CREDIT RATING INTRODUCTION In a market, financial markets play the role of efficient intermediary.

They act as a link between savers and investors, mobilizing capital on one hand, and efficiently allocating them between competing users to the other hand. In addition to this an investor can also base the investment decision on the grading offered by credit rating agencies. Concept of Credit Rating A credit rating is a measure used by creditors to determine how much they can trust a certain borrower, whether the borrower is an individual, a corporation, or a country. The credit rating is derived using past financial data or the borrowers credit history. There are several factors that can affect the credit rating of an individual including: The persons ability to pay a loan Reflected by the persons salary and Other assets The amount of credit in existence This is what credit limits are for. If the Person is near his credit limit or has reached it is harder to get a loan. This Also reflects whether the person is in the habit of going into debt
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CREDIT RATING

Definition The process of assigning a symbol with specific reference to the instrument being rated, that acts as an indicator of the Current opinion on relative capability on the issuer to service its debt obligation in a timely fashion, is known as credit rating. According to the Moodys, A rating 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 of the expected monetary loss, should a default occur. According to Standard & poors, it helps investors by providing an easily recognizable, simple tool that couples a possibly Unknown issuer with an informative and meaningful symbol of credit quality. According to ICRA, Credit ratings are opinions on the relative capability of timely servicing of corporate debt and obligations.

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CREDIT RATING ORIGIN OF CREDIT RATING

Origin in 1840 following the crisis in 1837 The First Mercantile Credit Agency was set up in New York by Louis Tappan in 1841. First rating guide was published in 1859 John Broad Street set up the similar agency in 1849 which published its Rating books in 1857 In 1900 John Moody founded Moodys Investors Services and in 1909 Published his manual of Rail Road Services

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CREDIT RATING Need and Importance of Credit Rating

1. A wide range of industries take advantage of credit scores to improve fairness, effectiveness and efficiency.

2. Financial companies use credit scores to predict the risk of delinquencies and losses, which enables them to better allocate costs.

3. Insurance companies use specialized credit scores to make fairer underwriting decisions.

4. Credit scores even provide benefits at the macroeconomic level by helping small enterprises attain the funds they need and by facilitating the securitization and sale of financial products in the secondary markets, substantially increasing the influx of capital into a country.
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CREDIT RATING

Importance of credit score A Credit rating is an indicator that reflects how well or badly you manage your financial matters. B By having a look at your credit rating, one can get much information regarding your business organization and particularly the payments made by your organization. C There are several credit bureaus that compile this kind of information and later on sale it to their clients. D It's very important to know your credit score and understand it completely, as it helps you to get loans, mortgage and even a job. E Credit report list personal information such as name, address, date of birth, social security number, number of family member, your employer etc. Financial situations like bankruptcies, tax liens, foreclosure, late payment of your bill...etc, will also be listed in the report.

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CREDIT RATING THE CREDIT RATING SYSTEM

Credit rating has facilitated authorities around the world to issue mandatory rating requirements. For instance, specific rules restrict the new issues that are rated below a particular grade. Growth Factors Credibility and Independence. Capital Market Mechanism. Disclosure requirements. Credit Education. Creation of Debt Market. Major issues in Credit Rating of a Company Investment Vs speculative Grades Continuous Monitoring Grade Surveillance Rating Ceiling Evaluation of Line

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CREDIT RATING CREDIT SCORE Credit score is an estimate of the risk that a bank will take to lend you money. It is also a snapshot of your credit file at a certain point in time. The FICO score is developed by Fair Isaac Corporation and based on credit files maintained by consumer credit reporting agencies. It is widely used by banks, credit unions, insurance agencies, financing companies and other lenders. However, it is not the only factor determining your ability to obtain credit. Other important factors include: income, employment history, previous and current relationships with a lender, to name a few. Each lender decides on its own what will be taken into account when it considers lending money to you. Credit score is a mathematical formula which takes into account many different pieces of information and compares it with hundreds of thousands of other credit reports from the past, to create patterns, which identify statistical possibility of future credit risk.

