CREDIT RATING AGENCIES IN INDIA

AUTHORED BY - MR. OM SRIVASTAVA & MS. RISHIKA PANDEY

Students of B. Com LL. B (Hons.) Semester IX, Amity University Kolkata

 

 

ABSTRACT

Credit ratings serve as a lens through which investors and lending institutions assess the ability of a borrowing entity to meet its debt obligations. Evaluation stretches beyond just a simple score; it reflects the potential risk involved in lending money to individuals, companies, or even governments. While many might consider credit ratings solely in the context of bonds and loans, the scope of credit rating agencies (CRAs) is much broader today. They analyse everything from financial products to overall economic landscapes, offering valuable insights into the financial health of various entities. This article explores the significance of CRAs in India, details their functions, and highlights the key agencies operating within the country.

 

Keywords: Credit Rating Agencies, India, financial markets, creditworthiness, investment, S&P, CRISIL, ICRA, credit ratings

 

INTRODUCTION

Credit rating systems are key components of financial markets, providing valuable assessments of the credit worthiness of institutions seeking financing. In India, CRISIL (Credit Rating Information Services of India Limited) and ICRA (earlier known as Investment Information and Credit Rating Agency of India Limited) stand out as major lending agencies, offering comprehensive scrutiny investors, lenders and issuers, strategies, regulatory framework, implications and challenges are explored.

 

The growth of the credit rating industry worldwide dates back to the early 20th century, with the establishment of agencies such as Moody's and Standard & Poor's in the United States in India, which was liberalized in the 1990s, the need for a reliable credit management mechanism needs to exposed. CRISIL emerged in 1987 as the first credit rating agency in India, supported in partnership with financial institutions and leading government agencies. Soon after, ICRA was established by financial institutions and major commercial banks in 1991, reflecting the growing demand for independent credit rating services in the evolving Indian economic environment in the revealed. The growth of the credit rating industry worldwide dates back to the early 20th century, with the establishment of agencies such as Moody's and Standard & Poor's in the United States, in India which was liberalized in the 1990s, the need for a reliable credit management mechanism needs to be exposed. CRISIL emerged in 1987 asthe first credit rating agency in India, supported in partnership with financial institutions and leading government agencies. Soon after, ICRA was established by financial institutions and major commercial banks in 1991, reflecting the growing demand for independent credit rating services in the evolving Indian economic environment in the revealed.

 

To effectively assess credit risk, CRISIL and ICRA use robust methodologies in line with Indian market dynamics. Their methods typically combine quantitative analysis with qualitative analysis, incorporating factors such as economic performance, industry metrics, corporate efficiency, and regulatory environment CRISIL and ICRA conduct comprehensive due diligence including site visits, interactions with management, review of financial statements to gather relevant information s and reliable credit management thereby helping investors and lenders to build the right decision. The regulatory framework governing credit management companies in India is regulated by the Securities and Exchange Board of India (SEBI). SEBI mandates registration and compliance with rules and regulations, ensuring strict standards and guidelines are followed. The Credit Rating Agency Regulations, 1999, prescribe rating procedures, disclosure, governance and standards of conduct for credit rating agencies. SEBI’s regulatory oversight is aimed at promoting transparency, integrity and financial safety in dealing with loans, thereby enhancing confidence in the financial markets.

 

The loans by means of CRISIL and ICRA have vital implications for creditors, investors, regulators, and other stakeholders. Higher credit rankings increase the borrower’s confidence and get admission in banks, lowering borrowing costs. Investors depend on credit rankings to assess credit score chance and make funding choices. Regulators use credit rankings to evaluate the financial balance and chance of regulated entities. However, credit downgrades or adjustments can affect market sentiment and borrowing expenses, emphasizing the significance of fair and accurate credit score scores.

 

Lending agencies like CRISIL and ICRA stumbled upon precarious situations in their operations. These include coping with conflicts of interest, ensuring the accuracy and timeliness of scoring, managing compliance, and adjusting for ongoing market developments Furthermore, optional a they have to continuously innovate and improve strategies to absorb risk and trends pose ongoing challenges to credit rating agencies.

 

Furthermore, increasing transparency, accountability and trust among stakeholders remains a priority in terms of increased scrutiny of credit scoring practices globally.

