Chapter 18Credit Rating 1 THEORETICAL FRAMEWORK CREDIT RATING AGENCIES RATING PROCESS AND METHODOLOGY RATING SYMBOLS/GRADES 2 THEORETICAL FRAMEWORK Credit rating is essentially a symbolic indicator of the relative grading of the investment/credit qualities of financial instruments and reflects the relative ability of the issuers of such instruments to meet the servicing obligations as and when they arise. In other words, credit rating provides simple system of gradation by which the relative capacities of companies (borrowers) to make timely repayment of interest and principal on a particular type of debt can be noted. 3 4 . personal risk preference of an investor and other consideration which may influence an investment decision. the rating does not amount to any recommendation to buy.It is neither a general purpose evaluation nor an over-all assessment of the credit risk associated with all the obligations of the issuers/corporates. hold or sell an instrument as it does not take into consideration factors such as market prices. Although it is an opinion expressed by an independent professional organization. hold or sell an instrument. It does not amount to any recommendations to buy. on the basis of a detailed study of all relevant factors. A rating is specific to an instrument. they can raise funds at a cheaper rate. it is indicator expressing the underlying credit quality of an (debt) issue programme. For banks and other financial institution. Credit rating is useful to decide on lending and investment srategies. with a good rating. The investor is fully informed about the company as any effect of changes in business/economic conditions on the company is evaluated and published regularly by rating agencies. It minimizes the role of ―name recognition‖ and lesser known companies can also approach the market on the basis of their rating. 5 . credit-rating is obviously useful to investors. Benefits of credit rating :- As a fee-based advisory financial service. corporates(borrowers). For corporates(borrowers). banks and financial institutions. For investors. because institutional investor did not require the need of a rating agency. In the changed scenario where corporates are increasingly dependent on public. the removal of restrictions on interest rates and stipulation of mandatory credit rating of a number of instruments. the Credit Rating Information Services of India ltd (CRISIL). was started in 1988. 6 . The first rating agency. since 1991. two more agencies were set up. by Government/ SEBI. it is of relatively importance in India also.Although credit rating has been a long established part of the financial mechanism abroad. it played a rather passive role. initially. In response to this increasing trend. the Information and Credit Rating services(ICRA) ltd in 1990 and Credit Analysis and Research(CARE) ltd in 1993. credit rating is now a days gaining more and more importance in debt/ financial market. known as Phelps Credit rating India Ltd.• The first private sector credit rating institution was set up as a joint venture between JM financials. Alliance Group and international rating agency Duffs NS Phelps. • SIDBI (Small industrial bank of India) launched in September 2005 in association with Small and medium enterprises Rating Agency (SMERA). 7 . in 1995. It is now known as FITCh India ltd. CARE. and SMERA. 8 . FITCH. ICRA.CREDIT RATING AGENCIES There are four credit rating agencies in the country which rate corporate entities: CRISIL. 9 .Regulatory framework • Credit rating agencies are regulated by SEBI. The main elements of its Credit Rating Agencies Regulations are: (1) (2) (3) (4) (5) Their registration Their general obligations Restrictions on the rating of securities Procedure for inspection and investigation Action in case of default. defined in section 4-A of the companies Act Scheduled bank Foreign bank operating in India with RBI approval Foreign credit rating agency. assigned by a credit rating agency. Registration with the SEBI is mandatory for carrying on the rating business.000. having at least 5 years of experience Any company incorporated under companies act having continues net worth of a minimum Rs. The application for grant of certificate of registration should made to the SEBI in Forn A with a non-refundable fee of Rs. 10 • . Rating is defined by SEBI as an opinion regarding securities.100 crore as per its audited annual accounts for the previous 5 years prior to filing of the application with SEBI for registration.50. Promoters of CRA: A CRA can be promoted by a (1) (2) (3) (4) (5) Public financial institution.(1) Registration of credit rating agencies • • • • Credit rating agency means a body corporate engaged in the business of rating securities. expressed in the form of standard symbols/ in any standardized form. Eligibility criteria • The agency: (1) (2) (3) (4) (5) (6) Is set up and registered as a company Has specified rating activity as one of its main objective in its Memorandum of Association Has adequate infrastructure Its promoters have professional competence Has employed person with adequate rating knowledge. any director of the applicant or its promoters (i) is not involved in any legal proceeding connected with the securities market that may have an adverse impact on the interest of the investors. (ii) Has not any time in the past been involved in mal pracices. experience as per SEBI requirements Applicant or its promoters. 11 . on the subject of credit rating (A) Where any information/ particulars furnished to the SEBI by a CRA. and (B) the certificate of registration is valid for 3 years.00. it would immediately inform SEBI in writing.Grant of certification of registration • The SEBI will grant to eligible applicants a certificate of registration on the payment of a fee of Rs.00. renewal fee of Rs.000 each time. (i) is found to be false/ misleading in any material particular or (ii) has undergone change subsequent to its furnishing at the time of application. 