OPERATIONAL PERFORMANCE OF CREDIT RATING AGENCIES

Transcription

1 CHAPTER - 5 OPERATIONAL PERFORMANCE OF CREDIT RATING AGENCIES A comparative analysis of the operations carried out by the various credit rating agencies under study, viz. CRISIL, ICRA, CARE and FITCH has been presented in this chapter. The chapter is divided into two sections. Section-I provides the general information about these rating agencies and Section-II describes the operational performance of all these agencies. SECTION-I 5.1 CREDIT RATING INFORMATION SERVICES OF INDIA LTD. (CRISIL) CRISIL is India s leading rating, research, risk and policy advisory company, and is the fourth largest in the world. It was incorporated in 1987 and was promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of India (UTI). It commenced its operations of rating in CRISIL has its association with internationally recognized rating agency Standard and Poor s (S&P) since CRISIL s majority shareholder is Standard and Poor s which is a subsidiary of The McGraw-Hill Companies. The latter is the world s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. CRISIL has been recognized by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, CRISIL is a group of businesses which offers the following diversified services: Rating and Risk Assessment, Infrastructure Advisory, and Business Research. CRISIL s services include credit ratings and risk assessment; research on India s economy, industries and companies; financial research and analytics outsourcing; fund services; risk management and infrastructure advisory services. Through its IPO Grading 96

2 initiative, CRISIL has also established a presence in the equity research domain. It provides all these services through its different subsidiaries. Figure 1: CRISIL s Business CRISIL S BUSINESS Rating Business Research Infrastructure Advisory & Risk Assessment CRISIL Ratings CRISIL Research The CRISIL Centre for Economic Research CRISIL Fund Services Irevna CRIS CRISIL Information Advisory CRISIL Risk Solution CRISIL Ratings It is the only rating agency in India to operate on the basis of sectoral specialization. It rates different kinds of organizations, including industrial companies, banks, SMEs, non-banking financial institutions, insurance providers, mutual funds, infrastructure entities, state governments, and urban local bodies. It also rates securitized papers CRISIL Fund Services CRISIL Fund provides fund evaluation services and risk solutions to the mutual fund industry through use of various benchmarks and analytical tools. 97

3 5.1.3 CRISIL Research CRISIL Research is India's largest independent integrated research house which provides research, analysis and forecasts on the Indian economy, industries and companies across financial, corporate, consulting and public sectors The CRISIL Centre for Economic Research The CRISIL Centre for Economic Research was set up in April It provides research offerings to different financial players, corporates and policy-makers. It offers products and services based on economic analysis to external clients, both independently and in collaboration with other group businesses Irevna CRISIL entered in equity research business by acquiring Irevna. Irevna is a division of CRISIL which provides customised equity research and analytics, and knowledge process outsourcing, to the world's leading financial institutions, investment banks, private equity firms and consulting companies. CRISIL transferred its advisory and risk consulting business into a 100 per cent subsidiary CRISIL Risk and Infrastructure Solutions Limited (CRIS) with effect from April 01, CRIS is engaged in the areas of infrastructure policy and transaction advisory services; integrated risk management services and consulting to banks and corporates, through its divisions CRISIL Infrastructure Advisory and CRISIL Risk Solutions CRISIL Risk and Infrastructure Solutions Limited (CRIS) CRISIL Infrastructure Advisory works extensively in the areas of policy-making and economic development. Its range of activities include undertaking complex feasibility studies, creation of appropriate policy frameworks, sector reforms, regulatory support and project structuring for various large and complex projects. 98

4 CRISIL Risk Solutions business provides risk management solutions and advice to banks and corporates in the areas of credit and market risk. 5.2 INVESTMENT INFORMATION AND CREDIT RATING AGENCY OF INDIA LTD. (ICRA) ICRA is a full-service credit rating agency but besides Ratings, Group ICRA offers Consulting services, IT-based services, Information services, and Outsourcing services. Thus, along with the ICRA Limited, Group ICRA has three wholly-owned subsidiaries which together form the ICRA Group of Companies (Group ICRA). These are: ICRA Management Consulting Services Limited (IMaCS); ICRA Techno Analytics Limited (ICTEAS); and ICRA Online Limited (ICRON). Figure 2: ICRA s Business Group ICRA Credit Rating / Grading Management Consulting IT Software ICRA Online Limited ( ICRON ) ICRA Limited ( ICRA ) ICRA Management Consulting Services Ltd. ( IMACS ) ICRA Techno Analysis Limited ( ICTEAS ) M. Serve Business Solutions Pvt. Ltd. ( M. Serve ) ICRA Sapphire Inc. ( ICSAP ) Axiom Technologies Ltd. ( AXIOM ) 99

5 5.2.1 ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) It was incorporated in 1991 and was jointly sponsored by Industrial Finance Corporation of India (IFCI) and other Financial Institutions and banks as an independent and professional investment information and credit rating agency. ICRA is an associate of the international rating agency Moody s Investors Services which is ICRA s largest shareholder. Moody s assists ICRA in organising formal training programmes and it gives advice to ICRA on rating-products strategy and the ratings business in general. ICRA has been granted registration with SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, ICRA provides information products, ratings and solutions to different businesses and investors ICRA Management Consulting Services Limited (IMaCS) It is a wholly-owned subsidiary of ICRA Limited and offers consulting services in strategy, risk management, regulation and reform, transaction advisory, development consulting and process reengineering. IMaCSs clientele includes banks and financial service companies, corporate entities, institutional investors, governments, regulators, and multilateral agencies. IMaCS provides management consulting services to clients based in India and abroad through five Business Groups: infrastructure, energy, banking and insurance, corporate advisory, and government ICRA Techno Analytics Limited (ICTEAS) It is a wholly-owned subsidiary of ICRA Limited, and offers Information Technology (IT) solutions to meet the dynamic needs of present-day businesses. The services range from the traditional development of client-server, web-centric and mobile applications to the generation of cutting-edge business intelligence applications and analytics solutions. ICTEAS has two subsidiaries, ICRA Sapphire Inc. (ICSAP) and Axiom Technologies Limited (AXIOM). 100