 

The background of the CRISIL and ICRA lending frameworks reflects their development, mechanisms, regulatory framework, implications and challenges. These agencies play a vital role in improving capital allocation, risk management and understanding investor confidence in the Indian financial markets as well as improving credit quality for independents enforcement can successfully navigate complex credit risk assessments, contributing to the stability and certainty of the financial system.

 

NECESSITY OF CREDIT RATING

The necessity of credit rating lies in its role as an informed opinion provided by independent professionals. This opinion is derived from a thorough analysis of relevant factors, which proves invaluable for investors in making sound investment decisions. Additionally, credit rating aids debt issuers in accurately pricing their offerings and expanding their investor base. Regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) utilize credit ratings to set eligibility criteria for certain financial instruments, ensuring a standardized approach to risk assessment.

 

Moreover, credit rating fosters a culture of quality consciousness in the market over time. By establishing a correlation between the quality of debt and credit ratings, it helps build trust and credibility in business relationships. For instance, companies with high credit ratings find it easier to secure loans from banks and other financial institutions, whereas those with poor ratings face greater challenges in accessing financing.

 

In essence, credit rating serves as a cornerstone of informed decision-making, risk management, and fostering trust within the financial ecosystem. It provides stakeholders with a reliable measure of creditworthiness, facilitating smoother transactions and promoting market efficiency.

 

FORMATION OF CREDIT RATING SYSTEM IN INDIA

India became a pioneer among developing countries by establishing its first credit rating agency, Credit Rating Information Services of India Limited (CRISIL), in 1988. This was followed by the launch of the Investment Information and Credit Rating Agency of India Limited (ICRA) in 1990, and Credit Analysis and Research Limited (CARE) in 1993. The credit rating framework was further strengthened during the 1990s when the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) mandated credit ratings for the issuance of commercial papers (CPs) and specific types of debentures and debt instruments.

 

India’s credit rating industry today comprises several key players, including:

• CRISIL: Credit Rating Information Services of India Limited
• ICRA: Investment Information and Credit Rating Agency of India Limited
• CARE: Credit Analysis and Research Limited
• FITCH: Fitch Ratings India Private Limited

 

RATING PROCESS

The process of credit rating typically starts when a company formally requests a credit rating agency (CRA) to rate its issued obligations. This kicks off a series of steps that are quite standard across major credit rating agencies.

1. Request Receipt and Agreement: The process begins with the company formally requesting a rating from a CRA. An agreement is then established between the agency and the company, outlining terms such as confidentiality, the company's right to accept or decline the rating, and the provision of necessary information.
2. Assignment to Analytical Team: Upon receiving the request, the CRA assigns the task to an analytical team comprising experts in the relevant industry. This team is responsible for conducting the rating assessment.
3. Information Gathering: The analytical team collects necessary information from the company, often guided by a list of requirements. This includes financial data, cash flow projections, and other relevant information crucial for analysis.
4. Plant Visit and Management Meeting: To gain deeper insights into the company's operations, the analytical team may visit the company's facilities and engage in discussions with management. These interactions help assess various factors such as production processes, equipment condition, and overall business strategies.
5. Presentation of Findings: Following analysis, the team presents their findings to an internal committee comprising senior analysts. All relevant issues influencing the rating are identified and discussed, leading to the formation of an opinion on the rating.
6. Rating Committee Meeting: The final rating decision is made during a rating committee meeting, where a composite assessment of all relevant factors is conducted. This process ensures that key issues are given due consideration.
7. Communication of Decision: The assigned rating grade, along with the rationale behind it, is communicated to the company. Ratings that are not accepted may be revised or rejected, with confidentiality maintained throughout.
8. Public Dissemination: Accepted ratings are disseminated to the public through printed reports by the credit rating agencies, ensuring transparency in the market.
9. Monitoring for Changes: Once a rating is accepted, CRAs monitor it throughout the instrument's lifespan. Any significant changes in the company's circumstances or industry trends are regularly reviewed, with updates on rating changes made public through published reports.

In essence, this process ensures that credit ratings are assigned based on thorough analysis and evaluation, providing valuable information to investors and market participants.