20.000 subject to the conditions specified below: (1) The CRA would obey with the provisions of the SEBI act/ regulations and guidelines/directions/circulars and instructions issued by the SEBI. 10. (2) 12 . from time to time. ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process. ethical and professional manner. – Not treat in any unfair competition nor should it wean(take) away the client of any other agency on assurance of higher rating. stock exchange or public large. – Fulfill its obligation in prompt. to the client either about its qualifications or capability to render certain services or its achievements with regard to the services rendered to other client. – At all times exercise due carefulness. – Not make any untrue statement. – Provide adequate freedom and powers to its compliance officer for the 13 effective discharge of his duty. whether oral or written. papers or information furnished to the board.(2) General obligation • The general obligations of CRA are as: • CODE OF CONDUCT: A CRA should: – Make all efforts to protect the interest of investors. users and the public. suppress any material fact or make any misrepresentation in any document. report. – Not make any blown up(over stated) statement. – Disclose its rating methodology to clients. . • Agreement with client:. provide such information simultaneously to the respective regional stock exchange(s) and to all the stock exchanges where the securities are listed. e. Client’s agreement to obtain a rating from at least two different CRAs for any issue of debt securities for Rs. • Monitoring of ratings :. and incase of securities (debt) issued by listed companies. Disclosure by CRA to the client regarding the rating assigned to its securities through regular methods of distribution. d.The CRA should enter into a written agreement with each client containing the following provisions : a. c. Rights and liabilities of each party in respect of rating of securities. It should disseminate information regarding newly assigned ratings and changes in the earlier rating promptly through press release and websites. Fee to be charged. A periodic review of the rating during the tenure of the rated instruments. 100 crore or more. b. 14 . irrespective of whether the rating is or is not accepted by him.The CRA should continuously monitor the rating of securities rated by it during their lifetime. hold or sell any securities. circulars and instructions issued from time to time. • The CRA have to comply with SEBI guidelines. If client does not cooperate. so as to enable it to comply with its obligations relating to monitoring of rating. rating agency should a) Make public clear about the concerned rating. b) Also state the rating do not constitute recommendation to buy. • Disclosure of rating definitions and rationale:. CRA must furnish such information (a) within the specified period. with in a reasonable period of time. directions.SEBI The credit • Submission of information to the SEBI:. It cannot withdraw the rating services.• Procedure for reviewing of rating:- The CRA should carry out periodic reviews of all published rating during the lifetime of the securities. the CRA should carry out the review on the basis of the best available information and should disclose this fact to the investors.when ever any information called for by the SEBI. except where the company is wound up/merged/amalgamated with another company. and also provide the rationale behind the rating and the risk associated with it. 15 . (b) if no such time is specified. along with the symbol. g) Rating notes. considered by the rating committee. h) Record of decisions of the rating committee 16 .• Maintenance of books of account and records :a) b) c) d) e) f) every CRA has to maintain for a minimum period of five years. the following books of accounts and intimate to the SEBI. including up gradation and down gradation (if any). A copy of balance sheet A copy of P&L account A copy of auditors report on its accounts A copy of agreement entered into with each client Information supplied by each of clients Rating assigned to various securities. file a copy of the same with the SEBI – Follow. comprising members who are adequate qualified and knowledgeable.• Rating process:. in all cases.The CRA should. a proper rating process – Have professional rating committees. – Not change rating definition with out prior information to the SEBI. – Specify the rating process. – The CRA should not rate securities issued by it. to assign rating – Inform the SEBI about new rating instruments or symbols introduced by it. 17 . its chairman/directors/ employess can not hold a similar position in the CRA or its rating committee.3) RESTRICTIONS ON RATING SECURITIES – Restrictions on rating by CRAs relate to securities issued by (i) promoters (ii) certain other entities (i) Securities issued by promoters :. of its share. or more. who holds 10%.A CRA is prohibited from rating securities issued by its promoters. • • If promoter is a lending institution. The independent director does not participate in the discussion in the rating decision (ii)Securities issued by certain entities:the securities of any entity cannot be rated by a CRA if it is (a ) borrower of its promoters (b) a subsidiary of its promoters (c) an associate( having at least 10% of the share capital) of its promoters 18 . ii. To investigate into the complaints form investors iv. To ascertain whether they are being maintained properly To ascertained whether the provisions of the SEBI act are being followed properly or not iii.4) Procedure for inspection/investigation • The SEBI is empowered to appoint inspecting officer to undertake inspection/ investigation of the books of accounts/records/documents of the CRA i. In the interest of the securities market/ investors 19 . subject to which certificates of registration had been granted Break any of the provisions of the SEBI act/ any other regulation under the SEBI act.5) Action in case of default • The CRAs that a. b. Fail to comply with any condition. would be dealt with in the manner provided under the SEBI procedure for Holding Enquiry Officer and Imposing