6 ICSAP is a wholly-owned subsidiary of ICTEAS and is based in Connecticut, USA. It provides business analytics and software development services backed by offshore teams. AXIOM is also a wholly-owned subsidiary of ICTEAS and it operates in Kolkata, India. AXIOM provides various customization and implementation services on the Oracle E-Business Suite ICRA Online Limited (ICRON) It is a wholly-owned subsidiary of ICRA Limited. ICRON was incorporated in January 1999 and is providing software and outsourcing solutions since then. ICRON has a wholly-owned subsidiary M-Serve Business Solutions Private Limited, a KPO services company which is headquartered in Kolkata, India. ICRON has two Strategic Business Units. The Knowledge Process Outsourcing Division (KPO Division) ICRON diversified into the Knowledge Process Outsourcing (KPO) business in April 2004, with focus on the banking, financial services and insurance as well as on retail, healthcare and pharmaceuticals sectors. The KPO Division of ICRON offers Knowledge Process Outsourcing services by translating data and information into structured business inputs. The Information Services and Technology Solutions Division (MFI Division) The MFI Division serves the Mutual Fund Industry through Research, Analytics and Mutual Fund Ranking. Besides, the company provides several innovative products to meet the varied needs of its clients. 5.3 CREDIT ANALYSIS & RESEARCH LTD. (CARE) Credit Analysis & Research Ltd. was incorporated in 1993 by consortium of Banks/financial institutions in India. The three largest shareholders of CARE are IDBI Bank, Canara Bank and State Bank of India. CARE s Ratings are recognized by Govt. of India and all regulatory authorities like RBI and SEBI. CARE has been granted 101

7 registration with SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, CARE is a founder member of Association of Credit Rating Agencies in Asia (ACRAA). CARE is set up with two divisions: CARE Ratings CARE Ratings offers a wide range of rating and grading services across sectors. Types of debt instruments rated by CARE Ratings include commercial paper, fixed deposit, bonds, debentures, hybrid instruments, structured obligations, preference shares, loans, etc. CARE Ratings provide investors and risk managers with credit opinions based on detailed in-depth research, which encompasses detailed analysis of risks that affect credit quality of an issuer CARE Research and Information Services CARE Research & Information Services is an independent division of CARE. The research division undertakes two activities, i.e., providing an in-house support to the ratings division and providing sectoral research to financial intermediaries, corporates, analysts, policy-makers, etc. as an aid to their decision-making process. CARE Research & Information Services offers both subscription based reports and also customised reports on request. Sector Research Sector Research includes an in-depth analysis of business environment of industry, trends, future direction, coverage on sectors in India, including updates at regular intervals for a year forward. Customised Research Customised Research involves business analysis and position in the market, financial analysis, future outlook, etc. which helps the clients to make better credit/investment decisions. 5.4 FITCH RATINGS INDIA PRIVATE LTD. (FITCH) Fitch Ratings India Private Ltd., formerly Duff and Phelps Credit Rating (India) Private Ltd. (DCR), was established in Duff & Phelps India became wholly-owned subsidiary of FITCH in November 102

8 2001. Fitch Ratings credit ratings provide the agency's views regarding the future performance and the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. FITCH rates sovereigns, financial institutions, insurance companies, corporates, municipalities, structured finance obligations, etc. FITCH has been recognized by SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, SECTION-II In this section, an attempt has been made to study the various operations conducted by the rating agencies covering the following dimensions: 1) Activities Undertaken 2) Instruments and Products Rated 3) Methodology Adopted 4) Rating Symbols Used 5) Rating Process Adopted. 5.5 ACTIVITIES UNDERTAKEN BY THE CREDIT RATING AGENCIES Credit rating agencies (subsequently denoted as CRAs) specialize in analysing and evaluating the creditworthiness of corporate and sovereign issuers of debt securities. Credit rating agencies are expected to become more important in the wake of various services/activities being undertaken by various credit rating agencies, along with the rating services that provide information and guidance to institutional and individual investors/creditors. These agencies enhance the ability of borrowers/issuers to access the money market and the capital market for lapping a large volume of resources from a wider range of the investing public. These services provided by the credit rating agencies also assist the regulators in promoting transparency in the financial markets. A comparative view of the activities undertaken by all these agencies is presented in Table

9 Table 5.1 Activities Undertaken Activities CRISIL ICRA CARE FITCH Rating & Grading Information Advisory Services Research Services Business Process Outsourcing Information Technology Services Rating and Grading Services Credit rating is the symbolic indicator of the relative capability of the corporate entity to timely service its debt obligations, whereas grading is done to assess the quality of performance of that particular entity. Ratings may be changed, qualified, placed on rating watch or withdrawn as a result of changes in, additions to, accuracy of, unavailability of or inadequacy of information or for any related reason. Different types of rating and grading services provided by all rating agencies are shown in Table 5.1a: It is evident from the table that all the agencies rate long/ medium-term debt instruments, short-term debts, claims paying ability of insurance companies, corporate governance and structured finance/ structured obligation of various companies. The rating of various types of long-term, medium-term as well as short-term instruments depicts the rating agencies views regarding the ability of the issuer of a particular debt instrument to repay the debt and pay the interest in a timely manner. Claims paying ability ratings (CPRs) for insurance companies are credit rating agencies opinion on the ability of the insurers concerned to honour policyholder claims and obligations on time. In other words, a CPR is credit rating agencies opinion on the financial strength of the insurer, from a policyholder s perspective. On the other hand, corporate governance rating (CGR) is meant to indicate the relative level to which an organization accepts and follows the codes and guidelines of corporate governance 104