 

RATING METHODOLIGIES FOLLOWED BY CREDIT

RATING AGENCIES

Credit rating agencies play a pivotal role in financial markets by evaluating the creditworthiness of entities and financial instruments. However, the rating process is inherently subjective, and each agency applies its own unique methodology. This subjectivity arises from the need to consider multiple factors—balancing comprehensiveness without making the process overly complex. Including too many variables can complicate the analysis, while considering too few might overlook essential aspects. Below is a breakdown of the broad parameters CRAs assess during the rating process.

 

Financial Risk

Financial risk focuses on an entity’s ability to meet both short-term and long-term obligations. This involves assessing the following:

• Financial Ratios: Leverage, solvency, and profitability ratios (such as debt-equity ratio, return on equity, and interest coverage ratio).
• Earnings Performance: Evaluates stability and sustainability of revenue and profit.
• Liquidity: Measures the entity's ability to meet near-term obligations through cash and other liquid assets.
• Future Prospects: Projections based on expected market performance and economic conditions.

 

Business Risk

This parameter reflects the industry conditions and the company’s ability to remain competitive. Key aspects include:

• Sectoral Analysis: Identifying trends and risks specific to the industry or sector.
• Expansion Potential: Assessing the entity’s ability to grow and capture market opportunities.
• Demand Conditions: Evaluating market demand for the company's products or services.
• Operational Efficiencies: Analyzing cost management and productivity levels.

 

Management Risk

A company’s management plays a critical role in strategic decision-making and corporate governance. This parameter involves:

• Experience and Expertise: The track record of the management team.
• Independent Directors: Evaluating the presence and role of independent board members to ensure transparency.
• Corporate Governance Practices: Adherence to best practices and ethical standards.
• Business Outlook: Management’s ability to plan for the future and respond to market changes.
• Attrition Rates: High employee turnover may indicate management inefficiencies.

 

Project Risk

When rating projects, CRAs analyse specific factors that influence project outcomes:

• Project Nature and Scope: Complexity, sector, and project objectives.
• Timeline: Evaluating whether the project is on schedule and identifying potential delays.
• Funding Requirements: Assessing the total capital needed to complete the project.
• Source of Funds: Evaluating how funding is arranged, including equity, loans, or grants.

 

Default Risk

This parameter examines the likelihood of an entity defaulting on its financial obligations. Key indicators include:

• Historical Performance: Past defaults or delays in repayment.
• Liquidity Position: Availability of liquid assets to manage obligations.
• Financial Statements: Comprehensive evaluation of financial health.
• Contagion Risk: Assessing how risks in connected sectors or markets might impact the entity’s performance.

 

Geographical Analysis

The location of operations plays a crucial role in determining operational risks. Factors assessed include:

• Area of Operations: Whether the entity operates locally, nationally, or internationally.
• Resources Available: Access to raw materials, human resources, and infrastructure in the operating area.

 

Regulatory and Competitive Environment

Compliance with laws and regulations, as well as competitive dynamics, greatly influences ratings. Important aspects include:

• Regulatory Certainty: The degree to which laws are stable and predictable.
• Legal Obligations: Compliance with mandatory guidelines and standards.
• Competitive Dynamics: Evaluating the nature and intensity of competition.
• Market Shifts: Assessing the impact of changes in consumer preferences or market demand.

 

Fundamental Analysis

This parameter assesses the financial fundamentals of the entity to provide deeper insights into its stability.

• Profitability: Evaluation of profit margins and return on assets (ROA).
• Asset Quality: Checking the quality and performance of assets owned by the entity.
• Maturity Profile of Liabilities: Analysing whether liabilities are structured to avoid liquidity issues.
• Sensitivity to Interest and Taxes: Examining how changes in interest rates or tax policies could affect financial performance.

 

REGULATIONS GOVERNING CREDIT RATING AGENCIES IN INDIA

Credit Rating Agencies (CRAs) in India operate under a regulatory framework designed to ensure the reliability of their ratings and mitigate risks of conflicts of interest. These agencies play a crucial role in financial markets by assessing the creditworthiness of companies, governments, and financial instruments. However, their effectiveness depends not only on the quality of their methodologies but also on the robustness of regulatory oversight. The primary regulator for CRAs in India is the Securities and Exchange Board of India (SEBI), which introduced the SEBI (Credit Rating Agencies) Regulations, 1999, establishing a comprehensive framework for monitoring and regulating their activities.