Penalty Regulation.2002 20 . application of new methodologies and assistance to client companies in raising funds across the country. Life Insurance Corporation of India. • CRISIL did a strategic alliance with the Standard & Poor (S&P).1988. such as international experience. S&P acquired stake in the CRISIL. derives other benefits from this alliance. revamping (restoring) of operating systems. the CRISIL.CRISIL • “CRISIL” the first credit rating agency in India. Apart from the financial collaboration. newyork. • In May 1997. • Other shareholder include the Asian Development Bank. . • It commence operation on January 1. GIC of India . the CRISIL was promoted in 1987 jointly by the ICICI Ltd & the Unit Trust of India. HDFC Ltd. Advisory services 3. currently CRISIL perform the following functions : 1. at a fair cost. :. To facilitate companies to mobilize funds in large amounts from a wide investor base. Credit rating services 2.Capital market Research .• Initially. To facilitate intermediaries to place debt instruments with investors by providing them with an effective marketing tool To achieve these objectives. Over the years it has take shape the following main objectives: To support both individual and institutional investors in making investment decisions in fixed interest securities.provide reliable database and analysis of Indian corporates Information Solution Company Ltd (CRIS-RISC):. Training services • – – – CRISIL has three subsidiaries: CRISInfac:. Creditability rating and evaluation services 4. the CRISIL was set up to rate Debt obligation that would guide investors as to the risk of timely payment of interest and principal.leader in research & information services business Global Data Services of India Ltd. banks and states. real estate developers/builders. deposits. chit funds. its rating services also extend to preference shares. commercial papers. namely. Its main business is rating services although it has diversified into information and advisory services. debentures. The 23 . structured obligations. LPG/kerosene dealers.CRISIL CRISIL is the most important rating agency in the country. While it undertakes rating of mandated instruments. debt securitization. credit evaluation and so on. It has leveraged its information base and expertise in credit rating to provide counseling to government. banks and financial institutions on aspects such as privatization of PSUs.extensive compilation and analysis of data for rating business is also used by CRISIL to provide information services to corporate clients. 24 . both individual and institutional. in large amounts and at a lower cost for highly rated entities To enable banks. the other shareholders are the Unit Trust of India. in making decisions To facilitates issuers in raising funds. the ICRA has diversified the range of its services. which holds 26% of the share capital. banks. 2. GIC. investment bankers. 3. LIC. It started operations in 1991. Rating services Information services Advisory services . It currently provides three services : 1. from large investors. The main objectives of ICRA are : – – – To assist investors. HDFC LTD.ICRA • • The ICRA Ltd has been promoted by the IFCI (Industrial Financial Corporation Of India) as the main promoter to meet requirements of companies based in the northern parts of the country Apart form the main promoter. brokers in placing debt with investors by providing them marketing tool • • • Over the years. EXIM BANK. kerosene/LPG dealers. it rates banks. deposits. 26 . It has also ventured into EPRA (earning Prospects & Risk Analysis) for grading the primary market at the instance of the issuing companies and assessing the secondary market for the investors. commercial papers. It also provides credit assessment and general assessment services.ICRA ICRA focuses on rating of instruments for which credit rating is mandatory. In addition. namely. debentures/ bonds. The EPRA includes (1) equity grading. (2) equity assessment Equity grading :The equity grading is done at the request of the prospective issuer. After interacting with the management and analyzing the data. A team of analyst take up the work of collection of data and information from the books and records of the concern and meets with its executives management). and culminates (ends) in an opinion from the ICRA. expressed symbolically as an equity grade.Earnings Prospects & Risk Analysis(EPRA) • • • • • • EPRA provides authentic information on the relative quality of equity shares in diverse corporate. The quality of equity of a company and the growth. the analysts present their finding to a committee. . stability and composition of its earnings is assessed by analyzing the underlying fundamentals that would affect its future performance over the medium-term. which then decides on the relative equity grade of the issuer. The process generally takes three to four weeks from tie of receiving the required data from the management. on receipt of required information from him. • The rest of the process is similar to the equity grading process. except that the end result is not in the form of a symbol but as an assessment report specific to the investor’s need and intended to be used by the investor only. Equity Assessment • The equity assessment process commence at the request of an investor and the consent of the company being assessed. during the period. . • Once the issuer decides to use grade. • Based on the information provided by the company or collected by ICRA on its own. the ICRA monitors the working of the company on a continuous basis. equity grade may be changed suitably.• The ICRA offers the issuer an opportunity to get itself analyzed confidentially and also and option regarding use of ICRA’s grade. • The ICRA may or may not disclose the investor’s identity to the company depending upon the investor’s prefrence. 2.CARE(credit analysis and research limited) • The CARE is a credit rating and information services company promoted by the Industrial Development Bank of India (IDBI) jointly with financial institutions. • CARE offers following services : 1. 