Financial Markets and Institutions

Module I – Pre-reading material

Credit Rating Agencies in India
A. Introduction:
A credit rating agency (CRA) is a company that rates debtors on the basis of their ability
to pay back their interests and loan amount on time and the probability of them
defaulting. These agencies may also analyse the creditworthiness of debt issuers and
provide credit ratings to only organisations and not individuals consumers. The assessed
entities may be companies, special purpose entities, state governments, local
governmental bodies, non-profit organisations and even countries. Individual customers
are rated by specialised agencies known as credit bureaus that provide a credit score to
every customer based on his/her financial history.

Credit rating agencies in India do not have a distant past. They came into existence in the
second half of the 1980s. As of now, there are six credit rating agencies registered under
SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Ratings
provided by these agencies determine the nature and integrals of the loan. Higher the
credit rating, lower is the rate of interest offered to the organisation.

Some of the CRAs in India are as under:

1. CRISIL
CRISIL stands for Credit Rating Information Services of India Limited and it was the
first credit rating agency set up in India in 1987. Today, CRISIL has become a global
analytical company that rates companies, researches the markets and provides risk
and policy advisory services to its clients. At the time of incorporation, the agency
was promoted by ICICI Limited, UTI and many such financial institutions. The
agency started operations in 1988.

CRISIL is headquartered in Mumbai. CRISIL provides independent opinion and

efficient solutions by performing data analysis and research. It has a strong track
record of growth and innovation. CRISIL has expanded its business operation to USA,
UK, Poland, Argentina, Hong Kong, China and Singapore apart from India. The
majority shareholder of CRISIL is Standard & Poor’s, one of the biggest credit rating
agencies of the world.

CRISIL works with various governments and policy-makers in India and other
developing nations to enhance and improve the infrastructure and meet the demands

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 of the region. The agency has rated around 5180 SMEs in India and has issued in
excess of 10,000 SME ratings overall. CRISIL commands revenue of Rs 1,110 Crores
with a net income of Rs 298 Crores and an operating income of Rs 320 Crores.

2. CARE
Credit Analysis and Research limited was established in 1993 and since then it has
gone on to become India’s second largest credit rating agency. It was promoted by
Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) Bank, Canara
Bank and other financial institutions. CARE has its headquarters in Mumbai and
regional offices in New Delhi, Bangalore, Chennai, Hyderabad, Ahmedabad and
Kolkata. CARE has the primary function to perform rating of debt instruments, credit
analysis rating, loan rating, corporate governance rating, claims-paying ability of
insurance companies, etc. It also grades construction entities and courses undertaken
by maritime training institutions. Ratings provided by CARE include financial
institutions, state governments and municipal bodies, public utilities and special
purpose vehicles.

The Information and Advisory Service Department of CARE prepares credit rating
and reports on requests from business partners, banks and other financial entities. It
also conducts sector-based studies and provides necessary advisories for valuation,
financial restructuring and credit appraisal systems. CARE conducts an extensive
research and rates SMEs based on their financial health. These ratings are provided
under 8 levels where CARE SME 1 signifies excellent financial health with negligible
risks and CARE SME 8 rank signifies lowest credit quality with highest credit risk.

3. ICRA
Originally named as Investment Information and Credit Rating Agency, the
organisation was set up in 1991. It was a joint venture of Moody’s and Indian financial
and banking service organisations. It was renamed to ICRA Limited and was listed in
the Bombay Stock Exchange and National Stock Exchange in April 2007. ICRA, which
is an independent professional corporate investment information and credit rating
and advisory agency, is headquartered in Gurugram, Haryana.

ICRA assigns corporate governance rating, performance ratings, grading and

provides ranking to mutual funds, hospitals and construction and real estate
companies. The agency generates revenue of Rs 2.28 Billion. ICRA has a major focus
on the MSME sector. To cater to its clients, the dedicated team of professionals have
developed a linear scale for the concerned sector. It helps the agency to benchmark

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 peers quite easily. ICRA ratings are used to analyse the credit risk in India. It does not
cater to the international companies and organisations.

4. SMERA
Small and Medium Enterprises Rating Agency of India is one such agency that
functions exclusively for the sector it was formed for, i.e. Micro, Small and Medium
Enterprises. This agency was founded in 2005 by Small Industries Development Bank
of India (SIDBI), Dun and Bradstreet Information Services India Private Limited
(D&B) and various public, private sector and other MNC banks of India. The agency
has its headquarters in Mumbai. SMERA has been registered with SEBI as a credit
rating agency and accredited by Reserve Bank of India in 2012. It is an external credit
assessment institution (ECAI). SMERA rates bank loans under Base II guidelines.
Grading of various instruments like IPO, bonds, commercial papers, NCDs, fixed
deposits, security receipts, etc. is done by SMERA which can be used by all banks for
capital adequacy requirements calculation as authorised by the RBI.

SMERA pioneered SME rating in India and till date it has rated more than 38,000
enterprises. Financial institutions highly consider SMERA ratings before approving
or lending funds.

