Project Report on Credit Rating Agency

5/20/2018 Project Report on Credit Rating Agency

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CHAPTERI.

1. INTRODUCTION TO INDUSTRY2. INTRODUCTION TO ORGANISATION


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INTRODUCTION TO INDUSTRY

INDIAN FINANCIAL SECTOR

Introduction

India's services sector has always served the Indian economy well,

accounting for nearly 57 per cent of the gross domestic product (GDP).

Here, the financial services segment has been a significant contributor.

The financial services sector in India is dominated by commercial banks

which have more than 60 per cent share of the total assets; other segments

include mutual funds, insurance firms, non-banking institutions, cooperativesand pension funds.

The Government of India has introduced reforms to liberalise, regulate and

enhance the country's financial services industry. Presently, the country can

claim to be one of the world's most vibrant capital markets. In spite of the

challenges that are still there, the sector's future looks good.

Market size

The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is

projected to touch US$ 28.5 trillion by FY 25.

Information technology (IT) services, the largest spending segment of India's

insurance industry at Rs 4,000 crore (US$ 665.78 million) in 2014, is

anticipated to continue enjoying strong growth at 16 per cent. Category

leaders are business process outsourcing (BPO) at 25 per cent and

consulting at 21 per cent.

Investments

During FY 14, foreign institutional investors (FIIs) invested a net amount of

about Rs 80,000 crore (US$ 13.31 billion) in India's equity market, according

to data by Securities and Exchange Board of India (SEBI).

Insurance companies in India will spend about Rs 12,100 crore (US$ 2.01

billion) on IT products and services in 2014, a 12 per cent increase over the

previous year, according to Gartner Inc.


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The forecast includes spending by insurers on segments such as internal IT

(including personnel), telecommunications, hardware, software, and external

IT services. The Rs 1200 crore (US$ 202.47 million) software segment is

predicted to be the fastest growing external segment, with overall growth of

18 per cent in 2014.

The following are some of the key developments and investmentsin the

Indian financial services sector:

1. About 75 per cent of the insurance policies sold by 2020 would be in one

way or another influenced by digital channels during the pre-purchase,

purchase or renewal stages, according to a report by Boston Consulting

Group (BCG) and Google India. This report, Digital@Insurance-20X By2020, predicts that insurance sales from online channels will increase 20

times from present-day sales by 2020, and overall internet influenced

sales will reach Rs 300,000-400,000 crore (US$ 49.9-66.54 billion).

2. Export-Import Bank of India (Exim Bank) will focus more on supporting

project exports from India to South Asia, Africa and Latin America, as per

Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has

moved up the value chain by lending support to project exports so that

India earns foreign exchange. In 2012-13, Exim Bank had supported 85

project export contracts valued at Rs 24,255 crore (US$ 4.03 billion)

secured by 47 companies in 23 countries.

3. Private-sector lender IndusInd Bank will soon begin its asset

reconstruction business. It plans to partner asset reconstruction

companies (ARCs) for this venture. "I think our new initiative, which is

going to launch in the next two months, is about asset reconstruction. We

will do asset reconstruction within the bank but in tie-ups with ARCs. The

business plan is ready. We believe a huge stock of assets is coming into

the ARCs as a business area that we need to look at and we will exploit,"

said Mr Romesh Sobti, CEO and MD, IndusInd Bank.


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4. Association of Mutual Funds in India (AMFI) has reported that the mutual

fund industry's assets under management (AUM) have gone past the Rs

10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian

mutual fund industry rose to Rs 10.11 trillion (US$ 168.19 billion) in May

from Rs 9.45 trillion (US$ 157.21 billion) in April.

Government Initiatives

In an effort to enable banks to provide greater choice in insurance products

through their branches, a proposal could be made which will allow banks to

act as corporate agents and tie up with multiple insurers. A committee set up

by the Finance Ministry of India is likely to suggest this model as an

alternative to the broking model.

The Reserve Bank of India (RBI) has simplified the rules for credit to

exporters. Exporters can now receive long-term advance credit from banks

for up to 10 years to service their contracts. They have to have a satisfactory

record of three years to get payments from banks, who can adjust the

payments against future exports.

The RBI has enabled foreign investors, including foreign portfolio investors

(FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in

insurance and related activities via the automatic route. "Effective from

February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs

and NRIs up to 26 per cent under automatic route shall be permitted in

insurance sector," as per the RBI.

Road Ahead

India is among the world's top 10 economies, driven by its strong banking

and insurance sectors. The country is expected to become the fifth largest

banking sector in the world by 2020, as per a joint report by KPMG-CII. The

report anticipates bank credit to increase at a compound annual growth rate

(CAGR) of 17 per cent in the medium term which will lead to better credit

penetration.Life Insurance Council, the industry body of life insurers in India,

has also estimated a CAGR of 12-15 per cent over the next few years for thesegment.


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INDIAN BANKING SECTOR

Introduction

India is considered among the top economies in the world, with tremendous

potential for its banking sector to flourish. The last decade witnessed a

significant upsurge in transactions through ATMs, as well as internet and

mobile banking.

The country's banking industry looks set for greater transformation. With the

Indian Parliament passing the Banking Laws (Amendment) Bill in 2012, the

landscape of the sector has duly changed. The bill allows the Reserve Bank

of India (RBI) to make final guidelines on issuing new licenses, which could

lead to a greater number of banks in the country. The style of operation is

also slowly evolving with the integration of modern technology into the

banking industry.

In the next 5-10 years, the sector is expected to create up to two million new

jobs driven by the efforts of the RBI and the Government of India to expand

financial services into rural areas. Two new banks have already received

licences from the government, and the RBI's new norms will offer incentives

to banks to spot bad loans and take necessary recourse to curb the

practices of rogue borrowers.

Market size

The size of banking assets in Indiatotalled US$ 1.8 trillion in FY 13 and is

expected to touch US$ 28.5 trillion in FY 25.Bank deposits have grown at a

compound annual growth rate (CAGR) of 21.2 per cent over FY 06-13. In FY

13, total deposits were US$ 1,274.3 billion.

The revenue of Indian banks increased from US$ 11.8 billion to US$ 46.9

billion over the period 2001-2010. Profit after tax also reached US$ 12 billion

from US$ 1.4 billion in the period.


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Credit to housing sector grew at a CAGR of 11.1 per cent during the period

FY 08-13. Total banking sector credit is anticipated to grow at a CAGR of

18.1 per cent (in terms of INR) to reach US$ 2.4 trillion by 2017.

In FY 14, private sector lenders experienced significant growth in creditcards and personal loan businesses. ICICI Bank saw 141.6 per cent growth

in personal loan disbursement in FY 14, as per a report by Emkay Global

Financial Services. The bank also experienced healthy growth of 20.8 per

cent in credit card dues, according to the report. Axis Bank's personal loan

business also grew 49.8 per cent, with its credit card business expanding by

31.1 per cent.

Investments

HDFC Bank and state-owned United Bank of India plan to tap the equity

markets to raise funds to enhance capital base and lending. HDFC Bank

plans to raise Rs 10,000 crore (US$ 1.66 billion) while the board of Kolkata-

based United Bank will seek approval for raising about Rs 1,300 crore (US$

216.47 million) by selling shares to increase its capital base.

Export-Import Bank of India (Exim Bank) will increase its focus on supporting

project exports from India to South Asia, Africa and Latin America, as per Mr

Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved

up the value chain by supporting project exports so that India earns foreign

exchange. In 2012-13, Exim Bank had lent support to 85 project export

contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47

companies in 23 countries.

IndusInd Bank will soon begin its asset reconstruction business. The private-

sector lender plans to partner asset reconstruction companies (ARCs) for

this venture. "I think our new initiative, which is going to launch in the next

two months, is about asset reconstruction. We will do asset reconstruction

within the bank but in tie-ups with ARCs. The business plan is ready. We

believe a huge stock of assets is coming into the ARCs as a business area

that we need to look at and we will exploit," as per Mr Romesh Sobti, CEO

and MD, IndusInd Bank.


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Jammu and Kashmir (J&K) Bank plans to increase its presence outside

India. The bank is looking to establish branches in London and Dubai to

enhance its relationship with current customers who have business interests

in West Asia and Europe. "We have a number of business relationships in

these countries and it makes sense for us to have a presence there," as per

Mr Mushtaq Ahmad, Chairman and CEO, J&K Bank.