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CREDIT RATING Every person with a credit file has three credit scores based on Information from three credit bureaus. They are not exactly the same, but for most people they will be only slightly different.

Following are the helpful tips which can improve the credit scores: 1. Collect credit report from Experian, Transfusion and Equifax. Review the report for any error or mistake. 2. Try to reduce the debt of those with high interest. 3. If not in full, try to make payment of minimum balance due of credit cards. 4. Pay all you bills on time. Late payment can do a serious damage to your report. 5. Avoid credit from financial companies. It can negatively affect your score. 6. Don't apply for too many credit accounts. Credit score determine your financial status, so one should always try to keep it as good as possible and avoid any such actions that can affect it and result a low score

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CREDIT RATING CREDIT RATING AGENCY A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgage-backed securities. These institutions can be companies, cities, non-profit

organizations, or national governments, and the securities they issue can be traded on a secondary market. A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying aAAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. Companies that issue credit scores for individuals are usually called credit bureaus and are distinct from corporate ratings agencies.
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CREDIT RATING Definition of Credit Rating Agency "Credit Rating Agency" means any commercial concern engaged in the business of credit rating of any debt obligation or of any project or programmed requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal Big Three Rating Agencies in U.S are: a. Moody's b. Standard & Poor's c. Fitch Ratings

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CREDIT RATING GROWTH OF CRDIT RATING AGENCIES 1841- Mercantile Credit Agency(USA) 1900- Moodys Investors Services (USA) 1916- Poor Publishing Company (USA) 1922- Standard Statistics Company (USA) 1924- Pitch Publishing Company (USA) 1941- Standard and Poor (USA) 1074- Thomson Bank Watch (USA) 1975- Japanese Bond Rating Institution (JAPAN) 1987- CRISIL by ICICI (INDIA) 1991- ICRA by IFCI (INDIA) 1994- CARE by IDBI (INDIA

Rating Grades Each rating agency has developed its own system of rating grades for sovereign and corporate borrowers. Fitch Ratings developed a rating grade system in 1924that was adopted by Standard & Poor's.
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CREDIT RATING

Moody's grading is slightly different. Moodys sometimes argues that their ratings embed a conceptually superior approach that directly considers not only the likelihood of default but also the severity of loss in the event of default.

Long Term Credit Rankings Fitch Ratings and Standard & Poor's use a system of letter sliding from the best rating "AAA" to "D" for issuers already defaulting on payments Investment Grade: AAA: best quality borrowers, reliable and stable without a Foreseeable risk to future payments of interest and principal AA: very strong borrowers; a bit higher risk than AAA A : upper medium grade; economic situation can affect finance BBB: medium grade borrowers, which are satisfactory at themoment

Non-Investment Grade: BB: lower medium grade borrowers, more prone to changes in the
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CREDIT RATING Economy, somewhat speculative B : low grade, financial situation varies noticeably, speculative CCC: poor quality, currently vulnerable and may default CC: highly vulnerable, most speculative bonds C : Highly vulnerable, perhaps in bankruptcy or in arrears but still Continuing to pay out on obligations CI: past due on interest D : has defaulted on obligations and S&P believes that it will Generally default on most or all obligations NR: not rated Criticism for Credit Rating Companies 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
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CREDIT RATING rating agencies had been aware of the company's problems for months. Some empirical studies have documented that yield spreads of corporate bonds start to expand as credit quality deteriorates but before a rating downgrade, implying that the market often leads a downgrade and questioning the informational value of credit ratings.[7] This has led to suggestions that, rather than rely on CRA ratings in financial regulation, financial regulators should instead require banks, broker-dealers and insurance firms (among others) to use credit spreads when calculating the risk in their portfolio. 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. Furthermore, because information about ratings changes from the larger CRAs can spread so quickly (by word of mouth, email, etc.),
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CREDIT RATING the larger CRAs charge debt issuers, rather than investors, for their ratings. This has led to accusations that these CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. At the same time, more generally, the largest agencies (Moody's and Standard & Poor's)are often seen as agents of globalization and/or "Anglo-American" market forces, that drive companies to consider how a proposed activity might affect their credit rating, possibly at the expense of employees, the environment, or longterm research and development. These accusations are not entirely consistent: on one hand, the larger CRAs are accused of being too cozy with the companies they rate, and on the other hand they are accused of being too focused on a company's "bottom line" and unwilling to listen to a company's explanations for its actions. .