10 practices prevalent in the organization. As the corporate governance practices reflect the distribution of rights and responsibilities among different participants in the organization such as the Board, management, shareholders and other financial stakeholders, and the rules and procedures laid down and followed for making decisions on corporate affairs. Moreover, rating of structured finance obligations is the opinion of credit rating agencies as an obligator s capacity and willingness to make timely payment, of financial obligations, on the rated instrument. Table 5.1a Rating and Grading Services Rating/Grading CRISIL ICRA CARE FITCH Rating of long /medium-term debt instrument Rating of short-term debt instrument Claims paying ability of insurance company Corporate Governance rating Structured Finance/ Obligation rating Grading of Mutual Funds/Bond Funds Grading of real estate/ Project finance rating SSI/ SME rating Issuer credit rating IPO Grading Loan/ Bank Loan rating Assessment of State Governments/ Rating of Urban Local Bodies Micro Finance Institution(MFI) Grading Grading of Maritime Training Course Grading of Healthcare Institutions Rating of Subsidiaries & Joint Ventures of MNCs in India Further, all the agencies are involved in Grading of mutual funds/bond funds, real estate or project finance gradings, SSI/ SME rating and issuer credit rating. Mutual fund grading scale is used to 105

11 rate the underlying credit risk of debt funds portfolio or risk associated with investing in individual mutual fund schemes. The Mutual fund/ Debt Fund rating signifies the likelihood of schemes to achieve the objectives and meet the obligations to investors. Grading of real estate developers and projects provides an independent opinion on the relative performance capability of real estate development entities. For the investor (buyer of property), the gradings communicate the risks associated with the developer s ability to deliver in accordance with the terms, quality parameters, and time stipulated. For developers, the gradings provide a scientific assessment of their abilities and risk profiles, serve to assist them in presenting their case to lenders. SSI/ SME rating signifies the prospect of SSI/ SME of timely servicing of interest and principle as per terms. Issuer Ratings, on the other hand, provide an opinion on the general creditworthiness of the rated entities and not specific to a particular debt instrument. All agencies are also involved in IPO Grading and Bank loan rating. IPO Grade represents a relative assessment of the fundamentals of the issue graded in relation to the universe of other listed equity securities in India. The bank loan ratings provide a uniform benchmark for credit and pricing decisions in the bank loan market, offering comments on the likelihood of repayment of loans to banks. The rating agencies focus both on the risk of default, and the likelihood of ultimate recovery in the event of default. The grading of microfinance institutions as well as the assessment of State Governments and rating of Urban Local Bodies is being done by all the agencies. MFI Grading is a symbolic indicator of credit rating agency s current opinion on the relative capability of the Microfinance Institution (MFI) concerned to manage its microfinance activities in a sustainable manner. The rating of State Governments and Urban Local Bodies include the ratings of those borrowings which 106

12 are guaranteed by such bodies including those of State Electricity Boards, Irrigation Corporations, Road Development Corporation, etc. With the passage of time CRISIL, ICRA and CARE have started grading of maritime training institutions/courses. Grading of maritime training institutions/courses depicts the level of consistency of institution s resources and processes with those required for delivering the best quality of maritime education and training. The grading of healthcare institutions is done by CRISIL and ICRA only. Healthcare Grading presents an independent opinion on the quality of care provided by healthcare entities to their patients. CRISIL has also pioneered the rating of subsidiaries and joint ventures of multinationals in India and has rated several multinational entities Information and Advisory Services The information and advisory services are the next very important activity being undertaken by rating agencies, which include information services, advisory services, project and infrastructure advisory services, investment and risk management advisory, Financial Restructuring advisory, etc. as highlighted in Table 5.1b. A glance at the table provides that all the agencies provide advisory services and such services are usually undertaken by the agencies through their advisory arms. Further, all the agencies are engaged in the information services which primarily focus on addressing the unique information needs of investors and the capital market community. Information services promote the efficiency in business and financial markets by providing proper information to the users as and when required. The Project/ Infrastructure advisory services are undertaken by three agencies except FITCH. These agencies evaluate the credit risks of the projects in areas such as roads, ports, power and telecom to advise investors and banks about the regulatory framework, the specific project risks and the ways of risk mitigation. Investment and risk management advisory services are undertaken by 107

13 CRISIL and ICRA in which risk management advice is offered on the efficient management of risk to banks and other lenders. Services relating to financial restructuring advice are provided by ICRA and CARE under which these agencies give advice to various companies about the optimal capital structure and the financial restructuring options. CARE is the only agency to perform credit appraisal services which help banks and other non-banking finance companies to set up or modify their credit appraisal systems. Table 5.1b Information and Advisory Services Services CRISIL ICRA CARE FITCH Information Services Advisory Services Project/ Infrastructure Advisory Investment & Risk Management Advisory Financial Restructuring Advice Credit Appraisal System Research Activities Some Indian credit rating agencies have set up research arms to complement their rating activities. These arms carry out research on the economy, industries and specific companies, and make the same available to external subscribers for a fee. Research being done by various agencies present an in-depth analysis into the matter being researched and helps various users to properly make use of that information in future planning or some policy formulation. In addition, they disseminate opinions on the performance of the economy or specific industries. The research is also used internally by the rating agencies for arriving at their rating opinions. The research related activities done by various agencies are highlighted in Table 5.1c. All the agencies are engaged in industry/sector and corporate analysis. Under industry/sector analysis an in-depth study of the competitive scenario, the 108