Government Initiatives

The RBI has announced a few measures in its bi-monthly monetary policy

on June 3, 2014 which includes an increase in the foreign exchange

remittance limit to US$ 125,000 from the previous limit of US$ 75,000.

State Bank of India (SBI) has announced a one-year rural fellowship

programme 'SBI Youth for India (SBI YFI)' for 2014 to draft the country's

youth to become change agents in the country's rural regions. The

programme is for young professionals who are keen to leadthe change for a

better India.

The RBI has simplified the rules for credit to exporters. Exporters can now

receive long-term advance credit from banks for up to 10 years to service

their contracts. Exporters have to have a satisfactory record of three years to

receive payments from banks, who can adjust the payments against future

exports.

The RBI has enabled overseas investors, including foreign portfolio investors

(FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in

insurance and related activities through the automatic route.

Road Ahead

India's banking industry could become the fifth largest banking sector

globally by 2020 and the third largest by 2025. These days, banks in India

are turning their focus to servicing clients and improving their technology

infrastructure, which can help better customer experience and give them a

competitive edge. The popularity of internet and mobile banking is at an all-

time high, with customer relationship management (CRM) and data

warehousing anticipatedto drive the next wave of banking technology in the

country.


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INTRODUCTION TO THE ORGANISATION

BOB PROFILE

Bank of Baroda (BoB) is an Indian state-owned banking and financial

services company headquartered in Vadodara (earlier known as Baroda) in

Gujarat, India. It is the second-largest bank in India, after State Bank of

India, and offers a range of banking products and financial services to

corporate and retail customers through its branches and through its

specialised subsidiaries and affiliates. During FY 2012-13, Its total business

was INR 8,021 billion.[3] In addition to its headquarters in its home state of

Gujarat, it has a corporate headquarters in the Bandra Kurla Complex in

Mumbai.

Based on 2012 data, it is ranked 715 on Forbes Global 2000 list.[4][5] BoB

has total assets in excess of INR 3.58 trillion (short scale), INR 3,583 billion

(long scale), a network of 4283 branches (out of which 4172 branches[6] are

in India) and offices, and over 2000 ATMs.

The bank was founded by the Maharaja of Baroda, H. H. Sir Sayajirao

Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat.[7]The bank, along with 13 other major commercial banks of India, was

nationalised on 19 July 1969, by the Government of India and has been

designated as a profit-making public sector undertaking (PSU). Bank of

Baroda is one of the Big Four banks of India, along with State Bank of India,

ICICI Bank and Punjab National Bank.

A saga of vision and enterprise

It has been a long and eventful journey of almost a century across 25

countries. Starting in 1908 from a small building in Baroda to its new hi-rise

and hi-tech Baroda Corporate Centre in Mumbai, is a saga of vision,

enterprise, financial prudence and corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted

in private capital, princely patronage and state ownership. It is a story of

ordinary bankers and their extraordinary contribution in the ascent of Bank of

Baroda to the formidable heights of corporate glory.


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It is a story that needs to be shared with all those millions of people -

customers, stakeholders, employees & the public at large - who in ample

measure, have contributed to the making of an institution.

Our mission statement

To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

Our Logo

Our new logo is a unique representation of a universal symbol. It comprises

dual B letterforms that hold the rays of the rising sun. We call this the

Baroda Sun.

The sun is an excellent representation of what our bank stands for. It is the

single most powerful source of light and energyits far reaching rays dispel

darkness to illuminate everything they touch. At Bank of Baroda, we seek to

be the source that will help all our stakeholders realise their goals. To our

customers, we seek to be a one-stop, reliable partner who will help them

address different financial needs. To our employees, we offer rewarding

careers and to our investors and business partners, maximum return on theirinvestment single-colour, compelling vermillion palette has been carefully

chosen, for its distinctivenes as it stands for hope and energy.

We also recognize that our bank is characterised by diversity. Our network

of branches spans geographical and cultural boundaries and rural-urban

divides. Our customers come from a wide spectrum of industries and

backgrounds. The Baroda Sun is a fitting face for our brand because it is a

universal symbol of dynamism and optimism it is meaningful for our manyaudiences and easily decoded by all.

Our new corporate brand identity is much more than a cosmetic change. It is

a signal that we recognize and are prepared for new business paradigms in

a globalised world. At the same time, we will always stay in touch with our

heritage and enduring relationships on which our bank is founded. By

adopting a symbol as simple and powerful as the Baroda Sun, we hope to

communicate both.


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THE HERITAGE

It all started with a visionary Maharaja's uncanny foresight into the future of

trade and enterprising in his country. On 20th July 1908, under the

Companies Act of 1897, and with a paid up capital of Rs 10 Lacs started the

legend that has now translated into a strong, trustworthy financial body, THE

BANK OF BARODA.

It has been a wisely orchestrated growth, involving corporate wisdom, social

pride and the vision of helping others grow, and growing itself in turn.

The founder, Maharaja Sayajirao Gaekwad, with his insight into the future,

saw "a bank of this nature will prove a beneficial agency for lending,

transmission, and deposit of money and will be a powerful factor in the

development of art, industries and commerce of the State and adjoining

territories."

THE ETHICS

Between 1913 and 1917, as many as 87 banks failed in India. Bank of

Baroda survived the crisis, mainly due to its honest and prudent leadership.

This financial integrity, business prudence, caution and an abiding care and

concern for the hard earned savings of hard working people, were to

become the central philosophy around which business decisions would be

effected. This cardinal philosophy was over years of its existence, to become

its biggest asset.

It ensured that the Bank survived the Great War years. It ensured survival

during the Great Depression. Even while big names were dragged into the

Stock Market scam and the Capital Market scam, the Bank of Baroda

continued its triumphant march along the best ethical practices.


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THE HEROES

No history is complete without mention of its heroes, mostly ordinary people,

who turn in extra-ordinary performances and contribute to building an

institution. Over the years, there have been thousands of such people. TheBank salutes these "unknown soldiers" who passionately helped to create

the legend of Bank of Baroda.

There were also the leaders, both corporate and royal, who provided the

vision and guided the Bank through trail blazing years, and departing, left

behind footprints on the sands of time. This Roll of Honor will be incomplete

without mention of men, of the stature of Maharaja Sayajirao Gaekwad,

Sampatrao Gaekwad, Ralph Whitenack, Vithaldas Thakersey, Tulsidas

Kilachand and NM Chokshi. Bank of Baroda salutes these leaders whose

vision helped to create an institution.

THE INITIATIVE

Bank of Baroda is a pioneer in various customer centric initiatives in the

Indian banking sector. Bank is amongst first in the industry to complete anall-inclusive rebranding exercise wherein various novel customer centric

initiatives were undertaken along with the change of logo. The initiatives

include setting up of specialized NRI Branches, Gen-Next Branches and

Retail Loan Factories/ SME Loan Factories with an assembly line approach

of processing loans for speedy disbursal of loans.


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The major ongoing initiatives of the Bank are detailed below:

Business Process Reengineering (BPR)

Bank had initiated a major Business Process Reengineering to give a big

boost to sales growth by enhancing customer satisfaction and by making

possible alternate channel migration thus reinventing itself to challenges of

the 21st century. Banks BPR project known as Project- Navnirmaan has

altogether 18 activities covering both the BPR and organisational

restructuring, aimed at transforming the Banks branches into modern sales

& service outlets.

The most important initiatives planned under this project include (1)

Conversion of all metro and urban branches into modern centres known as

Baroda Next branches; (2) Creation of Automated and Leaner Back Offices

like City Back Office (for automated cheque processing etc), Regional Back

Office (for faster account opening etc), Establishment of two Call Centres,

Creation of Academy of Excellence, Introduction of Frontline Automation at

select branches for customer convenience and Organisational Restructuring.

People Initiatives

Bank is endowed with a competent and motivated employee base which is

engaged in handling the extensive business operations of the Bank across

the globe. Strategic HR interventions like, according cross border and cross

cultural work exposure to its managers, hiring diverse functional specialists

to support line functionaries and complementing the technical competencies

of its people by imparting conceptual, managerial and leadership skills, gavethe Bank competitive advantage. People initiatives were blended with IR

initiatives to create an effectively harmonious workplace, where everyone

prospered.


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Bank launched a comprehensive leadership development program Project

UDAAN during 2010-11 with the prime objective of creating leaders for the

future. Such a massive and comprehensive leadership development effort is

unparalleled in the Indian banking industry and first of its kind for any Indian

state-owned Bank. These kinds of elaborate man management policies have

made the Bank a breeding ground for business leaders. The Bank provided

several leaders to the industry- men who went on to build other great

institutions.

