigation process are presented to Rating
committee (which comprises some directors not connected with any CRISIL shareholder)
which then decides on the rating.

(5) Communication Of Decision

The decision of the Rating committee is communicated to the client company with remarks
that the company, if it so likes, may present some additional information for reconsideration
of rating grade assigned to the instrument. In case the company has nothing to produce as
additional fact, the rating grade is formally confirmed to the company by CRISIL.

(6) Monitoring Of Change Of Rating

Once the company has decides to use the rating, CRISIL is obliged to monitor the rating, over
the life of the instrument. Depending upon new information, or developments concerning the
company, CRISIL may change the rating. Any change, so effected, is made public by CRISIL.

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CRISIL'S Rating Methodology

CRISIL analyses five factors while assessing the instrument. These five factors are as follows:

(1) Business Analysis

All the relevant information concerning the business is covered under the following subheads.
(a) Industry Risk
CRISIL evaluates the industry risk by taking into consideration various factors like nature and
basis of competition, key success factors, demand and supply position, structure of industry,
government policies etc. Industry strength is evaluated within the economy considering
factors like inflation, energy requirements and availability, international competitive situation
and socio-political scenario; demand projection growth stages and maturity of markets; cost
structure of industry in domestic and international scenario; or, the government policies
toward industry. Industry risk analysis may set an upper limit on rating.
(b) Market Position Of The Company Within The Industry
Market position of the company within the industry is evaluated form different angles, i.e.
market share and stability of market share; competitive advantage through marketing and
distribution strength and weakness; marketing/support service infrastructure; diversity of
products and customers base; research and development and its linkage to product
obsolescence; quality important programme; as finally, the long term sales contract, strong
marketing position of the company within the industry attracts better grade rating.

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CREDIT RATING
(c) Operating Efficiency
Operating efficiency of the company is assessed vis--vis competitors' comparison. For
instance, the pricing or cost advantage; availability, cost, quality of raw material; availability
of labour and labour relations; integration of manufacturing operations and cost effectiveness
of plant and equipments; level of capital employed and productivity; energy cost; or finally,
the compliance to pollution control requirement on taken into consideration.
(d) Legal Position
Legal position of issue of debt instrument is assessed by letter of offer; terms of debenture
trust deed, trustees and their responsibilities; system of timely payment of interest and
principal; or protection of forgery and fraud. Thus, business covers all relevant aspects as
related to business operations of the client company to assess the creditworthiness of the
company.

(2) Financial Analysis

Under financial analysis, all relevant aspects connected with the business and financial
position of the company is assessed in the following four important segments. Firstly the
accounting finally is seen as qualifications of auditors; focus on determining extent to which
performance is overstated; method of income recognition; depreciation policies and inventory
calculations; Under Valued/Over Valuing of assets; or off balance sheet liabilities.
Secondly, the Earning Potential return to long term earning potential under varying conditions
is assessed. Key consideration is: Profitability ratios; pretax coverage ratios; earnings on
assets/capital employed; source of future earnings; or ability to finance growth internally.
Thirdly, the adequacy of the Cash Flows is appraised in relation to debt and fixed and
working capital requirements of the company. Main focus of analysis is on variability of
future cash flows; capital spending flexibility; cash flows to fixed and working capital
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CREDIT RATING
requirements; or Working Capital management. Fourthly, the Financial Flexibility is assessed
through financial plans in times of stress and their reliability; ability to attract capital; capital
spending flexibility; asset redeployment potential; or the debt service schedule.

(3) Management Evaluation

The track record of management is evaluated by observing:
the goals and philosophies;
strategies and ability to overcome adverse situations;
judgment of management performance based on past operating and financial results;
planning and control systems;
conservatism or aggressiveness with reference to financial risk;
depths of managerial, talents and succession plans;
shareholding pattern and constitution/ of Board of Directors;
relationship with shareholders;
or mergers and acquisition considerations.

(4) Regulatory And Competitive Environment

CRISIL evaluates structure and regulatory framework of the financial system in which it
works. Trends in regulation/ deregulation and their impact on the company are evaluated.

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CREDIT RATING

(5) Fundamental Analysis

It covers aspects on liquidity management; assets quality; profitability and financial position;
and interest and tax sensitively. Liquidity management includes aspects on capital structure,
matching of assets and liabilities; or policy on liquid asset in relation to financing
commitments and maturing deposits. Asset Quality includes aspects concerning quality of
company's credit risk management, system for monitoring credit, sector risk, exposure of
individual borrowers, or management of problem credits. Profitability and Financial Position
includes aspects on historic profits, spreads on fund deployment, revenues on non fund-based
services, and accretion to reserves. Interest or Tax Sensitivity includes aspects dealing with
exposure to interest rate changes, revenues on non-fund based activities, and accretion to
reserves.
Factors listed above at serial number 1,2,3, are evaluated for manufacturing companies but for
finance companies, emphasis is laid in addition to above factors at serial number 4 and 5.

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CREDIT RATING

CRISILS RATING SYMBOLS FOR LONG TERM

INSTRUMENTS
Investment Grade Ratings:
AAA
(Triple A) Highest Safety
Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely
payment of financial obligations. Any adverse changes in circumstances are most unlikely to
affect the payments on the instrument

AA
(Double A) High Safety
Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely
payment of financial obligations. They differ only marginally in safety from `AAA' issues.
A
Adequate Safety
Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely
payment of financial obligations. However, changes in circumstances can adversely affect
such issues more than those in the higher rating categories

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CREDIT RATING
BBB
(Triple B) Moderate Safety
Instruments rated 'BBB' are judged to offer a moderate safety with regard to timely payment of
financial obligations for the present; however, changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal than for instruments in higher rating
categories.

Speculative Grade Ratings:

BB
(Double B) Inadequate Safety
Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of
financial obligations; they are less likely to default in the immediate future than other speculative
grade instruments, but an adverse change in circumstances could lead to inadequate capacity to
make payment on financial obligations.
B
High Risk
Instruments rated 'B' are judged to have greater likelihood of default; while currently financial
obligations are met, adverse business or economic conditions would lead to lack of ability or
willingness to pay interest or principal.
C
Substantial Risk
Instruments rated 'C' are judged to have factors present that make them vulnerable to default;
timely payment of financial obligations is possible only if favourable circumstances continue.

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CREDIT RATING
D
Default
Instruments rated 'D' are in default or are expected to default on scheduled payment dates. Such
instruments are extremely speculative and returns from these instruments may be realized only
on reorganisation or liquidation.
NM
Not Meaningful
Instruments rated 'N.M' have factors present in them, which render the rating outstanding
meaningless. These include reorganisation or liquidation of the issuer, the obligation is under
dispute in a court of law or before a statutory authority etc.

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CREDIT RATING

RATING SYMBOL FOR SHORT TERM INSTRUMENT

P-1 This rating indicates that the degree of safety regarding timely payment on the instrument is
very strong.
P-2 This rating indicates that the degree of safety regarding timely payment on the instrument is
strong; however, the relative degree of safety is lower than that for instruments rated 'P-1'.
P-3 - This rating indicates that the degree of safety regarding timely 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 - This rating indicates that the degree of safety regarding timely payment on the instrument
is minimal and it is likely to be adversely affected by short-term adversity or less favourable
conditions.
P-5 - This rating indicates that the instrument is expected to be in default on maturity or is in
default.
NM - Instruments rated 'N.M' have factors present in them, which render the rating outstanding
meaningless. These include reorganisation or liquidation of the issuer, the obligation is under
dispute in a court of law or before a statutory authority etc.
Not Meaningful

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