14 imperatives of succeeding in a global market and the relative position of industry participants is undertaken. Under the corporate analysis various reports about Indian corporates are provided, by the rating agencies, with regular updates to cover the implications of changes in business and economic conditions on corporate. Thus, this corporate analysis facilitates investment decisions of large investors and meets the informational requirements of others. Customised research is done by CRISIL, ICRA and CARE. These customised research solutions are meant to meet the specific requirements of particular companies and provide information advantageous to them. Equity research is done by CRISIL and CARE only. Equity research involves assessment of the fundamental quality of the company and the valuation of equity shares. Table 5.1c Research Services Services CRISIL ICRA CARE FITCH Industry/ Sector Analysis Corporate Analysis Customised Research Equity Research Business Process Outsourcing Business process outsourcing services are being provided by CRISIL as well as ICRA. These agencies provide knowledge process outsourcing to various financial institutions, investment banks, private equity firms and consulting companies at the global level, and help them to achieve sustainable competitive advantage. The outsourcing services being provided include financial modelling, data analysis valuation, outsourced research, financial assets pricing, etc. CRISIL provides knowledge process outsourcing through one of its divisions called Irevna, whereas ICRA is involved in this service through its subsidiary ICRA Online Limited. 109

15 5.5.5 Information Technology Services Information and Technology services are provided by ICRA only through its subsidiary ICRA Techno Analytics Limited (ICTEAS). ICTEAS provides IT products and solutions along with engineering services. It provides onsite and offshore design expertise in the areas like automotive, plant design, construction and instrumentation space. 5.6 INSTRUMENTS AND PRODUCTS RATED BY RATING AGENCIES The primary focus of the rating exercise is to assess the adequacy to meet debt obligations of a particular instrument in adverse conditions. Different types of products and instruments are being rated by all the rating agencies as shown in Table 5.2. The table reflects that almost similar types of instruments and products are being rated by all the agencies, but with a distinct classification of the products or instruments. The table depicts that various types of long-term instruments rated by credit rating agencies include bonds, non-convertible debentures, preference shares, loans/bank loan ratings (BLR), etc.; and medium-term instruments include fixed deposits of companies (FD) and certificates of deposit (CD), whereas short-term instruments being rated by the agencies include commercial papers (CP), short-term loans (STL), etc. The grading of other instruments including IPOs and mutual funds is also done by all these agencies. 110

16 Table 5.2 Instruments & Products Rated CRISIL ICRA CARE FITCH Long & Long-Term Long & Medium- Medium-Term Instruments Debentures Bonds Preference shares Instruments Debentures Bonds Preference shares Loans/Bank Term Instruments Non-convertible Debentures Bonds Fixed deposits Structured Loans Certificates of Obligations Fixed deposits Certificates Deposit Loans/Bank Loans Short-Term Instruments Commercial Papers Short-term deposits Loans Others IPOs Mutual funds of Medium-Term Instruments Fixed deposits Certificates of Deposit Short-Term Instruments Commercial Papers Loans Others IPOs Mutual funds Deposit Structured Obligations Convertible Preference Shares Redeemable Preference Shares Loans/Bank Loans Short-Term Instruments Commercial Papers Loans Others IPOs Mutual funds Number of Instruments and Products Rated Long-Term Instruments Debentures Bonds Loans/Bank Loans Medium-Term Notes Fixed deposits Certificates Deposit Commercial Papers Preferred Stock Loans IPOs Mutual Funds Instruments and products of various issuers including corporate sector (manufacturing and trading companies), financial institutions and banks, finance companies, Nigams, corporations, etc. are rated by all the credit rating agencies. Further, other institutions being rated by the agencies include micro finance institutions, maritime training institutions, healthcare institutions, etc. So, the details regarding the number of issuers as well as the instruments rated by all the four rating agencies during the time period have been shown in Tables 5.2a to 5.2h. It is clear from Table 5.2a that in the case of CRISIL, per cent of the total rated instruments are of long-term duration, per cent of them are of short-term duration, 6.80 per cent instruments are of medium-term duration and per cent of rated instruments of 111

17 fall in others category. Among the long-term instruments rated during the given period, the highest percentage is of Loans/ Bank Loans rating (39.34%) followed by debentures/bonds (13.31%) and preference shares (6.20%). This is also verified by the respective mean values of the given instruments. But CV values of Loans/Bank Loans ratings depict that there is more variation in number of Loans/Bank Loans rated by CRISIL over the years as compared to other long-term instruments. The yearly analysis highlights that among the long-term instruments, debentures and bonds hold the highest percentages during the period , whereas during Loans & Bank Loans ratings hold the highest position. As far as the medium-term instruments are concerned, the average number of fixed deposits of companies rated is more than those of Certificates of Deposit. The CV value signifies that there is more variation in number of Certificates of Deposit rated during the given period. In the case of short-term instruments the average number of commercial papers rated during the period is more than double the number of short-term loans, and there is more stability in rating of commercial papers during the period as highlighted by CV value. The ratings of other instruments including mutual funds and IPOs have also picked up after the year 2005 as is evident from the table. 112