Credit Rating Agencies in India

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CREDIT RATING

Credit rating information service ltd. (CRISIL) Investment Information and credit rating Agency of India (ICRA)

Credit Analysis and Research (CARE) Duff p helps credit rating pvt. ltd. (DCR India) Onida Individual Credit Rating Agency (ONICRA)

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CREDIT RATING Credit Rating Information Services of India Ltd (CRISIL) Objectives: To assist both individual & institutional investors in making investment decision in fixed income securities. CRISIL, the first credit agency was floated on Jan, 1998. It was started jointly by ICICI & UTI with an equity capital of Rs.4crore. Each of them holds 18% of the capital. Other contributions to the capital are as follows: 1. Asian Development bank 2. LIC, GIC & SBI 3. HDFC 4. Banks (Indian) 5. Banks (Foreign) 15% 5% each 6.2% 19.25% Balance

Credit Rating and Information Services of India Ltd.

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CREDIT RATING (CRISIL) (BSE: 500092, NSE: CRISIL) is India's leading Ratings, Research, Risk and Policy Advisory Company based in Mumbai. CRISILs majority shareholder is Standard & Poor's, a division of The McGraw-Hill Companies and the world's foremost provider of financial market intelligence. CRISIL pioneered ratings in India more than 20 years ago, and is today the undisputed business leader with the largest number of rated entities and rating products: CRISIL's rating experience covers more than 24654 entities, including 14,500 small and medium enterprises (SMEs) CRISIL offers domestic and international customers (CRISIL Global Research & Analytics comprising of Irevna & Pipal Research caters to international clients) with independent information, opinions and solutions related to credit ratings and risk assessment; energy, infrastructure and corporate advisory; research on India's economy, industries and companies; global equity research; fund services; and Risk management. .

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CREDIT RATING Process of Credit Rating Following factors are taken into account while assigning specific ratings to the issues: a) i. Financial Analysis: Quality of accounting such as profitability aspects, method of income recognition, valuation of inventory, auditors comments etc. ii. Adequate cash flows iii. Financial flexibility. b) Business Analysis: i. Industry risk, ii. Product demand, c) Management Competency: d) Philosophy, outlook, capacity, flexibility of the management

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CREDIT RATING Debentures AAA: Highest safety of timely payment of interest and principal. AA: Offer high safety of interest and principal. Differ in safety from AAA: only marginally. A: Adequate safety; however changes in circumstances can affect Adversely more than those in higher rated categories. BBB: Sufficient safety, however change in circumstances likely to lead a weakened capacity. BB: Inadequate safety but less susceptible to default than other Speculative grade Debentures B: Greater susceptibility to default. C: Vulnerable to default. D: In default and in arrears of interest or principal

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CREDIT RATING Investment Information and Credit Rating Agency of India (ICRA):

The IICRA was set up by industrial finance corporation of India on 16th Jan 1991.itis a public ltd company with an authorized share capital of Rs 101 crore. The initial paid up capital of Rs 3.50 cr. is subscribed by IFC, UTI, LIC, GIC, SBI & 17 other bank. IICRA started its operation from 15th Mar. 1991. During 94-95 IICRA rated 212 debt instruments covering a debt volume Rs. 5343 crores. Cumulative number of instruments covering a debt volume of Rs. 17,638 crores. ICRA was set up by ICICI and other leading investment institutions and commercial banks and financial services companies

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CREDIT RATING Credit Analysis and Research Ltd. (CARE) The CARE was promoted in1993 jointly with investment companies, banks &finance companies. Services offered by CARE are
(i)

Credit rating Information service

(ii)

(iii) Equity research (iv) Rating & parallel market of LPG & kerosene. Since its inception till the end of March 1995, CARE has rated 249 debt instruments covering a total debt volume of Rs 9729 crores.CARE was promoted by leading financial institutions, banks and private sector finance companies. Care prefixes CARE to the ratings given to the issue e.g. CARE AAA or CARE AA to the Debenture or Bond issue to indicate High safety. Similarly in case of Fixed / Short Deposit is sue the rating issued is CARE AAA (FD) or CARE AA (SD) and so on.