5. ONICRA
ONICRA Credit Rating Agency is the private rating agency established by Sonu
Mirchandani under ONIDA Finance. It is headquartered in Gurugram, Haryana. The
agency provides credit ratings, conducts risk assessment and provides analytical
solutions to individuals, corporates and MSMEs. The solutions offered by the agency
helps organisations take informed decisions about lending funds to individuals,
MSMEs and other organisations. After its establishment in 1993, the agency has
gained expertise in assessing micro, small and medium enterprises. It is one of the
seven agencies licensed by the National Small Industries Corporation (NSIC) for the
rating of SMEs. Onicra provides grading services as well. Its grading services include
education grading, healthcare grading, solar energy grading and APMC grading.
Onicra has signed MoUs with 16 banks and NBFCs in India to provide interest rate
concession to up to 1% to top MSME units. It performs a wide range of tasks such as
accounting, finance, analytics, customer relations and back-end management. More
than 2500 SMEs have been rated by Onicra in the past two and a half decades.

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 6. FITCH India
India Ratings and Research (Ind-Ra) is a credit rating agency that provides time-
bound, accurate and prompt credit opinions. It is 100% owned subsidiary of the Fitch
Group. Ind-Ra covers corporate issuers, financial institutions, banks, insurance
companies, urban local bodies, structured finance and project finance. Fitch‘s Ind-Ra
is headquartered in Mumbai and has branch offices in Ahmedabad, Bengaluru,
Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by Securities and
Exchange Board of India, National Housing Bank and the Reserve Bank of India. Fitch
is a major financial information service provider and rating agency having its
operations in more than 30 countries across the globe. It checks credit capacity of
global leaders in all industries.

B. Importance of Credit Rating

1. When a credit rating agency upgrades a company’s rating, it suggests that the
company has a high chance of repaying the credit. On the other hand, when the credit
rating gets downgraded it suggests the company’s ability to repay has reduced.
2. Once the company’s credit rating has been downgraded, it becomes difficult for the
company to borrow money. Lenders will consider such companies as high-risk
borrowers as they have a higher probability of turning into a defaulter. Financial
institutions will hesitate to lend money to the companies with low credit rating.
3. The importance of credit rating can be explained as under:
4. Credit rating does a qualitative and quantitative assessment of a borrower's
creditworthiness.
5. It allows investors to make a sound investment decision after taking into
consideration the risk factor and past repayment behaviour. In other words, it
establishes a relationship between risk and return.
6. In the case of the companies, credit ratings help them improve their corporate image.
It is useful especially for companies that are not popular.
7. The credit rating acts as a marketing tool for companies and also as a resource that is
helpful at the time of raising money. It reduces the cost of borrowing and helps in the
company’s expansion.
8. Lenders such as banks and financial institutions will offer loans at a lower interest
rate if the entity has a higher credit rating.
9. Credit rating encourages better accounting standards, detailed information
disclosure, and improved financial information.

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C. How do credit rating agencies work in India?
Each rating agency has its own method to calculate credit ratings. Agencies rate entities
including companies, state governments, non-profit organisations, countries, securities,
special purpose entities, and local governmental bodies. At the time of calculating the
rating, credit rating agencies take into consideration several factors like the financial
statements, level and type of debt, lending and borrowing history, ability to repay the
debt, and past debts of the entity before rating them. Once a credit rating agency rates the
entities, it provides additional inputs to the investor following which the investor
analyses and takes a sound investment decision.

Credit ratings that are given to the entities serve as a benchmark for financial market
regulations. However, it should be noted that the ratings should not be considered as
advice for investors and instead should be used as a tool to make a sound decision.

D. Different credit rating scales:

An individual's creditworthiness is represented by their credit score. Similarly, a
company’s creditworthiness is represented by the credit rating symbols assigned to them
by the agencies. Credit rating agencies rate Non-convertible debentures (NCD), company
deposits, and fixed deposits, among others. Some of the credit rating symbols offered by
rating agencies for long-term and mid-term debt instruments are as under.

India
BrickWork
Rating Scale Ratings & CRISIL CARE ICRA
Ratings
Research

Highest safety:
Lowest risk of CRISIL CARE ICRA
IND AAA BWR AAA
turning into a AAA AAA AAA
defaulter

High safety: Very CRISIL CARE ICRA

IND AA BWR AA
low credit risk AA AA AA

CRISIL CARE ICRA

Low risk IND A BWR A
A A A

Moderate safety:
CRISIL CARE ICRA
moderate credit IND BBB BWR BBB
BBB BBB BBB
risk

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 India
BrickWork
Rating Scale Ratings & CRISIL CARE ICRA
Ratings
Research

Moderate risk:
CRISIL CARE ICRA
moderate risk of IND BB BWR BB
BB BB BB
default

High risk: high risk CRISIL CARE ICRA

IND B BWR B
of default B B B

Very high risk:

CRISIL CARE ICRA
Very high risk of IND C BWR C
C C C
default

Default:
Instruments are
CRISIL CARE ICRA
already in default IND D BWR D
D D D
or on the verge of
default

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