5. Advisory services Information services Equity research Publications Other services . 4. public/private sector banks and private finance companies. 3. • It started its operation in 1993 and offers a wide range of products and services in the field of credit information and equity research. management capabilities.(1) CARE loan rating (2) credit analysis rating (3) interest rate structural model (4) performance rating of parallel marketers of LPG and kerosene oil.The CARE’s publications include (1) rating Reckoner:. 5. Publications :.updated on its accepted rating. and identification of the potential winners and losers among them.The objective of information services is to make available information on any company. Other services :.The CARE provides advisory services in – – – – Securitization transaction Structuring financial instruments Financing of infrastructure projects Municipal finances 2. industry or sector required by a business enterprise. (2) CAREVIEW :.a quarterly bulletin providing information on its rating.Equity research involves an extensive study of the shares listed/to be listed in the major stock exchanges. 3. 4. market shares. on the basis of fundamentals affecting the industry. . Information services :.1. Equity Research :. (5) rating of collective investment schemes of plantation. Advisory services :. • CLR fulfils following purposes of banks and institutions : 1. while DFIs (Development Financial Institutions). the CLR is aimed at providing a valuable input in assisting the decision making process in banks and DFIs. • So. are moving into working capital financing.• CARE loan rating (CLR) :. 2.The CARE loan ratings are obligations on the ability and willingness of a borrower to make timely payments on the specific loan obligation. In this context. whose traditional strong point has been working capital lending. Commercial banks. banks and DFIs often use credit rating on debt securities or fixed deposits as an indicator of the issuer’s ability to honor its obligations on loans. over its life. are increasingly moving into term financing. Determining the premium to be charged 3. Assessing the creditworthiness of borrowers. Making quick credit decisions. 31 . 32 . • The assessment indicates the opinion of the CARE on the entity’s capability to make timely payments of interest and principal on its debt obligations.credit analysis rating are useful for those business entities which need funds from banks/financial institutions/NBFC and so on.• Credit Analysis Rating(CAR)/ credit assessment :. • It indicates the overall debt management capability of entity. 33 . commercial papers and structured obligations. The instruments credit-rated by CARE are debentures. It also undertakes general credit analysis of companies for the use of banks. other lenders and business enterprises.CARE CARE confines to normal rating business only and has not diversified its operations. deposits. FITCH rating India Itd. • It is a joint venture between the international credit rating agency Duff and Phelps and JM financial and Alliance group. . In addition to the debt instrument it also rates companies and countries on the request. 35 .SMERA(small and medium enterprises Rating Agency it is latest entrant in the credit rating business. It has been launched by SIDBI in association with several banks to focus on rating small and medium enterprise. It has commenced operation only recently. moreover. 36 . credit rating is done in India at the request of the issuers of the instruments.Rating Process/Methodology Procedurally. The clients have. the option not to accept the ratings. Unsolicited rating at the initiative of the rating agencies has still not emerged. adequacy of cash flows and financial flexibility and (iii) management 37 . earnings protection. market position. All the credit agencies follow broadly the same analytical framework of rating methodology. It comprises of three broad sets of factors: (i) business analysis in terms of analysis of industry risk. operating efficiency and legal position. (ii) financial analysis on the basis of consideration of accounting quality.Rating is a search for fundamentals and the possibilities of change in these in the long-term. the assessment by the rating agencies lays emphasis on regulatory environment and fundamental analysis which includes liquidity management. For finance companies. profitability and financial position and interest and tax sensitivity. 38 . asset quality. in addition.evaluation. prior to meeting with the issuer. one of whom would be lead analyst. cash flow projections and other relevant information like: • Annual reports for the past five years and short-term reports for past three years • 1. the analytical team obtains and analyses information relating to its financial statements. . the CRA assigns an analytical team. – Rating agreement and assignment of analytical team:. comprising two/ more analysts. – Meeting with management :. Rating process of new issues :.the following steps are involved. Rating process/ procedure All four rating agencies in the country adopts a similar rating process. The steps followed by them are 1) rating of new issues/instruments (2) review of rating (3) flow chart of rating.the rating process starts with the issue of the rating request letter by the issuer of the instrument and signing of the rating agreement. On receipt of the request.Rating process and methodology3 • The process/ procedure followed and the methodology used generally by CRAs in respect of mandated and other instruments are briefly outlined in this section. balance sheets and operating statements for at least three years. normally takes three to four weeks. Rating to have value. Communication to the issuer:.After meeting with management. Consolidated financial statements for the past three fiscal years. the analysts present their report to a rating committee. showing lines of credit and contact officers for each. the rating decision is communicated to the issuer. when required. Two copies of latest prospectus offering statements and applications for listing on any major stock exchanges. The rating is arrived at after a composite assessment if all the factors concerning the issuer. Two copies of the statements of projected sources and application of funds.After the committee has assigned the rating. The rating committee meeting is the only aspect of the prospect in which the issuer does not participate directly. . Rating committee . with the reasons or rationale supporting the rating. thoroughness and transparency of its rating methodology and the integrity and fairness of its approach are important factors in establishing and maintaining credibility. form the initial management meeting to the assignment of the rating. 