New Technology Platform

Bank has made substantial progress in its end-to-end business and IT

strategy project covering the Banks domestic, overseas and subsidiary

operations. All Branches, Extension Counters in India, overseas business

and five sponsored Regional Rural Banks are on the Core Banking Solution

(CBS) platform.

Bank has been providing to its customers Internet Banking, viz., Baroda

Connect and other facilities such as online payment of direct and indirect

taxes and certain State Government taxes, utility bills, rail tickets, online

shopping, donation to temples and institutional fee payment. Bank has a

wide network of ATMs across the country and has also launched mobile

ATMs in select cities. Initiatives have been taken to provide corporate

customers with facilities like direct salary upload, trade finance and State

Tax payments etc. Bank has introduced Mobile Banking (Baroda M-connect)

and prepaid gift cards.

Bank has implemented the Global Treasury Solution in its key territories like

UK, UAE, Bahamas, Bahrain, Hong Kong, Singapore and Belgium. Bank

has taken various technological initiatives in overseas operations such as

implementation of Centralized SWIFT activity through Data Centre in

Mumbai, Payment Messaging System with Anti Money Laundering check,

Anti Money laundering Compliance and Online List Matching solution.


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While Bank implemented Transaction-based Internet Banking facility for its

customers in Uganda, Botswana, UAE, New Zealand, Kenya, Mauritius and

Seychelles, a Viewbased e-banking facility was made available in Fiji,

Oman, Tanzania and UK.

Marketing Initiatives

Ever since its rebranding in 2005, Bank has consistently promoted its major

strengths viz. large international presence; technological advancement and

superior customer service etc. Bank had introduced the sub brand BARODA

NEXT-State of the Art-Straight from the Heart to showcase how it has

utilized technology to nurture long term relationships for superior customer

experience. The sub brand has been reinforced by alternate delivery

channels such as internet banking, ATMs, mobile banking etc and robust

delivery outfits like Retail Loan Factories, SME Loan Factories, City Sales

Office etc. Banks constant endeavor to strengthen its branch/ATM network

combined with well informed staff offering personalized service at its various

touch points have enhanced customer interactions and satisfaction. Thus the

Bank has firmly positioned itself as a technologically advanced customer-

centric bank.

Corporate Social Responsibility (CSR) Initiatives

Bank has always upheld inclusive growth high on its agenda. Bank has

established 36 Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) for

imparting training to unemployed youth, free of cost for gainful selfemployment & entrepreneurship skill development and 52 Baroda Gramin

Paramarsh Kendra and for knowledge sharing, problem solving and credit

counseling for rural masses across the country, as on 31.03.2011. Bank has

also established 18 Financial Literacy and Credit Counseling Centres

(FLCC) in order to spread awareness among the rural masses on various

financial and banking services and to speed up the process of Financial

Inclusion, as on 31.03.2011.


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The Future

Revolutionary and discontinuous changes in the operating environment are

stark reminders that business success is 'impermanent'. Bank has achieved

substantial progress in technology and is continuously integrating multipleplatforms of technology to generate synergies. Bank continuously attempts

to adapt to the dynamic economic environment while engaging in long term

relationships to provide superior customer service.

Banks constant endeavor to delight its customers, which is built on its strong

fundamentals will make it stronger, more resilient and enable to achieve its

vision of to be the Most Admired Bank.

BOARD OF DIRECTORS

1. Shri P. Srinivas, Executive Director

2. Shri Ranjan Dhawan, Executive Director

3. Shri Bhuwanchandra B. Joshi, Executive Director

4. Dr. K.P. Krishnan, Director

5. Smt Surekha Marandi, Director

6. Shri Maulin Vaishnav, Director

7. Shri Surendra Singh Bhandari, Director

8. Shri Rajib Sekhar Sahoo, Director

Key Business Indicators(Rs. in Crore) 31.03.2012 31.03.2011

Total Deposits 384871.11 305439.48

Total Advances 287377.29 228676.36

Total Investments 83209.4 71260.63

Total Assets 447321.47 358397.18

Net Profit 5006.96 4241.68

Capital Adequacy Ratio (percentage)

12.95 as per Basel I 14.67 as per Basel II

13.02 as per Basel I 14.52 as per Basel II


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Net Non Performing Loans to Net Advances (percentage) 0.54 0.35

Net Interest Margin (percentage) 2.97 3.12

Business Per Employee (Lacs) 1466 1229

Dividend History (Percentage)

2012 170

2011 165

2010 150

2009 90

2008 80

2007 60

2006 50

2005 50

2004 65

2003 60

2002 40

2001 40

2000 40


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BOB NETWORK

Corporate Offices

Head Office

Suraj Plaza 1, Sayaji Ganj,

Baroda 390005

Ph: (0265) 2361852(10lines)

Fax: (0265) 2362395, 2361824, 2361806 Corporate Centre

Bank Of Baroda

Baroda Corporate Centre,

Plot No. C-26, Block G,

Bandra Kurla Complex,Bandra (East),

Mumbai 400051

Ph: (022) 6698 5000-04 (PBX)

Fax: (022) 2652 1955

Branch Network (as of 6/8/2014)

Area No. of Branches

Metro 971Urban 861

Semi-Urban 1306

Rural 1818

Total (Indian) 4956

Foreign (Overseas) 104

Total (Global) 5060

Controlling Offices

Zonal Offices 13

Regional Offices 56

Human Resources (Staff as of 01.04.2013)

Officers 17631

Clerks 16397

Sub - Staff 8186

On Contract 1

Total 42215


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SUBSIDIARIES AND JOINT VENTURES

Domestic Overseas

Subsidiary Subsidiary

BOBCARDS Ltd. Bank of Baroda (Botswana) Ltd.

BOB Capital Markets Ltd. Bank of Baroda (Kenya) Ltd.

Nainital Bank Ltd. Bank of Baroda (Uganda) Ltd.

Bank of Baroda (Guyana) Ltd.

Bank of Baroda (New Zealand) Ltd

Bank of Baroda (Tanzania) Ltd

Bank of Baroda (Trinidad & Tobago) Ltd.

Bank of Baroda (Ghana) Ltd.

Representative Offices

Bank of Baroda (Thailand)

Associate

Baroda Pioneer Asset Management Company Ltd

India First Life Insurance Company Limited

Baroda Uttar Pradesh Gramin Bank

Baroda Rajasthan Gramin Bank

Baroda Gujarat Gramin Bank

Nanital -Almora Kshetriya Gramin Bank

Jhabua-Dhar Kshetriya Gramin Bank

Indo-Zambia Bank Ltd. (Lusaka)

India International Bank Malaysia Berhad


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CHAPTERII.

3. THEORETICAL PERSPECTIVE -COMPARATIVE STUDY OF CREDITRATING SERVICE OFFERED BYCRISIL, CARE, ICRA, FITCH


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THEORETICAL PERSPECRTIVE

Raters and Ratings: Evolution and the Current State of the Art

The Raters

A credit rating agency (CRA) is a commercial concern engaged in the

business of credit rating of any debt obligation or of any project or program

requiring finance in the form of debt or otherwise. CRA is different from a

mercantile credit agency, which usually supplies general information on

corporates. It is also different from a credit bureau, which collates

information on credit record of corporates or even individuals. Nor is it a

credit-assessing agency like the credit department of a commercial bank.

The most significant aspect of credit rating is that it is an opinion made

available for public, influencing decisions by participants in financial markets.

The following information on the origin and growth of credit rating has been

collected from two sources, viz., Cantor and Packer, 1995 and ICRA, 1994.

The precursors of bond rating agencies were the mercantile credit agencies,

which rated merchants ability to pay their financial obligations. After the

financial crisis of 1837 in the US, Louis Tappan established the first

mercantile credit agency in New York in 1841. Robert Dun subsequently

acquired the agency, which first published its first ratings guide in 1859. In

1849, John Bradstreet formed another mercantile rating agency, which

published a ratings book in 1857.

In 1933, the two agencies were merged into Dun and Bradstreet, which

became the owner of Moodys Investors Service (Moodys) in 1962. Credit

goes to John Moody for introducing formally the credit rating symbols in

1909 using Aaa through C notations when Moodys started rating US

railroad bonds. Meanwhile, Henry Varnum Poor published, The History of

Railroads and Canals of the United States in 1860. The railroads were the

principal engine propelling the Industrial Revolution. In 1906, Standard

Statistics began publishing financial information on US industrial companies.