18 Year Debentures/Bonds Long-term Instruments Table 5.2a Instruments Rated by CRISIL Medium-term Instruments Short-term Instruments Preference shares Loan/BLR FD CD CP STL Others Total (24.72) 89(11.17) 153(19.20) 42(5.27) 22(2.76) 131(16.44) 60(7.53) 103(12.92) 797(100) (24.79) 79(9.55) 169(20.44) 47(5.68) 22(2.66) 145(17.53) 53(6.41) 107(12.94) 827(100) (24.51) 92(10.59) 161(18.53) 55(6.33) 35(4.03) 137(15.77) 66(7.59) 110(12.66) 869(100) (28.26) 107(7.20) 496(33.38) 63(4.24) 48(3.23) 149(10.03) 79(5.32) 124(8.34) 1486(100) (22.63) 123(6.49) 705(37.18) 69(3.64) 50(2.64) 175(9.23) 67(3.53) 278(14.66) 1896(100) (21.06) 117(5.65) 728(35.17) 88(4.25) 59(2.85) 192(9.28) 80(3.86) 370(17.87) 2070(100) (20.66) 138(5.85) 855(36.27) 97(4.12) 69(2.93) 177(7.51) 89(3.78) 445(18.88) 2357(100) (16.80) 145(4.82) 940(31.27) 103(3.43) 74(2.46) 190(6.32) 93(3.09) 956(31.80) 3006(100) (15.61) 149(4.31) 1188(34.39) 111(3.21) 86(2.49) 196(5.67) 95(2.75) 109(031.56) 3454(100) TOTAL 2231(13.31) 1039(6.20) 6595(39.34) 675(4.03) 465(2.77) 1492(8.90) 682(4.07) 3583(21.38) 16762(100) Overall Percentage Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. 113

19 Year Corporate Sector Financial Institutions and Banks Table 5.2b Issuers Rated by CRISIL Finance Companies Nigams/ Corporations Others Total (46.99) 28(15.30) 21(11.48) 25(13.66) 23(12.57) 183(100.00) (43.58) 32(14.68) 26(11.93) 31(14.22) 34(15.60) 218(100.00) (42.92) 34(14.17) 27(11.25) 27(11.25) 49(20.42) 240(100.00) (39.71) 46(16.61) 29(10.47) 37(13.36) 55(19.86) 277(100.00) (33.33) 54(15.52) 35(10.06) 48(13.79) 95(27.30) 348(100.00) (31.38) 69(16.16) 57(13.35) 59(13.82) 108(25.29) 427(100.00) (31.74) 77(15.98) 70(14.52) 65(13.49) 117(24.27) 482(100.00) (26.49) 90(17.27) 78(14.97) 80(15.36) 135(25.91) 521(100.00) (24.14) 109(18.79) 88(15.17) 85(14.66) 158(27.24) 580(100.00) TOTAL 1075(32.81) 539(16.45) 431(13.16) 457(13.95) 774(23.63) 3276(100.00) Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. Table 5.2b highlights the number of issuers rated by CRISIL during the given time period. The maximum number of instruments of corporate sector including manufacturing and trading companies are rated (119 on an average) followed by other institutions (average 86) including micro finance institutions, maritime training courses, healthcare institutions, etc. Next in order appear financial institutions and banks, Nigams/corporations and finance companies. The CV value indicates that the highest variation appeared in rating of issuers belonging to Others category over the period. 114

20 Year Debentures/Bonds Long-term Instruments Table 5.2c Instruments Rated by ICRA Medium-term Instruments Short-term Instruments Preference Shares Loan/BLR FD CD CP STL Others Total (22.22) 24(12.70) 33(17.46) 14(7.41) 4(2.12) 27(14.29) 13(6.88) 32(16.93) 189(100.00) (19.59) 26(13.40) 35(18.04) 15(7.73) 5(2.58) 29(14.95) 14(7.22) 32(16.49) 194(100.00) (22.75) 28(12.02) 38(16.31) 17(7.30) 8(3.43) 35(15.02) 15(6.44) 39(16.74) 233(100.00) (24.69) 28(11.72) 38(15.90) 17(7.11) 8(3.35) 35(14.64) 15(6.28) 39(16.32) 239(100.00) (23.67) 34(12.01) 45(15.90) 22(7.77) 10(3.53) 42(14.84) 19(6.71) 44(15.55) 283(100.00) (21.79) 41(13.14) 50(16.03) 23(7.37) 12(3.85) 47(15.06) 21(6.73) 50(16.03) 312(100.00) (21.12) 58(12.50) 78(16.81) 35(7.54) 19(4.09) 74(15.95) 33(7.11) 69(14.87) 464(100.00) (20.24) 82(13.95) 95(16.16) 57(9.69) 27(4.59) 85(14.46) 40(6.80) 83(14.12) 588(100.00) (20.14) 58(13.58) 68(15.93) 29(6.79) 23(5.39) 59(13.82) 28(6.56) 76(17.80) 427(100.00) TOTAL 630(21.51) 379(12.94) 480(16.39) 229(7.82) 116(3.96) 433(14.78) 198(6.76) 464(15.84) 2929(100.00) Overall Percentage Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. 115