3.• • • • 2. The rating process. which then decides on the rating. the CRA deliver the rating decision in shorter time frames. List of banks. However. Rating change :. 1. Rating review for possible change :In case of rated instrument. . the rated company is on the observation system of the CRA.4. 2. through the print media.Once the issuer accepts the rating. the earlier rating is reviewed. Dissemination to the public . the CRAs disseminate it.On the basis of the analysis of the new data. then the analysts request the issuer for a meeting with its management and proceed with a comprehensive rating analysis. and from time to time. which might be sent by the company or might have been procured through new channels. The CRA constantly monitors all rating with reference to new political. Economic and financial developments and industry trends. if the analysts feel that there is a possibility for changing the rating. along with the rationale.Analysts review the new information or data available on the company. New data of the company :. A rating is assigned after assessing all the factors that could affect the credit worthiness of the entity. examination of cash flow adequacy is importance. For instance. careful assessment of the issuer’s market position is stressed. Typically. .• • • • • Rating methodology The rating methodology involves an analysis of the industry risk. If company has large capital requirement. Both quantitative and qualitative criteria are taken in to consideration in evaluating and monitoring the rating. the industry risk assessment sets the stage for analyzing more specific company risk. if the industry is highly competitive. issuer’s business and financial risks. industry risk sets the ground for analyzing the company risks. In other words. The methodology is illustrated below with reference to (1) manufacturing companies and (2) financial services companies. For manufacturing companies • The main elements for manufacturing companies are : 1. demand and supply position. (i) Industry risk :. government policies and so on. systems for timely payment and for protection against fraud/ forgery and so on. . key success factors. labour relationship. cyclical/ seasonal factors. focusing on the industry prospects. pattern of business cycles as well as the competitive factors affecting the industry. competitive advantages. cost structure. (iv) Legal position :. trustees and their responsibilities. product and customer diversity and so on.Terms of the issue document/prospectus.Market share. structure of industry. selling and distribution arrangements. technological advantages and manufacturing efficiency.The rating analysis begins with an assessment of the company’s environment. Business risk analysis :. (ii) Market position of the company within the industry :.Locational advantages. (iii) Operating efficiency of the borrowing company :.nature and basis of competition. 44 .A proper assessment of debt protection levels requires an evaluation of the management philosophies and its strategies.After evaluating the issuer’s competitive position and operating environment. 3. Financial risk analysis :. Management Risk :. • Emphasis is also laid on an analysis of cash flow patterns. • The analysts compares the company’s business strategies and financial plans to provide insights into a management’s abilities with respect to forecasting and implementing of plans. compared to reported earnings.2. past financial performance is also important in the financial analysis. the analysts proceed to analyzed the financial strength of the issuer. as it provides a better indicator of the issuer’s debt serving capability. Financial risk can be analyzed through financial ratios. 4.Financial services sector • When rating debt instrument of financial institutions. 1. 5. banks and nonbanking finance companies the assessment also lays emphasis on the following factors : 1.fundamental analysis should include : 45 . Regulatory and competitive environment 1. 2. 6. Fundamental analysis :. 3. Capital adequacy Resources Asset quality Liquidity management Profitability and financial position Interest and tax sensitivity 2. 2. Structure and regulatory framework of the financial system Trends in regulation/deregulation and their impact on the company/institution. They group together similar entities in terms of their relative capacity of timely servicing of obligations as per the terms of the contract. Appropriate prefixes and suffixes such as 46 .Rating Symbols The technique of credit rating is rating symbols. The suffixes plus (+) or minus (—) are added to the symbols to indicate the relative position of the instrument within the group covered by the symbol. medium term. Crisil uses five-bold classification as in the case of debentures with the word CHIT as a prefix for chit funds andPA for builders. The credit assessment symbols are numerals ranging between 1-14. long-term. The grading the primary 47 market by ICRA is classified into four broad .