Rating for various other corporate bonds followed in 1923.


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In 1941, Poors Publishing Company and Standard Statistics Company

merged to form Standard & Poors Corporation (S&P).S&P was a publicly

owned corporation till 1966 when its controlling interest was acquired byMcGraw Hill Incorporated which acts as the holding company. While the

rating of corporate bonds started in the early twentieth century, sovereign

ratings represent a relatively new line of business for the agencies. The first

industrial country to be rated was France, by S&P in 1959. Both Moodys

and S&P rated Venezuela, a non-industrial country, in October 1977. Fitch

IBCA entered the business of sovereign rating only in 1975.

In cases where a sovereign does not seek a rating, but a corporate entity of

such a country seeks a rating, CRAs do assign an implicit sovereign rating.

The scope of rating in 15 international arena broadened in 1960s to include

sovereign states and public agencies raising funds in international financial

markets. With the increasing number of companies and sovereigns entering

into the international capital market for raising funds, the credit rating

operations of both Moodys and S&P have expanded and, hence, they

maintain offices in major countries of the world. Besides these two worldfamous credit rating agencies in USA, there are a few more famous

agencies that offer sovereign ratings.

These are Canadian Bond Rating Service, Dominion Bond Rating Service

Ltd., Duff & Phelps Credit Rating Co., The Fitch IBCA Group, Japan Credit

Rating Agency Ltd. and Thomson Bank Watch Incorporated. While normally

CRAs assign a rating on the request of an issuer, there are occasions when

unsolicited ratings are assigned, and in many such cases, the fact that they

are unsolicited is made explicit with an asterisk.


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There is also the criticism against the structure of CRAs in USA, with an

oligopolistic market largely carved out between Moodys. S&P and Fitch.

This quest for market shares is viewed as a reason for a lack of commonality

in the rating symbols. Also, the argument put forward for maintaining the

oligopoly is that size begets experience and expertise, hence a larger

number of smaller firms is undesirable in the interests of quality standards.

All of these agencies are represented in India through their collaborations:

S&P : CRISIL Moodys : ICRAFitch : CARE (for 1 year only) Fitch : Fitch

India (formerly Duff & Phelps India) These collaborations bring in financial

capital, and more importantly, knowhow, experience, depth of expertise,

research capabilities and manpower synergies. The global orientationreceived by CRAs in India is further enhanced by two factors Affiliation to the

Association of Credit Rating Agencies in Asia (ACRAA), an ADB sponsored

body. Indian CRAs are founder members. Alignment with the IOSCO Code

of Conduct, to the extent they coincide with the SEBI Code of Conduct for

CRAs.

These collaborations, affiliations and alignments enable the Indian CRAs to

benefit from an exposure to an international environment. It is also a notablefeature that Indian CRAs, in turn, provide technical expertise and knowhow

to CRAs in Mexico and other countries in the SAARC and ASEAN regions.

This provides an emerging markets perspective. Indian CRAs have a

leadership position in Asia, behind only Japan, whose CRAs show a greater

affinity in interacting with CRAs from the developed (G7) countries. 16 As on

date, there are 5 CRAs in India:

CRISIL (est. 1988), ICRA (est. 1991), CARE (est.1993), Fitch India (formerly

Duff & Phelps India, est. 1996, taken over by Fitch in 1999), Brickworks (est.

2008). Notably, India has 5 CRAs in comparison to 3 of USA. Thus,

competition is stiffer since there are more CRAs for a financial market that is

smaller than USA in value, and hence dilutes oligopolistic power. However,

in terms of number of firms and issues, India could be a market of

considerable size.


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During the current downturn from 2008, the number of rating assignments

has increased, and to some extent, issuers have got away with discounts in

rating fees (which range from Rs.1 lakh to 2 lakhs per rating assignment).

This is evidence of a dilution of the oligopolistic power. At a smaller level,

there is SMERA (Small & Medium Rating Agency) which rates loans availed

by Small & Medium Enterprises. The rating fees are around Rs.40,000 per

assignment, which the large CRAs find to be unviable; hence such

assignments are either rejected or outsourced to smaller Chartered

Accountant firms, supplemented by a cursory telephonic verification.

The quality of personnel at SMERA or smaller agencies may not be the

same as those at the SEBI registered CRAs. Outsourcing is a matter ofpolicy and should generally be discouraged for reasons of quality as well as

privacy. Another phenomenon is the presence of Credit Information

Companies (CIC) which are recognized by the RBI through the Credit

Information Companies Regulation Act. Their services are availed by credit

granting institutions for the sanctioning and monitoring of facilities to

individuals who borrow loans, housing loans and avail of credit card facilities.

The Credit Information Bureau of India Limited (CIBIL) is one such example.

The Rating Process

In 1934, Benjamin Graham, David Dodd and Sydney Cottle wrote their book

Securities Analysis a classic work that marked the beginning of the field.

Until then, financial analysis was sketchy and bereft or analytical principles

or rigour. They also pioneered the first steps in the Quantitative School of

financial information for decisions on Securities investment. Securities

Analysis is the classic textbook used in Columbia University till this day. This

1934 classic has come to the forefront once again in recent times, indicating

how the tenets of conservative value investing protect the investor from

overpaying when investing in securities, tenets which are overlooked as

unfashionable during the periods of economic boom. The Graham approach

involves an analysis over the past 10 years to ascertain the track record of

an issuer.


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Also in parallel, during the 1930s, a notable development was the

emergence of Philip Fisher, who wrote his book Conservative Investors

Sleep Well. Thisis a recommended textbook at Stanford Business School.He stressed on the Qualitative aspects such as Management Vision and

Integrity, Marketing & 17 Sales Capabilities, Employee Morale Levels,

Product Development etc. The hallmark of this approach is the use of

informal information in addition to formal sources so as to obtain a more

complete evaluation of a companys prospects. This technique, currently

known as the process of Due Diligence Review (DDR) is critical in any

financial appraisal. With the onset of outsourcing, financial appraisal skillseems to be a dying art, viewed as a poor cousin to investment banking and

financial engineering. Thus, Philip Fishers Qualitative School neatly

complemented the Quantitative School of Graham et al.

The 1930s are known for the disillusionment of the investing public with the

quality of information disseminated by the financial community. It was also a

period in which the dissatisfaction with the accounting community was made

public. Thus, the 1930s are a period which witnessed the formation of theSEC, the imposition of the Glass-Steagall Act that separated Commercial

Banking from Investment Banking. The repeal of the Glass-Steagall Act

recently has exposed the systemic risks, seen from the downfall of Citigroup

and other banks in the USA. European banks are further weakened by a

total absence of an act similar to the Glass-SteagallAct. Academic interest

in financial analysis reemerged with studies by Edward Altman who used the

statistical technique of Multiple Discriminant Analysis (MDA), which has theability to filter data into two baskets: Safe and Default categories. It is a

scoring model (revolving around a Z-score), with different weights to different

ratios and variables. Based on the relevance of the various weights and

variables, subsequent researchers have been able to tweak the Altman Z-

Score Model to devise their own scoring models. Supplementary to such

studies, the Linear Probability Models (LPM) became popular in predicting

bond defaults.


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These models were further improved upon by the LOGIT and PROBIT

models, which are comparable. In later developments, Credit RiskMeasuring

approaches such as Credit-metrics, Loss-Given-Default (LGD) and the KMV

Models have extensively been used to measure credit default probabilities

and assign ratings and rating transitions. In particular, Moodys, and

Standard and Poor (S&P) have equipped themselves with these techniques.

A study of the sub-prime crisis in USA is illustrative of the functioning,

through a paper by Vikrant Vig et al, presented at the Conference on

Securities Markets organized by NISM in December 2008. The US CIC

compiles a score and discriminates loan applicants into two basketscredit-

worthy or otherwise. The cut-off score was 620 for obtaining a mortgageloan. It was found that most of the defaults that occurred were by applicants

who had obtained a score marginally above 620 (say, 621 to 630). This led

to the massive sub-prime crisis and its global consequences. The lesson

here is that the CIC and the applicants got around the system and weakened

the mortgage loan systemically. Abetted by lax standards of loan origination

in a quest to boost balance sheet 18 size and adventurous investment

bankers, elaborate structured obligations were created. Whereas the CICs

failed in the loan-filtering process, the CRAs failed in detecting risks in the

design of the pretty securitization structures. By analogous reasoning, it is

assumed that the maximum potential for default is by borrowers who

artificially manage to get a rating barely above the acceptable credit rating or

credit score.