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CREDIT RATING

USES OF CREDIT RATING A credit rating agency (CRA) 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. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the2008 financial crisis. In 2003 the Securities and Exchange Commission submitted report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

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CREDIT RATING

FUTURE OF CREDIT RATING IN INDIA At present, commercial paper, k bonds and debentures with maturities exceeding18 months & fixed deposits of large nonbanking companies registered with RBI are required to be compulsorily rated. These are moves to make rating compulsorily for other types of borrowings such as fixed deposit programmed of manufacturing companies. In addition, the rating agencies are expected to be called upon to enlarge volumes of securitization of debt & structuring of customized instruments to meet the needs of issuers or different class of investors. There are number of areas where rating agencies will have to cover new grounds in the coming years. The rating of municipal bonds, state govt. borrowings, commercial banks & public sector.

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CREDIT RATING

Cumulative Historic Default Rates (in percent)

------------------------------------------------------------------------

Moody's

S&P

Rating categories

---------------------------------------

Muni Corp Muni Corp ------------------------------------------------------------------------Aaa/AAA......................... 0.00 0.52 0.00 0.60

Aa/AA...........................

0.06

0.52

0.00

1.50

A/A.............................

0.03

1.29

0.23

2.91
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CREDIT RATING

Baa/BBB.........................

0.13

4.64

0.32 10.29

Ba/BB...........................

2.65

19.1 2 1.74 29.93

B/B.............................

11.86

43.34

8.48 53.72

Caa-C/CCC-C.....................

16.58

69.18 44.81 69.19

Investment Grade................

0.07

2.09

0.20

4.14

Non-Invest Grade................

4.29

31.37

7.37 42.35

All.............................

0.10

9.70

0.29 12.98

----------------------------------------------------------------------------

CODE OF CONDUCT
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CREDIT RATING 1. A credit rating agency shall make all efforts to protect the interests of investors.

2. A credit rating agency, in the conduct of its business, shall observe high standards of integrity, dignity and fairness in the conduct of its Business. 3. A credit rating agency shall fulfill its obligations in a prompt, ethical and professional manner. 4. A credit rating agency shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process. 5. A credit rating agency shall have a reasonable and adequate basis for performing rating evaluations, with the support of appropriate and in depth rating researches. It shall also maintain records to support its decisions. 6. A credit rating agency shall have in place a rating process that reflects consistent and international rating standards.
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CREDIT RATING

7. A credit rating agency shall not indulge in any unfair competition nor shall it wean away the clients of any other rating agency on assurance of higher rating. 8. A credit rating agency shall keep track of all important changes relating to the client companies and shall develop efficient and responsive systems to yield timely and accurate ratings. Further a credit rating agency shall also monitor closely all relevant factors that might affect the creditworthiness of the issuers. 9. A credit rating agency shall disclose its rating methodology to clients, users and the public. 10. A credit rating agency shall, wherever necessary, disclose to the clients, possible sources of conflict of duties and interests, which could impair its ability to make fair, objective and unbiased ratings. rating committee participating in the rating analysis, and that of its client. 11. A credit rating agency shall not make any exaggerated statement, whether oral or written, to the client either about its
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CREDIT RATING qualification or its capability to render certain services or its achievements with regard to the services rendered to other clients. 12. A credit rating agency shall not make any untrue statement, suppress any material fact or make any misrepresentation in any documents, reports, papers or information furnished to the board, stock exchange or public at large. 13. A credit rating agency shall ensure that the Board is promptly informed about any action, legal proceedings etc., initiated against it alleging any material breach or non-compliance by it, of any law, rules, regulations and directions of the Boarder of any other regulatory body. (b) In case an employee of the credit rating agency is rendering such advice, he shall also disclose the interest of is dependent family members and the employer including their long or short position in the said security, while rendering such advice.] 14. A credit rating agency shall maintain an appropriate level of knowledge and competence and 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. The credit
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CREDIT RATING rating agency shall also comply with award of the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman) Regulations, 2003. 15. A credit rating agency shall ensure that there is no misuse of any privileged information including prior knowledge of rating decisions or changes. 16. (a) A credit rating agency or any of his employees shall not render, directly or Indirectly any investment advice about any security in the publicly accessible media. (b) A credit rating agency shall not offer fee-based services to the rated entities, beyond credit ratings and research. 17. A credit rating agency shall ensure that any change in registration status/any penal action taken by board or any material change in financials which may adversely affect the interests of clients/investors is promptly informed to the clients and any business remaining outstanding is transferred to registered person in accordance with any instructions of the affected
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clients/investors.