21 Table 5.2c highlights that during the time period among all the instruments rated by ICRA, per cent were of long-term duration; per cent of them were of short-term duration; per cent instruments were of medium-term duration; and per cent of rated instruments fall in others category. Moreover, in the case of long-term instruments rated by ICRA, the average number of debentures and bonds (70) is the highest followed by loan as well as Bank loan ratings (53) and preference shares (42). This trend has been observed during the whole period of study. CV value further clarifies that there is more variation in the rating of preference shares during the given period. In the case of mediumterm instruments rated by ICRA the average number of fixed deposits being rated, i.e., 25 is almost double the number of certificates of deposit, i.e., 12. However, in the case of short-term instruments also the average number of commercial papers rated is more than double the number of short-term loans rated. Among all the instruments being rated over the period, the highest variation has been found in the rating of certificates of deposit as depicted by their CV value. Year Corporate Sector Financial Institutions and Banks Table 5.2d Issuers Rated by ICRA Finance Companies Nigams/ Corporations Others Total (30.77) 14(21.54) 12(18.46) 10(15.38) 9(13.85) 65(100.00) (31.25) 17(21.25) 15(18.75) 10(12.50) 13(16.25) 80(100.00) (30.77) 20(19.23) 18(17.31) 18(17.31) 16(15.38) 104(100.00) (30.33) 21(17.21) 18(14.75) 22(18.03) 24(19.67) 122(100.00) (29.10) 24(17.91) 24(17.91) 21(15.67) 26(19.40) 134(100.00) (28.19) 30(20.13) 22(14.77) 26(17.45) 29(19.46) 149(100.00) (27.11) 33(19.88) 26(15.66) 28(16.87) 34(20.48) 166(100.00) (26.49) 36(19.46) 29(15.68) 33(17.84) 38(20.54) 185(100.00) (30.49) 40(17.94) 36(16.14) 38(17.04) 41(18.39) 223(100.00) TOTAL 357(29.07) 242(19.71) 230(18.73) 209(17.02) 190(15.47) 1228(100.00) Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. 116

22 Table 5.2d carries the data showing the number of issuers rated by ICRA during the period On an average 39 issuers falling in corporate sector have been rated by ICRA during the given period, followed by 26 financial institutions and banks, 25 issuers falling in others category, whereas the average number of finance companies and nigams/corporations rated by ICRA during the period are 22 each. The CV value being the highest for issuers falling in others category clarifies that there is more variability in rating of these types of issuers during the study period. Table 5.2e exhibits the number of instruments rated by CARE. The table explains that in the case of CARE, per cent of the total rated instruments were of long-term duration, per cent of them were of short-term duration, 8.89 per cent instruments were of medium-term duration and per cent of them fall in others' category. Further, among the long-term instruments the average number of debentures and bonds is higher, followed by loan & bank loan rating and preference shares. Whereas among the medium-term instruments rated almost equal number of Fixed Deposits and Certificates of Deposit were rated during the period but yearwise variation in rating of Certificates of Deposit is more as is clear from their CV value. As far as short-term instruments are concerned, the average number of commercial papers rated (56) during the given period are more than the short-term loans (32). A good number of other instruments including mutual funds and IPOs are also rated by CARE during the given period. 117

23 Year Debentures/Bonds Long-term Instruments Table 5.2e Instruments Rated by CARE Medium-term Instruments Short-term Instruments Preference Shares Loan/BLR FD CD CP STL Others Total (21.51) 24(12.90) 35(18.82) 7(3.76) 7(3.76) 30(16.13) 18(9.68) 25(13.44) 186(100.00) (21.13) 29(13.62) 40(18.78) 9(4.23) 8(3.76) 34(15.96) 19(8.92) 29(13.62) 213(100.00) (19.84) 35(13.89) 46(18.25) 9(3.57) 10(3.97) 48(19.05) 22(8.73) 32(12.70) 252(100.00) (21.03) 37(12.76) 58(20.00) 11(3.79) 13(4.48) 50(17.24) 27(9.31) 33(11.38) 290(100.00) (21.10) 45(13.01) 64(18.50) 13(3.76) 15(4.34) 56(16.18) 34(9.83) 46(13.29) 346(100.00) (21.52) 49(12.86) 70(18.37) 15(3.94) 17(4.46) 61(16.01) 37(9.71) 50(13.12) 381(100.00) (21.68) 56(13.05) 76(17.72) 18(4.20) 19(4.43) 70(16.32) 41(9.56) 56(13.05) 429(100.00) (21.32) 59(12.58) 88(18.76) 20(4.26) 23(4.90) 75(15.99) 44(9.38) 60(12.79) 469(100.00) (21.41) 66(12.97) 93(18.27) 20(3.93) 24(4.72) 81(15.91) 50(9.82) 66(12.97) 509(100.00) TOTAL 653(21.24) 400(13.01) 570(18.54) 122(3.97) 136(4.42) 505(16.42) 292(9.50) 397(12.91) 3075(100.00) Overall Percentage Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. 118