For example, the highest defaults would be in the BBB category and need a

stronger level of sanctioning procedures and scrutiny of collateral security.At the 2003 Conference by ISMA held in Madrid, one of the Hedge Fund

managers mentioned that the International Rating Agencies lagged behind

the market information. This was stated in the light of the collapse of

WorldCom and Xerox, in the aftermath of the Enron fallout. The RBI has

rightly been very critical of the role of Direct Selling Agents (DSAs) which are

ill-equipped to filter bad loan proposals due to the commission structures

that are based on commissions.


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This perverse incentive structure results directly into a moral hazard and

could pose a systemic risk. Likewise, in Mutual Funds (regulated by SEBI)

and Insurance (regulated by IRDA), cases of mis-selling are more

widespread than on evidence, due to the possibility of unreported

complaints. This could be the genesis of premature redemptions and

adverse claims. Along the same lines, tough norms need to be placed for

recognition and renewal of registration of CRAs, SMERA and CICs.

Although they operate in different segments, the basic Due Diligence

Process (DDR) remains the same. This argument is extendable to auditors

also, who are the first level in the filtering process. While there will always be

asymmetric information between the issuer/borrower vis--vis the CRA and

lender, steps need to be taken to minimize the asymmetry. Here, the DDR

skills of the personnel will be the most important risk mitigating device. CRAs

and regulators need to be doubly careful in the blind spots or grey

regulatory zones. AIG for instance, was an insurance company whose

unregulated affiliate strayed into Credit Default Swaps (CDS) that were

traded in the unregulated OTC markets. Investment losses directly hit the

capital and the vulnerability showed up after it was too late. In this regard,

complexity grading is a good step and must be factored in to expose the

heightened risks (counterparty risk) that is in addition to the basic credit risk,

since one of the counterparties in the structured obligation who may be

unregulated and hence possess inadequate risk capital. The Rating Process

was gauged firsthand through site visits to the various CRAs.


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A careful look at the right hand side (What is Not Done) reveals that there is

scope for improvement. It is no surprise, therefore, that financial markets,

which, in totality have a greatest number of surveyors and is equipped and

empowered to price even unconfirmed news into asset prices, react faster to

new information than the CRAs. By contrast, CRAs are required to be more

guarded and restrained in either upgrading or downgrading issues on

account of protocols namely, to wait for a confirmation. Until then, the

CRAs can, at best, place an issue under Rating Watch.

During the same period as this study, SEBI conducted site inspection visits

to the CRAs. It was a through, detailed inspection of the records and

procedures. It was found that the record-keeping was not sufficient,particularly proofs of CRAs visits to rated entities, minutes ofmeetings with

clients, minutes of meetings of rating committees etc. It was also observed

that a more in-depth probing by the CRAs need to be conducted.

Interactions with some rated entities confirmed these findings. Some entities

were pleasantly surprised to get an AAA within a month, after one site visit

and management interaction. Queries to the Projections were raised and

settled through email. In this regard, it was felt that CRISIL was a moreprobing than the other CRAs. Further enquiry with other rated entities

revealed that the officers of CRISIL are far superior to the other agencies;

hence it would be unfair to paint all CRAs with the same brush. However,

CRISIL also have lesser rating mandates to other CRAs since some large

entities that are rated have significant shareholding in CRISIL and ICRA. As

per the SEBI inspection reports, it is found that CRISIL has further

strengthened its systems especially after 2007.

There is a view that the ratings by S&P and Moodys are more stringent than

those of their Indian counterparts. More specifically, it is said that an AAA by

an Indian CRA could be equivalent to an AA by their US counterpart. The

table above reflects areas for improvement. Apart from this, there is another

dynamicthat of the treatment of Non-Performing Loans (NPL) as they are

called in USA, corresponding to the terminology of Non-Performing Assets

(NPA) in India. In USA, a firm that has declared itself insolvent under Goingby such an environment, the rating agencies can be as tough as possible


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without harming the future prospects of the rated entity. However, in India,

there are no such supporting devices the NPA tag will result in an enmasse

withdrawal of credit lifelines and permanently destroy the future of the rated

entity. Hence, Indian CRAs may be more cautious in confirming adverse

indications before a downgrade. It comes as no surprise, therefore, that the

markets react faster than the CRAs. However, this cannot be verified in case

of unlisted entities/instruments.

Generally, investors in such debt instruments are large Domestic Financial

Institutions (DFIs) who adopt a buy-and-hold strategy and are not affected

by short term swings in the fortunes of companies, so long as the payment

obligations are not seriously threatened. At this stage, it is more pertinent toremedy the existing lacunae in the rating processes than to focus on the

market-efficiency-versus-CRA-efficiency.

On the balance, the arguments that the financial markets respond faster to

incorporate new information into asset prices is tabulated as under: Markets

CRAs Markets are answerable to no one and are free to over-react CRAS

are responsible to the investing public and for being fair to issuers Mispricing

and volatility are inherent. Rumours are incorporated instantly

Knee jerk reactions could result in repeated re-ratings, hence rumours need

verification Markets consider all risks CRA are responsible only for credit risk

Markets factor in price corrections and market microstructure issues CRAs

factors in significant credit risks Markets have more traders and more noise.

Markets are also known to overreact, especially to short term noise. Long

term bond investors generally buy and hold longer.

Need not react immediately if long term prospects not endangered Everyone

brings news into the market, hence surveillance is more comprehensive. .

CRA surveillance teams are smaller, with limited information resources and

cannot act on unconfirmed news. Too much of re-rating also damages

credibility of both issuer and CRA Details of transactions factored instantly

CRAs get to know of bulk deals, block deals and insider trades

simultaneously or after the market trades are completed


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The table above shows that Markets, collectively, are information-superior.

However, this does not render CRAs redundant nor can the motives of

CRAs be questionable a priori. The main function of CRAs is to factor credit

risk so that the bond investors can base their judgement on factual data. The

major point is, CRAs will always trail the market, but need to take all possible

steps to improve their functioning by a comprehensive and contemporary

DDR process. Investors will be doing themselves a favour by keeping CRAs

informed of all delays/defaults as and when they occur. Investors, in turn,

could also access the files maintained by CRAs on an ongoing basis. CRAs

also need to maintain databases for further processing through advanced

applications such as Data Warehousing and Data Mining.

It is also a part of the overall Knowledge Management (KM) initiatives within

their organizations and serves as an aid to Research and Training. 23

Without any attempt to defend the CRAs, it must be stated that large

institutions in Bonds, Debentures and Loans do not react instantaneously to

adverse quarterly changes since they have sufficient collateral security and

enjoy a direct rapport with the investee/companies (issuers) so as to enforce

performance.

Moreover, in most cases, corporate debt instruments are illiquid and the

investing institutions adopt a buy-and-hold strategy. Hence, instantaneous

downgrades are not expected. The role and performance of CRAs has

resulted into a raging debate in the recent times, which have been highly

turbulent, especially after October 2008. Some of the observations and

issues raised by experts are encapsulated below for consideration during

this study. Some myths in Credit Rating need to be demystified and placedin a right, healthy perspective.

First, the myth that rating is an opinion and therefore, the CRAs are not

accountable to any failure to detect weakness. This is a loose interpretation.

A correct interpretation would be that CRAs remain accountable to the

investing public, regardless of the freedom provided to them on matters of

methodology.


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Second, the myth that the rating of an instrument is unconnected with the

standing of the issuer needs to be revisited carefully. While it is true in the

case of Structured Obligations (SO) with a maze of credit enhancements, in

the case of plain vanilla debt, the credibility and cash flow projections of the

entity are closely intertwined with the ability to honour obligations on its debt

instruments.

In general, CRAs are believed to have a good model for first time ratings.

However, the important and difficult part is to maintain the currency of the

rating throughout its tenor. This will establish whether ratings are proactive

or reactive.