CREDIT RATING

18. A credit rating agency shall maintain an arms length relationship between its credit rating activity and any other activity. 19. A credit rating agency shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties within the credit rating agency and as a part of the industry. 20. A credit rating agency shall provide adequate freedom and powers to its compliance officer for the effective discharge of his duties. 21. A credit rating agency shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis. 22. A credit rating agency shall ensure that good corporate policies and corporate governance are in place.
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CREDIT RATING 23. A credit rating agency shall not, generally and particularly in respect of issue of securities rated by it, be party to or instrumental for (a) Creation of false market; (b) Price rigging or manipulation (c) Dissemination of any unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange, unless required, as part of rationale for the rating accorded.

IPO GRADING/IRATING
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CREDIT RATING

When the Securities and Exchange Board of India (SEBI) decided to scrap discretionary allotment for qualified institutional buyers (QIBs) and switch to the more transparent proportionate allotment system, it became the first regulator to stand up to the powerful investment banking community anywhere in the world. Once the decision was taken, it was evident that the exaggerated outrage and predictions that large institutional investors would shun IPOs were completely baseless. That decision recognized the specific needs of the Indian capital market and was the result of pressure from investor groups. The path to mandatory grading of IPOs has been rocky, with enormous opposition from companies, investment bankers, fund managers, market experts and SEBI board members. We learn that the final decision came about in the face of strong opposition by certain board members(apparently not full-time) and that too only, with a twist in the tail, which dilutes the original proposal. The alleged opposition of the regulators board members raises an interesting question. All board-level discussions must, indeed, remain confidential in order tonsure free and frank expression, but what is the fiduciary responsibility of board members of a
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CREDIT RATING watchdog organization, who have no knowledge, training or

expertise about capital markets, when they choose to oppose recommendations of the Primary Market Advisory Committee that are endorsed by the regulator? It is also important to remember that investor groups have been pressing for IPO grading for several years; first with the Investor Education and Protection Fund (attached to the ministry of company affairs), which developed cold feet and dropped even its plans for a pilot project and later with the capital market regulator Over the years, those opposed to IPO grading have constructed several elegant arguments to rubbish its utility, but from an investor standpoint, the logic is simple. The disclosure-based model adopted by the regulator, leads to a bulky, jargon-filled prospectus that can neither be read nor understood by the average investor; consequently, a simple, one-page evaluation of disclosures by an expert agency, which also helpfully condenses its findings into a single numerical grade on a scale of five, is clearly a blessing.

INTRODUCTION TO IPO GRADING

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CREDIT RATING IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI; to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at alter date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger IPO IPO IPO IPO fundamentals and vice versa as below. grade1: Poor grade2: Below-average grade3: Average grade4: Above-average fundamentals fundamentals fundamentals fundamentals

IPO grade5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional Information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.
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CREDIT RATING

IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO. The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO. IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA. IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an even tall grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