24 Year Corporate Sector Financial Institutions and Banks Table 5.2f Issuers Rated by CARE Finance Companies Nigams/ Corporations Others Total (28.79) 14(21.21) 14(21.21) 10(15.15) 9(13.64) 66(100.00) (26.19) 17(20.24) 18(21.43) 14(16.67) 13(15.48) 84(100.00) (25.74) 20(19.80) 20(19.80) 17(16.83) 18(17.82) 101(100.00) (23.68) 28(24.56) 25(21.93) 19(16.67) 15(13.16) 114(100.00) (25.95) 26(19.85) 28(21.37) 23(17.56) 20(15.27) 131(100.00) (27.97) 28(19.58) 29(20.28) 25(17.48) 21(14.69) 143(100.00) (27.44) 33(20.12) 31(18.90) 28(17.07) 27(16.46) 164(100.00) (25.82) 36(19.78) 38(20.88) 33(18.13) 28(15.38) 182(100.00) (25.12) 38(18.72) 40(19.70) 39(19.21) 35(17.24) 203(100.00) TOTAL 311(26.18) 240(20.20) 243(20.45) 208(17.51) 186(15.66) 1188(100.00) Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. Table 5.2f highlights that the average number of issuers related to corporate sector rated by CARE are 34 which is followed by finance companies as well as financial institutions and banks. However, the least number of instruments of issuers related to others category during the given period. The CV value further depicts that the highest variation have been found in the rating of nigams/corporations during the study period. It is clear from Table 5.2g that among all the instruments rated by FITCH, per cent were of long-term durations; per cent of them were of short-term duration; per cent instruments were of mediumterm duration; and per cent of rated instruments fall in others category. Further, in the case of long-term instruments rated by FITCH during the period , the highest average is of debentures and bonds, i.e., 46 followed by loan/bank loan rating (25) and preference shares (14) but CV value explains that the highest variation has been found in the rating of preference shares during the years. Among medium-term instruments, almost double number of the Fixed Deposits are rated as compared to Certificates of Deposit. As far as rating of short-term instruments is concerned, the average number of commercial papers being 119

25 Year Debentures/Bonds Long-term Instruments Table 5.2g Instruments Rated by FITCH Medium-term Instruments Short-term Instruments Preference Shares Loan/BLR FD CD CP STL Others Total (30.95) 0(0.00) 17(20.24) 7(8.33) 0(0.00) 12(14.29) 7(8.33) 15(17.86) 84(100.00) (27.27) 8(7.27) 19(17.27) 8(7.27) 0(0.00) 18(16.36) 9(8.18) 18(16.36) 110(100.00) (27.27) 11(8.33) 21(15.91) 8(6.06) 6(4.55)` 20(15.15) 10(7.58) 20(15.15) 132(100.00) (30.22) 14(10.07) 24(17.27) 9(6.47) 6(4.32) 11(7.91) 12(8.63) 21(15.11) 139(100.00) (28.31) 14(8.43) 26(15.66) 10(6.02) 7(4.22) 23(13.86) 15(9.04) 24(14.46) 166(100.00) (27.93) 16(8.94) 27(15.08) 11(6.15) 8(4.47) 24(13.41) 16(8.94) 27(15.08) 179(100.00) (25.64) 18(9.23) 29(14.87) 13(6.67) 10(5.13) 27(13.85) 18(9.23) 30(15.38) 195(100.00) (28.57) 22(9.82) 33(14.73) 14(6.25) 12(5.36) 29(12.95) 19(8.48) 31(13.84) 224(100.00) (28.05) 26(10.57) 37(15.04) 16(6.50) 13(5.28) 30(12.20) 21(8.54) 34(13.82) 246(100.00) TOTAL 414(28.07) 129(8.75) 233(15.80) 96(6.51) 62(4.20) 194(13.15) 127(8.61) 220(14.92) 1475(100.00) Overall Percentage Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. 120

26 rated are 21 as compared to 14 in the case of short-term loans. The other instruments including mutual funds and IPOs are also rated by FITCH during the years of study. Among all the instruments rated the highest variation has been found in the rating of Certificate of Deposits as signified by its CV value. Year Corporate Sector Financial Institutions and Banks Table 5.2h Issuers Rated by FITCH Finance Companies Nigams/ Corporations Others Total (45.71) 7(20.00) 7(20.00) 5(14.29) 0(0.00) 35(100.00) (43.18) 9(20.45) 8(18.18) 5(11.36) 3(6.82) 44(100.00) (41.18) 9(17.65) 10(19.61) 7(13.73) 4(7.84) 51(100.00) (37.10) 13(20.97) 12(19.35) 9(14.52) 5(8.06) 62(100.00) (36.76) 14(20.59) 13(19.12) 10(14.71) 6(8.82) 68(100.00) (34.15) 17(20.73) 14(17.07) 13(15.85) 10(12.20) 82(100.00) (32.22) 19(21.11) 16(17.78) 15(16.67) 11(12.22) 90(100.00) (32.29) 20(20.83) 17(17.71) 16(16.67) 12(12.50) 96(100.00) (30.91) 23(20.91) 20(18.18) 19(17.27) 14(12.73) 110(100.00) TOTAL 226(35.42) 131(20.53) 117(18.34) 99(15.52) 65(10.19) 638(100.00) Mean SD CV Source: Compiled from various publications and website of the agency. Note: Figures in parentheses denote percentages. Table 5.2h depicts that among the issuers whose instruments being rated by FITCH during the period , average number is the highest (25) for corporate sector (manufacturing & trading companies), whereas average number is the least (7) for institutions falling in others category which includes micro finance institutions only. Whereas financial institutions and banks, finance companies and nigams/ corporations hold the second, third and fourth position respectively. CV values reveal that the highest variations have been in rating of institutions belonging to others category during the period. 121