A reactive approach needs to be eschewed, since it implies a hurriedly

convened meeting ex-post-facto. The track record of an issuer is important

and adds to the credibility of the issue. The past repayment track record

needs to be considered favourably, except in cases where the new debt

instruments of a very high magnitude are on offer. Timeliness and currency

of the ratings are of utmost importance especially since the investors would

like to buy or sell debt investments based on reliable information. CRAs

have an important gap-filling role between the investors and the debenturetrustees. The real test of a CRA is quick response time. As regards

projections, it is believed that very long term projections are not useful (viz.,

beyond 5 years). Rating symbols need to be placed at one central point for

reference by the general public. The meanings of the symbols need to be

clarified and placed in a comparable table.

From the investors perspective, Ratings are a fortification to their own due

diligence process, and not to be considered as a crutch or substitute to

appraisal. It is necessary for the investing community to place facts before

the CRAs and elicit responses. This will tone up the systems and operations

of the CRAs. The primary role of CRAs is rating of credit instruments. IPO

Grading was introduced on an experimental basis, mainly at the behest of

the Investors Associations. Most of the issues received poor grading ratings

and also failed to raise funds (say 1 to 2 marks on a total of 5). It is a

different matter that the turn of events and the high valuations prescribed byMerchant Bankers led to the total drying up of the IPO market post January


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2008. In view of the events in the financial markets it needs to be concluded

that the US systems are no longer the standard of reference. With all the

chronicled experience available on hand, India should now seek to create its

own standards and mechanisms in addressing the issues related to CRAs.

In the next chapter, the actual performance of CRAs is gauged by an

analysis of select data.


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CREDIT RATING AGENCIESA BRIEF VIEW

Credit Rating Information Services of India Limited (CRISIL) is a global

analytical company providing ratings, research, and risk and policy advisory

services. CRISILs majority shareholder is Standard & Poor's, a division of

McGraw-Hill Financial and provider of financial market intelligence.

CRISILs businesses can be divided into three broad categories - Ratings,

Research and Advisory. CRISIL Ratings has rated/assessed over 61,000

entities in India. Its rating capabilities span the entire range of debt

instruments and it has worked across the corporate strata, from large

corporates in the country to the SMEs.

Under Research, CRISIL Global Research & Analytics serves global

investment banks and financial institutions with high-end research, risk,

analytics, equity and credit research services. Its credit research supports 80

per cent of the global structured finance market, and over 60 per cent of the

global credit markets. The company's equity research covers over 90 per

cent of the global trading volumes and 88 per cent of the global market

capitalisation.

In India, CRISIL Research is an independent and integrated research house

and provides growth forecasts, profitability analysis, emerging trends,

expected investments, industry structure and regulatory frameworks.

CRISIL Infrastructure Advisory is a division of CRISIL Risk and Infrastructure

Solutions (CRIS) Limited, a wholly owned subsidiary of CRISIL Limited. It

helps shape policy and establish viable frameworks to improve the risk

profile of infrastructure projects. It works with government agencies in

enhancing their capacity, capabilities and internal financial viability, and

support implementation of infrastructure improvement initiatives.


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CRISIL Risk Solutions (CRS), the other division of CRIS, provides a range of

risk management tools, analytics and solutions to financial institutions,

banks, and corporates, in India, and across the world.

ICRA Limited(formerly Investment Information and Credit Rating Agency of

India Limited) was set up in 1991 by leading financial/investment institutions,

commercial banks and financial services companies as an independent and

professional Investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of

Companies (Group ICRA). ICRA is a Public Limited Company, with its

shares listed on the Bombay Stock Exchange and the National Stock

Exchange.

Alliance with Moodys Investors Service

The international Credit Rating Agency Moodys Investors Service1is ICRAs

largest shareholder. The participation of Moodys is supported by a

Technical Services Agreement, which entails Moodys providing certain high-

value technical services to ICRA. Specifically, the agreement is aimed at

benefiting ICRAs in-house research capabilities, and providing it with

access to Moodys global research base. The agreement also envisages

Moodys conducting regular training and business seminars for ICRA

analysts on various subjects to help them better understand and manage

concepts and issues relating to the development of the capital markets in

India. Besides this formal training programme, the agreement provides for

Moodys advising ICRA on Rating-products strategy, and the Ratings

business in general.

The ICRA Factor Facilitating Efficiency in Business...

ICRA information products, Ratings, and solutions reflect independent,

professional and impartial opinions, which assist businesses enhance the

quality of their decisions and help issuers access a broader investor baseand even lesser known companies approach the money and capital markets.


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The Research Factor

We strongly believe that the quality of analytical output is a derivative of an

organisations research capabilities. We have dedicated teams for Monetary,

Fiscal, Industry and Sector research, and a panel of Advisors to enhance ourin-house capabilities. Our research base enables us to maintain the highest

standards of quality and credibility.

Committed to the Development of the Financial Market

The focus of ICRA in the coming years will continue to be on developing

innovative concepts and products in a dynamic market environment,

generating and promoting wider investor awareness and interest, enhancing

efficiency and transparency in the financial market, and providing a healthier

environment for market participants and regulators.

Our Produ cts and Services are Designed to:

1. Provide information and guidance to institutional and individual

investors/creditors;

2. Enhance the ability of borrowers/issuers to access the money market and

the capital market for tapping a larger volume of resources from a widerrange of the investing public;

3. Assist the regulators in promoting transparency in the financial markets;

and

4. Provide intermediaries with a tool to improve efficiency in the funds

raising process.


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Range of Services

Rating Services

As an early entrant in the Credit Rating business, ICRA Limited (ICRA)is one of

the most experienced Credit Rating Agencies in the country today. ICRA

rates rupee-denominated debt instruments issued by manufacturing

companies, commercial banks, non-banking finance companies, financial

institutions, public sector undertakings and municipalities, among others.

ICRA also rates structured obligations and sector-specific debt obligations

such as instruments issued by Power, Telecom and Infrastructure

companies. The other services offered include Corporate Governance

Rating, Stakeholder Value and Governance Rating, Credit Risk Rating of

Debt Mutual Funds, Rating of Claims Paying Ability of Insurance

Companies, Project Finance Rating, Line of Credit Rating and Valuation of

Principal Protected-Market Linked Debentures (PP-MLD). ICRA, along with

National Small Industries Corporation Limited (NSIC), has launched a

Performance and Credit Rating Scheme for Small-Scale Enterprises in India.

The service is aimed at enabling Small and Medium Enterprises (SMEs)

improve their access to institutional credit, increase their competitiveness,

and raise their market standing.

PT ICRA Indonesia (ICRA Indo),a subsidiary of ICRA, offers a wide range

of Rating services in the Indonesian market, including Credit Rating of

rupiah-denominated debt instruments issued by corporate entities, banks,

finance companies and financial institutions, service companies and

infrastructure sector companies; Issuer Rating of corporate entities, banks,

finance companies and financial institutions, service companies,

infrastructure sector companies and small & medium sector companies;

Structured Finance Rating of asset-backed and mortgage-backed

securitization transactions, among others; Bank Loan Rating based on the

Basel II accord; Project Finance Rating; Mutual Funds and Fund House

Ratings; Municipal Bonds Rating and Claims Paying Ability Rating of

Insurance Companies.


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ICRA Lanka Limited (ICRA Lanka), a wholly-owned subsidiary of ICRA,

offers a wide range of Rating services in the Sri Lankan market, putting into

use parent ICRAs accumulated experience in the areas of Credit Rating,

Grading, and Investment Information. Its Rating focus is on entities mainly in

the financial sector, besides long-, medium-, and short-term debt

instruments issued by borrowers from various sectors of the economy.

ICRA Lanka also rates rupee-denominated debt instruments issued by

commercial banks, nonbanking finance companies, financial institutions, and

manufacturing and service companies, among others. It also rates structured

obligations and sector-specific debt obligations. The other services offered

include Corporate Governance Rating, Stakeholder Value and GovernanceRating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying

Ability of Insurance Companies, Project Finance Rating, and Line of Credit

Rating.

ICRA Nepal Limited (ICRA Nepal), a subsidiary of ICRA, offers a wide

range of Rating services in the Nepalese market. Using the accumulated

experience and technical support of its holding company, it has developed

the capability to offer a diverse range of Rating and Grading relatedservices. ICRA Nepal rates rupee-denominated long-term, medium-term and

short-term debt instruments. Its services also include Issuer Rating, Fund

Management Quality Rating and Grading of Equity Offers. The

Rating/Grading service, which is currently focused on the banking and

finance, insurance and hydro-electricity sectors, is also being offered to

manufacturing companies, infrastructure sector companies, service

companies, small and medium sector entities, and others. Further, ICRANepal is preparing to offer other products including Bank Loan/Line of Credit

Rating and Rating of Claims Paying Ability of insurance companies in the

near future.