(FD)/(CD)/Pf/SO/L/F/M/P/A/PR are used to denote specific instruments such as fixed/certificates of deposits. while the credit analysis has five ranges between 1-5. satisfactory. preference shares. commercial paper and so on. low risk and high risk. The rating of LPG/Kerosene dealers is expressed as good. categories in descending order of earnings prospects. Each group has three sub-grades correlated with the degree of risk as a result of changes in economic and business conditions, the letters (ER) added as a prefix to each grade. The opinion of Icra is not expressed in terms of symbols but in terms of a report specific to the needs of the investor in the case of assessment of secondary markets. Similarly, the ratings of the banks and states are also submitted as reports rather than symbols. 48 CRISIL Rating Symbols The rating symbols of the CRISIL are illustrated with reference (1) debentures, (2) fixed deposits, (3) short-term instruments (commercial papers), (4) credit assessment, (5) structured obligations, (6) bond funds, (7) bank loans (8) collective investment schemes, (9) Indian states, (10) chit funds and (11) real estate developers/builders. Debentures The rating of debentures is mandatory. The CRISIL assigns an alpha based rating scale to rupee denominated debentures. It categorises them into three grades namely, high investment, investment and speculatives. High Investment Grade High investment includes: AAA - (Triple A) Highest Security The debentures rated‘ AAA ‗ are judged to offer the highest safety against timely payment of interest and principal. Though the circumstances providing this degree of safety are likely to change, such changes as can be envisaged are most unlikely to affect adversely the fundamentally strong position of such issues. AA - (Double A) High Safety The debentures rated ‗AA‘ are judged to offer high safety against timely payment of interest and principal. They differ in safety from‘ AAA ‗ issues only marginally. Investment Grades Investment grades are divided into: 49 A- Adequate Safety The debentures rated ‗A‘ are judged to offer adequate safety against timely payment of interest and principal; however, changes in circumstances can adversely affect such issues more than those in the higher rated categories. BBB- (Triple B) Moderate Safety The debentures rated ‗BBB‘ are judged to offer sufficient safety against timely payment of interest and principal, for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay the principal than in the case of debentures in higher rated categories. Speculative Grades Speculative grades comprise: BB- (Double B) Inadequate Safety The debentures rated ‗BB‘ are judged to carry inadequate safety of the timely payment of interest and principal. While they are less susceptible to default than other speculative grade debentures in the immediate future, the uncertainties that the issuer faces could lead to inadequate capacity to make interest and principal payments on time. B- High Risk The debentures rated ‗B‘ are judged to have greater susceptibility to default. While currently interest and principal payments are met, adverse business or economic conditions would lead to a lack of ability or willingness to pay interest or principal. C- Substantial Risk The debentures rated ‗C‘ are judged to have factors present that make them vulnerable to default; timely payment of interest and principal is possible only if favourable circumstances continue. 50 FAAA-(F-Triple A) Highest Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. The + (plus)/– (minus) signs may be applied for ratings from grade two to grade six to reflect comparative standing within the grade/category.D. 51 . The contents within parentheses are a guide to the pronunciation of the rating symbols. Fixed Deposits The fixed deposits are divided into six broad groups.Default The debentures rated ‗D‘ are in default and in arrears of interest or principal payments or are expected to default on maturity. FAA-(F-Double A) High Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. However. Such debentures are extremely speculative and returns from these debentures may be realised only on reorganisation or liquidation. Note: (1) The CRISI may apply ‗+‘ (plus) or ‗–‘ (minus) signs for ratings from AA to C to reflect comparative standing within the category. Preference shares rating symbols are identical to debenture rating symbols except that the letters ‗pf‘ are prefixed to the rating symbols for example pf AAA (―pf Triple A‖). The symbols and their implications are described below. the relative degree of safety is not as high as for the fixed deposits with ‗FAAA‘ rating. Such deposits have factors at present that make them vulnerable to default. FB-Inadequate Safety This rating indicates inadequate safety of timely payment of interest and principal. FC-High Risk This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such deposits are less susceptible to default than fixed deposits rated below this category. as listed below. Changes in circumstances can affect such deposits more than those in the higher-rated categories. adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.FA-Adequate Safety This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. Their rating is also mandatory. 52 . FD-Default This rating indicates that the deposits are either in default or expected to be in default upon maturity. but the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments. The CRISIL grades them into five broad groups. Short-Term Instruments Such instruments include commercial papers. which roughly correspond to the medium-term instruments rating symbols.P-1 (Highest Safety) This rating indicates that the degree of safety. however. P-4 (Inadequate Safety) 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. the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories. Credit Assessment The assessment indicates the CRISIL‘s broad opinion as to the relative degree of capability of the entity to repay the interest and principal. as per the terms of the contract. 