Bond Rating
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CREDIT RATING

Bond Rating Variability and Methodology: Evidence from the Indian Bond Market Credit rating is an indicator of the current opinion on the capability of capital to service its debt obligations in a timely fashion. It is a useful source of information for investors, companies, banks and other financial intermediaries. While the various bond rating areas have been extensively evaluated for mature markets, similar evidence for emerging markets such as India is limited. In particular, the issues relating to bond rating variability over time and the consistency of bond rating methodology have been ignored. In an attempt to fill this lacuna, Sanjay Sehgal and Mamta Arora conduct a two-part study. In the first part, which deals with bond rating variability over time, the time-series variability of bond ratings has been analyzed. The issue is also addressed sector-wise and industry-wise. A separate analysis has been carried out for the two leading bond rating agencies - CRISIL and ICRA. The second part relates to consistency in bond rating methodology adopted by rating agencies.

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CREDIT RATING

The results indicate that bond ratings are becoming extremely variable over time and the majority of these rating changes are on the downside, with price risk implications for investors. While bond rating variability is high for both the manufacturing and the financial sectors, the figures are relatively higher for the latter. Rating changes also seem to have an industry pattern with a greater concentration in industries more affected by economic slowdown and global competition. The findings for consistency of bond rating methodology are also not encouraging. While the key financial ratios do not vary for companies belonging to the same rating class, they also do not vary across companies belonging to different rating classes. This points at probable weaknesses in rating methodology as the important financial factors fail to discriminate across rating classes. Perhaps the subjective judgments of rating analysts taint the relationship between bond ratings and key financial factors. Inconsistency in bond rating methodology may Partly explain the increasing bond rating variability over time.

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CREDIT RATING

CRISIL S.M.E RATINGS Background Recent years have seen rapid growth in the Small and Medium Enterprises (SME) sector, and an enhanced appreciation of this sector's critical role in driving economic growth. However, authentic and independent credit research in this sector has so far been minimal. With many private and public sector banks directing resources and focus towards SME lending, the need has arisen for independent credit opinions. CRISIL offers its rating services to SMEs to meet this need.

SME ratings are offered on an exclusive rating scale, distinct from regular ratings offered to large corporations, banks and government entities.

Credit evaluation in the SME sector needs a specialized approach, as the issues and drivers of credit quality are different from those applicable for large companies. The weight ages assigned to various parameters of evaluation therefore need to be different.
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CREDIT RATING

There has to be a good understanding of the particular cluster or area where the SME is operating. When Lalchand Nathalal Gandhi was approached by Crisil three years ago to get accredit rating exercise done for his companies, LN Chemicals and Modera Chemicals, he was skeptical but decided to go ahead anyway. The experiment worked. While Gandhis businesses already had a good relationship with Saraswat Bank for years, the rating helped them get an additional 0.5% interest rate reduction on their bank borrowings. We were also noticed by other companies and new enquiries began to flow in, says Gandhi, whose firmswith a combined turnover of Rs 40 croremake chemicals that are used in textile processing, and soap, paper and paint manufacture. Now, as Gandhi looks to expand his business, hes already being approached by other banks to fund his expansion plans. This could be due to the rating we got from Crisil over the past three years, he says. Cultivating healthy relationships with banks may have helped small companies tide over credit access issues to an extent. However, banks reluctance to lend to MSMEs often stems from lack of information, and the fact that evaluating risk in such firms is often a difficult and
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CREDIT RATING time consuming process. Credit rating could be the solution. A rating report provided by an independent agency like Crisil, ICRA or CARE offers deep insights into a companys operations. It can reveal the creditworthiness of the company in relation to its peers in the sector, and an assessment of its strengths and weaknesses based on its financial condition. Anyone who sees the report is instantly appraised of the health of the company, says Yogesh Dixit, head-SME Ratings at Crisil. Large corporates have been getting themselves rated for many years now, but in the world of small business this is a relatively recent and emerging trend. Four years ago, the National Small Industries Corporation (NSIC) launched a programme where a micro or small enterprise (with a maximum investment of Rs 5crore in plant and machinery) would receive a 75% subsidy on rating fees (around RS 50,000) charged by any of the six empanelled rating agenciesCrisil, ICRA,D&B , SMERA, Fitch and CARE. This has had a positive effect with around 5,000units getting rated last year, and NSIC expects that at least another 7,000 will follow suit this year.
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CREDIT RATING