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Grading Services

The Grading Services offered by ICRA employ pioneering concepts and

methodologies, and include Grading of: Initial Public Offers (IPOs);

Microfinance Institutions (MFIs); Construction Entities; Real EstateDevelopers and Projects; and Maritime Training Institutes. In IPO Grading,

an ICRA-assigned 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. In MFI Grading, the focus of ICRAs grading

exercise is on evaluating the candidate institutions business and financial

risks. The Grading of Construction Entities seeks to provide an independent

opinion on the quality of performance of the entities graded. Similarly, theGrading of Real Estate Developers and Projects seeks to make property

buyers aware of the risks associated with real estate projects, and with the

developers ability to deliver in accordance with the terms agreed. In the

education sector, ICRA offers the innovative service of Grading of Maritime

Training Institutes in India. These apart, of late, ICRA has been offering the

services of Grading of Renewable Energy Service Companies (RESCOs)

and System Integrators (SI); Grading of Management Education Institutes;

Grading of Engineering Colleges/Universities; Grading of Fundamental

Strength and Recovery Prospects; Assessment of the Fundamental and

Financial Strength of Real Estate Entities (REEs) & Real Estate Projects

(REPs); and ICRA Corporate Responsibility and Sustainable-Business

Grading.

Industry Research

ICRA has re-launched its industry research service, covering over 30

segments in the corporate and financial services sectors. Given ICRAs

strong analytical capabilities across industries, the research reports provide

in-depth analysis of industry-specific issues, trends in demand-supply

factors, the competitive landscape, and medium-to-long-term outlook. The

research reports are tailored to meet the research requirements of a wide

range of participants, including banks, mutual funds, insurance companies,

venture funds and corporates.


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Equity Research Service

The ICRA Equity Research Service seeks to provide market participants with

an assessment of the fundamental earning quality of specific companies and

their current relative valuation as reflected by the prevailing price of theirequity shares. An ICRA Equity Research assessment, while not specifying

any target price for the shares evaluated, captures two key factors

fundamental earning quality and relative valuationthat influence the price

behaviour of equity shares of companies over the medium and long term. In

assessing the relative valuation of a companys equity share, the same is

benchmarked against an appropriate peer set or index. ICRA Equity

Research reports are aimed at benefiting all categories of investors,including retail investors and especially those with a longer term investment

horizon.

Consulting Services

ICRA Management Consulting Services Limited (IMaCS), a wholly-owned

subsidiary of ICRA Limited, is a multi-line management consulting firm with a

global operating footprint. IMaCS consulting services span Public Policy,

Strategy, Risk Management, and Transaction Advisory services. IMaCS

clientele includes Banks and Financial Service Companies, Corporates,

Financial Investors, Governments, Regulators, and Multilateral/Bilateral

Development Agencies. Headquartered in India, IMaCS has consulting

experience in over 45 countries across South East Asia, South Asia, West

Asia, Africa, Europe, and North America.

IMaCS offers Programme Management and other outsourcing services

through its wholly-owned subsidiary, Pragati Development Consulting

Services Limited. Software Development, Analytics & Business Intelligence

and Engineering Services

ICRA Techno Analytics Limited (ICTEAS),a wholly-owned subsidiary of

ICRA Limited, offers a complete portfolio of Information Technology (IT)

solutions to meet the dynamic needs of present-day businesses. The

services range from the development of traditional web-centric and mobile

applications to the new generation of cutting-edge analytics and business


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intelligence solutions. With many manyears of experience in data-mining and

predictive modeling, ICTEAS offers analytics solutions in multiple functional

domains such as procurement, sales, supply chain, logistics, and resource

planning. The Engineering Division of ICTEAS offers multidisciplinary

computer aided engineering design services. ICTEAS uses a mix of

onsite/offshore strategies to optimize bottom-line benefits for its customers.

It is a Microsoft Gold Partner and is ISO 9001: 2008 certified.

ICRA Sapphire Inc. (ICSAP),a wholly-owned subsidiary of ICTEAS, is

based in and operates out of Connecticut, USA. It offers US clients a full

array of leading edge Business Analytics and Software Development

services backed by offshore teams, which work out of ICTEAS, Kolkata. Thishybrid engagement model allows for seamless project management,

execution and rapid offshore scaling of teams while bringing down

development costs.

ICRA Global Capital, Inc. (IGCI) is a special purpose vehicle of ICTEAS.

IGCI has been incorporated to look after overseas investment activities.

Currently, it holds 100% equity stake in BPA Technologies, Inc.

BPA Technologies Inc. (BPA),a wholly-owned subsidiary of ICTEAS, is a

California-based global business consulting and software technology

services firm. It delivers Enterprise Content Management (ECM) solutions,

Portal and Collaboration solutions, and Comprehensive Quality Assurance

(QA) Solutions. BPA has development centres in Chennai and

Visakhapatnam. With a global delivery model, BPA offers innovative and

cost effective information management solutions to its clients across various

industries.

BPA Technologies Pte. Ltd.,a wholly-owned subsidiary of BPA, acts as a

state-of-the-art offshore delivery centre in India for software development

and QA services.


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Knowledge Process Outsourcing and Online Software

ICRA Online Limited (ICRON)is a wholly-owned subsidiary of ICRA

Limited. The company operates out of Kolkata and Mumbai.

Encouraged by the emerging dynamics of the outsourcing business, ICRON

diversified into the Knowledge Process Outsourcing business in April 2004,

with focus on the Banking, Financial Services and Insurance (BFSI) vertical.

Presently, ICRON has three lines of business (LoBs) offering data services,

research and analytics to regional and global clients. ICRON works with

banks, insurance companies, asset management companies and other

financial institutions. Timely, accurate, and affordable solutions help partners

achieve their business goals. In the Data Services segment, ICRON offers

support to its clients in the areas of data extraction, aggregation, validation,

analysis and adjustments in areas of accounts, financial management and

structured finance.

In Research, ICRON serves clients through financial research, asset-class

reports, news & event tracking, company profiles preparation, customer data

analysis, newsletters, fund profiling and financial blogging. Analytics is an

emerging business for ICRON and involves discovering patterns in data and

building predictive models. ICRON, Kolkata Division, is ISO 9001:2008 and

27001: 2005 certified through continuous focus on and adherence to quality

and data security policies and practices.

ICRA Limited (ICRA) is an Indian independent and professional investment

information and credit rating agency. It was established in 1991, and was

originally named Investment Information and Credit Rating Agency of India

Limited (IICRA India). It is second largest Indian rating company in term of

customer base. It was a joint-venture between Moody's and various Indian

commercial banks and financial services companies. The company changed

its name to ICRA Limited, and went public on 13 April 1997, with a listing on

the Bombay Stock Exchange and the National Stock Exchange.


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ICRA Credit Rating

ICRAs credit ratings are symbolic representations of its current opinion on

the relative credit risks associated with the rated debt obligations/issues.

These ratings are assigned on an Indian (that is, national or local) creditrating scale for Rupee (local currency) denominated debt obligations. ICRA

ratings may be understood as relative rankings of credit risk within India.

ICRA ratings are not designed to enable any rating comparison among

instruments across countries; rather these address the relative credit risks

within India.

ICRAs ratings (other than Structured Finance Ratings) in the investment

grade convey the relative likelihood of default, that is, the possibility of the

debt obligation not being met as promised. All other ratings, including

Structured Finance Ratings, reflect both the probability of default and the

severity of loss on default, that is, the expected loss against the rated debt

obligation.

Credit ratings apart, ICRA also assigns Corporate Governance Ratings,

besides Performance Ratings, Gradings and Rankings to mutual funds,

construction companies and hospitals.

Group Companies

There are five subsidiary of ICRA Ltd. as,

1. PT. ICRA Indonesia (ICRAIndo) www.icraindonesia.com,

2. ICRA Lanka Limited (ICRALanka) www.icralanka.com,

3. ICRA Techno Analytics Limited (ICTEAS), www.icteas.com,

4. ICRA Online Limited (ICRON)www.icraonline.com,5. IMaCs www.imacs.in.


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FITCH RATINGS INC

Fitch Ratings Inc. is a jointly owned subsidiary of Hearst

Corporation and FIMALAC SA. On April 12, 2012, Hearst

increased their stake in the Fitch Group to 50%. Previously, Hearst owned a40% stake in the company, while FIMALAC was the majority owner with

60% stake. Fitch Ratings and Fitch Solutions are part of the Fitch Group.