53 . is very strong. P-5 (Default) This rating indicates that the instrument is expected to be in default upon maturity or is in default. detailed below. P-2 (High Safety) 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-l‖. The CRISIL may apply ―+‖ (plus) sign for ratings from P-l to P-3 to reflect a comparatively higher standing within the category. P-3 (Adequate Safety) This rating indicates that the degree of safety regarding timely payment on the instrument is adequate. It indicates credit assessment symbols (as distinct from credit rating symbols) by numerals ranging from 1 to 14. regarding timely payment of the instrument. adverse business or economic conditions would lead to a lack of capacity to pay interest or principal. 7 Adequate Capacity This indicates that the capacity for timely payment of interest and principal is satisfactory. 12. 6. Changes in circumstances can affect the capacity of the borrower. 4 Strong Capacity This indicates that the capacity for timely payment of interest and principal is strong. 8. 3. more than those in the stronger credit assessment categories. 11. 13 Poor Capacity This indicates that the capacity for timely payment of interest and principal is doubtful. However. such borrowers face circumstances that make them vulnerable to default. 5. 54 . At present. 14 Default This indicates that the borrower is either in default or is expected to be in default upon the maturity of the debt. but the uncertainties that the borrower faces could lead to inadequate capacity to make timely interest and principal payment. 10 Inadequate Capacity This indicates inadequate capacity for timely payment of interest and principal. the capacity is not as strong as for borrowers with a credit assessment of ―1‖.1-Very Strong Capacity This indicates that the capacity for timely payment of interest and principal is very strong. Such borrowers are less susceptible to default than borrowers with credit assessment below this category. 9. 2. reflecting the distinction of structured obligations from a debt instrument. This differs only marginally in safety from ‗AAA(SO)‘ instruments. (2) investment and (3) speculative.Structured Obligations The structured obligations ratings are based on the same scale (AAA through D) as ratings for long-term instruments. High Investment Grades These grades comprise: AAA(SO) Highest Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. Grades are classified into (1) high investment. However. the rating symbols are defined differently. 55 . AA(SO) High Safety This rating indicates the highest degree of certainty regarding timely payment of financial obligations on the instrument. Investment Grades Investment grades include: A(SO) Adequate Safety This rating indicates adequate degree of certainty regarding timely payment of financial obligations on the instrument. Changes in circumstances can adversely affect such instruments more than those in the higher-rated categories. Any adverse changes in circumstances are most unlikely to affect payments on the instruments. D(SO) Default This rating indicates that the obliger is in default or expected to default. Such instruments are less susceptible to default than instruments rated below this category. Note: The CRISIL may apply ‗+‘ (plus) or ‗–‘ (minus) signs for ratings from AA(SO) to C(SO) to reflect comparative standing within the category. changing circumstances are more likely to lead to a weakened capacity to meet financial obligations than for instruments in higher-rated categories. B(SO) High Risk This rating indicates high risk and greater susceptibility to default. Speculative Grades Speculative grades consist of: BB(SO) Inadequate Safety This rating indicates an inadequate degree of certainty regarding timely payment of financial obligations on the instrument.BBB(SO) Moderate Safety This rating indicates a moderate degree of certainty regarding timely payment of financial obligations on the instrument. Any adverse business or economic conditions would lead to a lack of capability or willingness to meet financial obligations on time. C(SO) Substantial Risk This rating indicates that the degree of certainty regarding timely payment of financial obligations is doubtful unless circumstances are favourable. 56 . However. BLR-3 A satisfactory likelihood of repayment of interest and principal on the bank loan.Bond Funds The rating symbols and their interpretation are as follows: AAAf The fund‘s portfolio holdings provide very strong protection against losses from credit defaults. Cf The fund‘s portfolio holdings have factors present that make them vulnerable to credit defaults. AAf The fund‘s portfolio holdings provide strong protection against losses from credit defaults. BBBf The fund‘s portfolio holdings provide moderate protection against losses from credit defaults. BLR-l A strong likelihood of repayment of interest and principal on the bank loan. Af The fund‘s portfolio holdings provide adequate protection against losses from credit defaults. BBf The fund‘s portfolio holdings provide inadequate protection against losses from credit defaults. BLR-2 A good likelihood of repayment of interest and principal on the bank loan. Bank Loan Ratings (BLRs) The BLRs and their interpretation are given below. 57 . would have impact on the degree of certainty of the scheme providing an assured return to the investor. as mentioned in the offer document. in terms of the quantity of produce and/or cash. vulnerability to loss. as detailed below: Grade I (High Certainty) This rating indicates high certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. BLR-6 Loss. Collective Investment Schemes The CRISIL has developed a framework for the rating of collective investment schemes of plantations and other companies. Grade II (Adequate Certainty) This rating indicates adequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. the CRISIL has identified factors that it believes. The rating is not a comment on the quality of the produce or the monetary value that all the investors will get from the produce. The rating is an opinion on the degree of certainty of the scheme to deliver the assured returns. Under each of these. 