27 5.7 METHODOLOGY ADOPTED Rating methodology is concerned with the use and appreciation of the tools in rating process. Both qualitative as well as quantitative factors are considered by the agencies before assigning any rating. Table 5.3 highlights that almost similar basic parameters of rating methodology are being used by all the rating agencies. The analytical framework involves the analysis of business risk, operational risk, industry risk, market risk, financial risk and management risk. Business risk analysis covers industry analysis, operating efficiency, market position of the company, whereas financial risk includes accounting quality, existing financial position, cash flows and financial flexibility. Under management risk analysis an assessment is made of the competence and risk appetite of the management. In addition to the basic framework, rating agencies also have detailed criteria/methodologies for various industries which take into account the specific features of that industry. Table 5.3 Methodology Adopted CRISIL ICRA CARE FITCH Business analysis Industry Economic & Past Years Regulatory and Competitive characteristics Competitive environment Fundamental position issuer of the analysis Management analysis Financial analysis Financial position of the issuer Operational efficiency Management efficiency Commitment to new projects Funding policies of the issuer Industry risk Business risk Rating Methodology (competitor s Past Years assignment) Instrument Financial Data Competitive terms Management position company of the assessment Forecast of the Financial risk future performance Analysis of company s financial position and ability to generate cash 122

28 5.7.1 CRISIL Rating Methodology: CRISIL assesses all the factors that could affect credit worthiness of the borrowing company and then assigns rating to debt instruments. The key factors, considered for rating assessment are: Business Analysis: Every relevant piece of information concerning the business is evaluated by assessing industrial risk, market position of the company within industry, operating efficiency and legal position. Financial Analysis: Under financial analysis, all relevant aspects connected with the business and financial position of the company are assessed. The profitability, solvency and liquidity ratios are taken into consideration. Thus, CRISIL considers Growth rate of PAT, PAT/OI, PBIT/Net Worth, Earnings on Capital Employed, PBDITA/TI, Current Ratio, Quick Ratio, Debt to Equity Ratio, Interest Coverage Ratio, Pre-tax Coverage Ratio, Earnings on Assets to Capital Employed, etc. Management Evaluation: Judgment of management performance based on past operating and financial results, planning and control system of management, depths of managerial talents are considered. Regulatory and Competitive Environment: CRISIL evaluates structure and regulatory framework of financial system in which it works. Fundamental Analysis: It covers aspects on liquidity management (capital structure), asset quality, economic as well as industrial analysis of that particular entity to take the rating decision accordingly ICRA Rating Methodology: While assigning ratings ICRA considers all relevant factors that have a bearing on the future cash generation of the issuer. A detailed analysis of the past financial statements is made and estimates of future earnings under various scenarios are drawn up, over the tenure of the instrument being rated. The other factors considered are: Industry Characteristics: Industrial features are evaluated by ICRA by taking into account various success factors, demand and supply position, structure of industry and Government policies related to that particular entity. 123

29 Competitive Position: The competitive position of the issuer is evaluated by considering various factors including nature and basis of competition, competitive advantage through marketing and distribution, strength, weaknesses and opportunities available to the issuer in comparison to the competitors. Financial Risk Analysis: Under this, ICRA considers various accounting policies, debt servicing track record, cash flow position, profitability position and capital structure of the issuer. The ratios considered specifically for the purpose include: Profit after Tax /Total Income, Profit Before Depreciation Interest and Tax/Total Income, Earnings Before Depreciation Interest and Tax/ Interest and Fixed Charges, Return on Capital Employed, Return on Net Worth, Total Debt/ Net Worth, Current Ratio, Quick Ratio, Cash Accrual Ratio and so on. Operational Efficiency: Operational efficiency of the company is assessed by evaluating the price or cost advantage availability, cost and quality of raw material, availability of labour and labour relations prevalent in the organization. Management Quality: The quality of the management is evaluated by observing the goals and philosophies of the management, and its strategies and abilities to overcome adverse situations. Commitment to New Projects: ICRA also evaluates the company s commitment to new projects by estimating its progress in the initial stages and from past performance on similar projects. Funding Policies of the Issuer: The funding policies of the issuer are also evaluated to get the deep knowledge of the sources of funds of the issuer company and the uses to which these funds have been put into CARE Rating Methodology: CARE also takes into account various quantitative as well as qualitative factors while assigning rating which include: Economy and Industry Risk: The factors assessed by CARE include the effect of economic cycle on industry, business cycles, tariff structure, 124

30 basis of competition, environmental as well as political factors concerning the issuer s business. Business Risks (Competitor's Assessment): Factors considered under this are size of company and market share, supply of raw material and marketing arrangements, bargaining power of issuers, suppliers as well as customers, and location advantages and disadvantages available to the business of the issuer. Financial Risk: It includes analysis of financial management, capital structure, cash flow adequacy and profitability as well as liquidity position of the company. The financial risk is evaluated by CARE by considering various ratios including, Growth in total Income, Profit after Tax/Total Income, Profit before Depreciation Interest and Tax/ Total Income, Return on Capital Employed, Return on Net Worth, Debt-Equity Ratio, Interest Coverage Ratio, Overall Gearing Ratio, Current Ratio, Quick Ratio and Average Collection Period. Management Assessment: CARE makes complete assessment of the background and history of the issuer, corporate strategy adopted, philosophy and quality of management and the strength of management capabilities under stress. Terms of Instrument: Rating also depends on such factors as maturity of instrument, nature of security (whether secured or unsecured), repayment terms, coupon rates, etc. So, CARE also considers all these things before the assignment of rating FITCH Rating Methodology: FITCH rating analysis involves the assessment of the following: Past Years Rating Methodology: While assigning ratings FITCH takes into account last few years rating methodology on the basis of which rating was done. Past Years Financial Data: The ratios considered by FITCH while evaluating the past years financial data include, Profit Before Depreciation Interest and Tax/ Total Income, Profit after Tax/Total Income, Return on Capital Employed, Return on Net Worth, Operating 125