Under the new Basel II norms that came into effect from April 1 this year, rating is mandatory for businesses with investments over Rs 10 crore. For those firms that are below the Rs 10-crore level, rating is also beneficial, especially when it comes to dealing with customers. For a small business, a rating by a recognized agency helps it command better terms with its buyers, says HP Kumar, chairman and managing director of NSIC. A robust rating process includes a visit to the factories and warehouses to authenticate information provided by the company, verifying if the insurance of assets is in order and also taking feedback from suppliers, customers and bankers of the firm, among other aspects. The NSIC rating scale takes into account two factors performance capability and financial strength. For example, a company with moderate performance capability and high financial strength will be rated SE3A, while one with weak performance capability and moderate financial strength will be rated SE4B. On the basis of rating reports, banks are able to take faster decisions on project loans as well as on renewing and increasing
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CREDIT RATING credit limits for those clients. Every bank has its own internal guidelines on lending but Dixit says ratings are useful since information about small companies is not readily available. It is an independent third-party assessment of the overall condition of the SME, he says. In that sense, ratings bring credibility and a better image to a sector thats fragmented and often opaque about the financial health of its companies. Ratings can be revealed to vendors and customers without furnishing all financial data, says Rajesh Dubey, executive director, ICRA Online Take the case of In Marco Industries, which makes high-tech industrial sealing products. The Rs 25-crore (turnover) firm has been getting rated by Crisil every year for the past four years and has managed to obtain the highest level of SE1Aeach time. We have been able to establish JVs and partnerships with the help of the rating, says Chetan Doshi, executive director, In Marco, adding that its a calibration tool for his business that could come handy when he decides to go for an IPO later. It helps us in selfanalysis as we expand. Many companies have been leveraging ratings to enhance their brand image and acquire new clients. For instance, Gandhi says his firms rating is displayed prominently on the company stationery and website. It gives us an
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CREDIT RATING

identity in new markets and with new customers, he says. Moreover some supply tender notices insist the applying companies be rated. Rating is also bringing a shift in thinking among SMEs in terms of self-regulation. Rated companies today understand that good corporate governance, transparency and a sound accounting policy are all important in this changing world, says Dixit.

That doesnt mean ratings have become fully accepted among small companies and their bankers. There have been cases reported where banks have not honored ratings done by external agencies, and have relied only on their own due diligence. Rajeev Karwal, CEO, Mila grow Business and Knowledge Solutions, a small business advisory firm says, Banks should accept it. Only if they give loans on the basis of the rating will it have any meaning. At Meerut-based Kanohar Electricals, managing director Dinesh Singhal contends that mandatory rating due to Basel IIadds to his cost and provides no additional value. These rating agencies are not fully equipped to rate according to Basel II. They prepare reports after just looking at the balance sheets, he says. While the maximum benefit to a company getting rated is an
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CREDIT RATING

interest reduction of 0.5%, the cost of rating works out to be higher than the savings, he says. There are other limitations to the ratings system as well, says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). Most banks have a tacit understanding with one or two rating agencies and they do not accept ratings by other agencies.

STANDARD & POOR'S Standard & Poor's (S&P) is a United States-based financial services company. It is a division of the McGraw-Hill and analysis Companies that publishes financial research

on stocks and bonds. It is well known for the stock market indices, 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. It is one of the Big Three (credit rating agencies) (Standard & Poor's, Moody's Investor Service and Fitch Ratings) 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
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CREDIT RATING 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 History of Standard and Poors

Standard & Poor's traces its history back to 1860, with the publication by Henry Varnum Poor of History of Railroads and Canals in the United States.

This book was an attempt to compile comprehensive information about the financial and operational state of U.S. railroad companies. Henry Varnum went on to establish H.V. and H.W. Poor Co with his son, Henry William, and published updated versions of this book on an annual basis.