58 . BLR-5 Sub-standard. high likelihood of loss. These factors are crystallised into a composite rating expressed in the form of grades.BLR-4 A moderate likelihood of repayment of interest and principal on the bank loan. The symbols divide them into five grades. The methodology broadly assesses the scheme-related risk factors as well as promoter-related risk factors. Risk factors for the scheme are extremely high expectation of default on obligations.Grade III (Moderate Certainty) This indicates moderate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Grade V (High Uncertainty) This rating indicates high uncertainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Grade IV (Inadequate Certainty) This rating indicates inadequate certainty that the collective investment scheme will provide the assured returns in the form of produce and/or cash. Risk factors for the scheme are high and the scheme is prone to default. 59 . a rating enhances the marketability of chits. provides a distinct identity to the chit fund and an objective evaluation of its strengths and weaknesses. with a reported minimum net worth of Rs 5 1akh. widens the access to subscribers. It also reflects the relative degree of risk associated with subscription to the chit series floated by chit funds. not mandatory. Investment Grade: CHIT AAA-Very High Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is very strong. The purpose of the rating of chit funds is to assess their ability to make timely payment of the prize money to the subscribers. Moreover. 60 . however. CHIT AA+/CHIT AA/CHIT AA-High Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is strong. The rating process and methodology is the same as in the case of mandated instruments. typically having an operating track record of at least 10 years. Such rating is. The rating symbols and their broad interpretations are listed below. CHIT A+/CHIT A/CHIT A-Adequate Safety This rating indicates that the degree of safety regarding timely payment to the subscribers is satisfactory.Rating of Chit Funds The CRISIL undertakes rating of chit funds incorporated as public/private limited companies. the uncertainties that such chit funds face could lead to inadequate capacity to make timely payments to subscribers. CHIT C+/CHIT C/CHIT C-High Risk This rating indicates that the degree of safety regarding timely payment to the subscriber is doubtful. CHIT D Default This indicates that the chit fund is either in default or is expected to be in default. While such chit funds are less susceptible to delay/default than chit funds rated below this category.Inadequate Safety This rating indicates inadequate safety of timely payment to subscribers. as well as the ability to transfer clear title to customers. The rating pertains to a particular project and not to the company as a whole. Such chit funds have factors at present which make them vulnerable to default. The considered factors are: (i) project risk analysis and (ii) developer risk analysis. The ratings are based on current information provided to the CRISIL. Only projects with an approved plan and planning permit from the appropriate local authorities are considered for a rating. Rating of Real Estate Developers/Builders The CRISIL undertakes rating of real estate projects. adverse business conditions would lead to lack of ability or willingness to pay subscribers.Speculative Grade: CHIT B+/CHIT B/CHIT B. Methodology The CRISIL assigns ratings after assessing the factors that could affect the ability of the developer to meet agreed specifications in terms of quality and time. 61 . · Exemption order under the Urban Land Ceiling Act. existing financial position. · A report on the title. together with commencement and completion certificates. 62 . as applicable. The key documents for scrutiny at the time of rating are: · Registered sale deeds for all transfers over the past 30 years or from the time a clear proof of title is established. financial flexibility and management evaluation are some of the factors considered in order to assess the standing of the developer. duties and taxes in respect of the property paid to date. in respect of the property to be constructed. from a reputed legal firm/lawyer or from the appropriate authority. · Copies/formats of all agreements between the developer and the buyer(s). The analysis of quality takes into account the specifications agreed upon by the developer and the buyers. · Copy of the sanctioned plan. Developer Risk Analysis The track record of the developer.Project Risk Analysis The quality of legal title. if applicable and · Clearance certificate under the Income Tax Act. 1976. from a competent authority. · Receipts of all municipal and government rates. quality of construction and timeliness of delivery of the proposed/completed unit are assessed. however. 63 . The CRISIL. PA1 Highest Ability Projects rated PA1 indicate the highest ability of the developer to specify and build to the agreed quality levels. Note: The CRISIL may apply ‗+‘ (plus) sign for ratings PA1 to PA3 to reflect comparative standing within the category. PA2 High Ability The developer‘s ability to build the project to specified quality levels and time schedules and transfer clear title is high. Project risks are marginally higher in this category as compared to projects in the PA1 category.Rating Symbols The rating of builders is not mandatory. PA4 Inadequate Ability The developer‘s ability to build to specified quality levels and adhere to time schedules is inadequate. rates them as a part of its diversification strategy. Uncertainties facing the project could result in inability and/or unwillingness to complete projects. The rating symbols it uses and their interpretation are indicated below. However. PA3 Adequate Ability Adequate ability of the developer to build to reasonable quality levels and time schedules and transfer clear title for the present. changing circumstances are likely to adversely affect these projects more than those in the higher rated categories. and transfer clear titles within stipulated time schedules. It uses the prefix (PA) to the rating symbols to indicate the project development ability of the developer. PA5 Inability Projects rated PA5 indicate the inability of the developer to complete projects or transfer clear titles.