Fitch Ratings is dual-headquartered in New York, USA, and London, UK. It

was one of the three nationally recognized statistical rating organizations

(NRSRO) designated by the U.S. Securities and Exchange Commission in

1975, together with Moody's and Standard & Poor's, and the three are

commonly known as the "Big Three credit rating agencies".

The firm was founded by John Knowles Fitch on December 24, 1913 in New

York City as the Fitch Publishing Company. It merged with London-based

IBCA Limited in December 1997. In 2000 Fitch acquired both Chicago-based

Duff & Phelps Credit Rating Co. (April) and Thomson Financial BankWatch

(December). Fitch Ratings is the smallest of the "big three" NRSROs,

covering a more limited share of the market than S&P and Moody's, though

it has grown with acquisitions and frequently positions itself as a "tie-

breaker" when the other two agencies have ratings similar, but not equal, in

scale. In September 2011, Fitch Group announced the sale of Algorithmics

(risk analytics software) to IBM for $387 million. The deal closed on October

21, 2011.

Long-term credit ratings

Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale

from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by

S&P. (Moody's also uses a similar scale, but names the categories

differently.) Like S&P, Fitch also uses intermediate +/- modifiers for each

category between AA and CCC (e.g., AA+, AA, AA-, A+, A, A-, BBB+, BBB,

BBB-, etc.).


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Investment grade

AAA: the best quality companies, reliable and stable

AA: quality companies, a bit higher risk than AAA

A: economic situation can affect finance

BBB: medium class companies, which are satisfactory at the moment

Non-investment grade

BB: more prone to changes in the economy

B: financial situation varies noticeably

CCC: currently vulnerable and dependent on favorable economic

conditions to meet its commitments

CC: highly vulnerable, very speculative bonds

C: highly vulnerable, perhaps in bankruptcy or in arrears but still

continuing to pay out on obligations

D: has defaulted on obligations and Fitch believes that it will generally

default on most or all obligations

NR: not publicly rated

Short-term credit ratings

Fitch's short-term ratings indicate the potential level of default within a 12-

month period.

F1+ : best quality grade, indicating exceptionally strong capacity of obligor

to meet its financial commitment

F1: best quality grade, indicating strong capacity of obligor to meet its

financial commitment

F2: good quality grade with satisfactory capacity of obligor to meet its

financial commitment

F3: fair quality grade with adequate capacity of obligor to meet its financial

commitment but near term adverse conditions could impact the obligor's

commitments

B: of speculative nature and obligor has minimal capacity to meet its

commitment and vulnerability to short term adverse changes in financial

and economic conditions


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C: possibility of default is high and the financial commitment of the obligor

are dependent upon sustained, favorable business and economic

conditions

D: the obligor is in default as it has failed on its financial commitments.

Fitch Solutions

Launched in 2008, Fitch Solutions offers a range of fixed-income products

and professional development services for financial professionals. The firm

also distributes Fitch Ratings' proprietary credit ratings, research, financial

data, and analytical tools.

Fitch Learning

Fitch Learning is a financial services training and development firm.

Previously named 7city Learning, it was acquired by Fitch Group in January

2013. 7city Learning merged with Fitch's existing training business to form

Fitch Learning. The company offers professional certifications, tailored

training and short courses to a range of financial institutions and individuals.

Criticism

Credit rating agencies such as Fitch Ratings have been subject to criticism

in the wake of large losses in the collateralized debt obligation (CDO) market

that occurred despite being assigned top ratings by the CRAs. For instance,

losses on $340.7 million worth of collateralized debt obligations (CDO)

issued by Credit Suisse Group added up to about $125 million, despite being

rated AAA by Fitch. However, differently from the other agencies, Fitch has

been warning the market on the constant proportion debt obligations

(CPDO) with an early and pre-crisis report highlighting the dangers of

CPDO's.


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CHAPTERIII.

5. RESEARCH METHODOLOGY

6. ANALYSIS & INTERPRETATION


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RESEARCH METHODOLOGY

5.1 RESEARCH METHODOLOGY - DEFINED

a. Research is the systematic investigation to establish facts or collectinformation on a pre-decided subject.

b. Methodology is the specification of the system of principles and

techniques used in a particular discipline.

5.2 TITLE OF THE STUDY: -

Comparative Analysis of Credit Rating services offered by CRISIL,

CARE, ICRA, FITCH and to Study reasons as to why external rating

does not find favour with SME segment

5.3 DURATION OF THE STUDY: - The duration of the project training was

45 days undertaken to accomplish the title and objective.

Define the problem and research objective

Develop the research plan

Collect the information

Analyze the information

Finding & Recommendations


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5.4 OBJECTIVE OF THE STUDY

1. To evaluate the comparative analysis of various credit rating agencies viz

CRISIL, CARE, FITCH, ICRA etc.

2. To study the corporate atmosphere in the concerned banking organisation

and to gain the understanding of the conceptual knowledge pertaining to the

credit ratings.

3. To find out the probable causes and reasons as to why external credit rating

is not effective and favourable with SME segment.

5.5 TYPE OF RESEARCH DESIGN

Research design involves a general plan of how to go about answering the

research questions set keeping in mind the research objective.

5.6 METHOD OF SELECTING SAMPLE

SECONDARY SOURCES: -

For the completion of the research it was important that the secondary data

should be supplemented by primary data originated specifically for theresearch in hand. The primary data was gathered through questionnaires.

My research findings are based on information collected from filled

questionnaires. The main sources of secondary data were: -

PRIMARY DATA COLLECTION METHOD

Method used to collect primary data is: Questionnaire

QuestionnaireMethod: For the purpose of the study survey was conducted

across different areas of Jaipur city. The Questionnaire (a sample copy is

attached) was prepared according to the objectives of the project and was

administered accordingly. The data gathered through this exercise became

the primary data.


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SAMPLING ERRORS

While interpreting the results I kept in mind the potential errors. Two sources

of errors are random sampling error, which arises due to the fact that the

sample may not be a true representative of the population, and non-

sampling error which comes up because of faulty coding, untruthful

responses, respondent fatigue etc.

QUESTIONNAIRE DEVELOPMENT PROCESS

In order to gather primary data, I used structured questionnaires, prepared in

advance to elicit the necessary response from the respondents.

Questionnaires help to facilitate communication and know the perceptions of

the respondents clearly. The following points were kept in mind while

structuring the questionnaire.

Content of the questions: the questions had been framed keeping in mind

the objective of the research. Type of questions:the questionnaire consists

of open-ended, closed-ended, dichotomous and multiple-choice questions.

Further I made use of likert scale to get a more vivid response. Wording of

the questions:the questions are such that they are easy to understand and

the respondents do not have any hesitation in answering the questions.


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ASSESSMENT OF LONG TERM PERFORMANCE OF CREDIT

RATING AGENCIES IN INDIA

CRAs: Relevance and Perspective

The study is a proactive initiative, with a view to assess the preparedness of

the CRAs to communicate signals and reduce the informational asymmetries

that generally exist between issuers and investors. CRAs have been rating

instruments and subjecting them to periodic review, sometimes necessitating

a transition to a lower or higher grade. The timeliness of the transition is also

a matter of informational asymmetry.

Thus far, CRAs have obtained the approval of SEBI, giving them the status

of approved rating agencies. The RBI also has put regulations in place with

reference to credit rating agencies and credit information companies. There

are five Credit Rating Agencies registered with SEBI, viz. CRISIL, ICRA,

CARE, Fitch and Brickworks. Of this, CRISIL has been the oldest, having

been in operation since 1988 followed by ICRA (1991), CARE (1994), Duff &

Phelps, subsequently taken over by Fitch (1999) and Brickworks (2008).

This makes it an opportune time to assess the quality of services that the

CRAs have been rendering to the investing community in risk mitigation.

SEBI put in place the Regulations for CRAs in 1999 this has been followed

by a Code of Conduct for CRAs.

The desire for this study is truly proactive since its pre-dates the outbreak of

the sub-prime type of crisisof a scale and magnitude witnessed in USA and

Western Europe. In those countries, CRAs are facing the heat for the high

ratings for complex structures, laced with enhancements, through

guarantees, by entities that ultimately did not have sufficient risk capital. This

left several i

Project Report on Credit Rating Agency

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Transcript of Project Report on Credit Rating Agency