In 1906 Luther Lee Blake founded the Standard Statistics Bureau, with the view to providing financial information on non-railroad companies. Instead of an annually published book Standard Statistics would use 5" x 7" cards, allowing for more frequent updates.

In 1941, Poor and Standard Statistics merged to become Standard & Poor's Corp. Then in 1966 S&P was acquired by The McGrawPage 47

CREDIT RATING Hill Companies, and now encompasses the Financial Services division

From this source, it shows that Standard & Poors expects a brief earnings dip in the fourth quarter of 2007 with the earnings trend returning to the prior growth pattern by the second quarter of 2008. Remember that much of the growth in earnings was driven by the growth in revenues which was fueled by the rapid expansion of credit that is now contracting significantly. The problem is this earnings forecast doesnt do not seem very logical nor does it follow history. According to McKinsey & Company, the strategic consulting firm, in order for overall S&P 500 earnings to reach the long-run average proportion of GDP, profits would have to fall 20
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CREDIT RATING percent from their 2007 levels. This excludes the financial and energy sectors, so we get a better focus on the underlying economy. Standard and Poors Rating Comparison

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CREDIT RATING Standard and Poors Credit Rating

Long-term credit ratings S&P rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB) Investment Grade AAA: the best quality borrowers, reliable and stable (many of them governments) AA: quality borrowers, a bit higher risk than AAA. Includes: AA+: equivalent to Moody's and Fitch AA: equivalent to Aa2 AA-: equivalent to Aa3 A: quality borrowers whose financial stability could be affected by certain economic situations A+: equivalent to A1 A: equivalent to A2
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CREDIT RATING BBB: medium class borrowers, which are satisfactory at the moment

Non-Investment Grade (also known as junk bonds) BB: more prone to changes in the economy B: financial situation varies noticeably CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments CC: highly vulnerable, very speculative bonds C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations CI: past due on interest R: under regulatory supervision due to its financial situation SD: has selectively defaulted on some obligations D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations NR: not rated
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CREDIT RATING Short-term issue credit ratings:

S&P rates specific issues on a scale from A-1 to D. Within the A-1 category it can be designated with a plus sign (+)

A-1: obligor's capacity to meet its financial commitment on the obligation is strong A-2: is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory A-3: adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation

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CREDIT RATING

B: has a significant speculative characteristic. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impact its financial commitment on the obligation C: currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation D: is in payment default. Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition.

Recent Activity
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CREDIT RATING A congressional panel is examining whether the Obama administration tried to unduly influence Standard & Poors before the credit rater revised its outlook on the debt rating to negative. Randy Neugebauer, the Republican chairman of a House oversight panel, said on Wednesday his staff is probing whether Treasury tried to make material changes to a draft of S&Ps news release announcing the negative outlook revision in April. His concern was if the administration was trying to influence this rating decision some above what would be a normal practice. Neugebauer told reporters after a hearing examining oversight of the credit rating industry and the role the raters are playing in U.S. debt talks.

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CREDIT RATING CONCLUSION The credit market turmoil that began in the U.S. in the summer of 2007 has been amplified in recent months by dramatic slowing of broader economic activity. What began as a significant, but relatively isolated, deterioration in the performance of sub-prime housing loans has led to a wave of negative events that have reverberated across a highly-leveraged, interconnected and, at times, opaque global financial system. More importantly, a credit crisis has transformed into a much wider and deeper crisis of confidence in the global markets. Credit rating

agencies have an opportunity to help restore confidence in markets by restoring confidence in our industry. Many necessary actions can and have been undertaken at the individual firm and industry level and we are committed to continuing along that path. Nonetheless, a

few key actions and reforms as I have described above require help from the broader market and oversight authorities. For 2009, the description of credit is identical to the way forward for credit markets: confidence. The rebuilding process will be far more protracted than the events that necessitated it which is all the
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CREDIT RATING

more reason to get on with the task with energy, tenacity and coordination.

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CREDIT RATING BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Credit_rating http://www.smera.in/Compliance.aspx http://www.nsic.co.in/creditrating.asp www.crisil.com www.icra.in www.sebi.com

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