 

Over time, the regulatory framework has evolved through amendments to address emerging challenges, particularly following high-profile financial crises. Complementing SEBI’s oversight, the Reserve Bank of India (RBI) and other financial regulators like the IRDAI and PFRDA also monitor specific aspects of credit rating activities to ensure systemic stability. Below is a detailed exploration of the regulations governing CRAs in India.

 

SEBI (Credit Rating Agencies) Regulations, 1999

The 1999 regulations marked the formal beginning of CRA oversight in India, aimed at creating a framework for accountability, transparency, and consistency in credit ratings. These regulations cover several critical areas:

• Code of Conduct: CRAs are required to adhere to high standards of integrity and independence. They must avoid conflicts of interest and ensure that their operations are free from external influence.
• Monitoring and Disclosure of Ratings: CRAs are mandated to continuously monitor and update their ratings to reflect any significant changes in an entity’s financial health. These updates must be disclosed promptly to ensure that investors have access to the latest information.
• Fee Structures and Transparency: The regulations require CRAs to disclose their fee structures and compensation arrangements to avoid biases in their ratings. The goal is to prevent ratings from being influenced by the level of fees paid by issuers.
• Management of Conflicts of Interest: To ensure the independence of ratings, CRAs are restricted from rating securities issued by their promoters or connected entities.
• Shareholding and Governance: CRAs must disclose their ownership patterns, especially when promoters or significant stakeholders have a vested interest in the entities being rated.

 

Several amendments to the 1999 regulations have been introduced over the years to address emerging risks and challenges. These amendments were shaped by both domestic events and global financial developments:

1. 2006 Amendment:

This amendment focused on enhancing the review process. CRAs were required to closely monitor credit ratings and ensure timely upgrades or downgrades. The objective was to make the rating process more dynamic and reflective of real-time market conditions.

 

1. 2010 Amendment (Post-Global Financial Crisis):

The 2008 global financial crisis revealed that many CRAs failed to predict deteriorating credit conditions. In response, SEBI revised the regulations in 2010 to introduce more stringent monitoring and reporting norms. CRAs were instructed to review ratings periodically and publish justifications for any significant changes.

 

1. 2011 Amendment:

This reform focused on curbing rating shopping, a practice where issuers seek favorable ratings from multiple CRAs. SEBI made it mandatory for CRAs to disclose all ratings, including those that the issuers declined to accept, on their websites. This transparency measure ensured that investors could access complete information about an entity's creditworthiness.

 

1. 2018 Amendment (Post-IL&FS Crisis):

The collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018, despite having investment-grade ratings, exposed major flaws in CRA methodologies. In response, SEBI introduced stricter norms. CRAs were required to factor liquidity risks and asset-liability mismatches more rigorously into their ratings. Additionally, SEBI imposed penal provisions: if more than 10% of ratings fail to reflect the entity's actual credit quality within a financial year, penalties such as suspension of authorization or restrictions on accepting new debt ratings can be imposed.

 

Role of RBI in CRA Regulation

The Reserve Bank of India (RBI) plays a complementary role in overseeing CRAs, particularly when it comes to their involvement with financial institutions and debt restructuring. To prevent conflicts of interest, the RBI has prohibited CRAs or their affiliate companies from offering consultancy services to companies undergoing debt restructuring. This measure ensures that CRAs remain impartial when assigning ratings for companies seeking sustainable debt solutions.

 

In addition, RBI provides guidelines on the eligibility criteria for credit ratings of instruments used by banks and other financial institutions. These measures aim to protect the stability of the financial system by ensuring that ratings accurately reflect the risk associated with different financial instruments.

 

Involvement of IRDAI and PFRDA

Beyond SEBI and RBI, the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) also play a significant role in CRA regulation. Insurance companies and pension funds rely heavily on CRAs to determine the creditworthiness of investments.

 

Both regulators ensure that these entities only invest in financial instruments with high credit ratings, underscoring the importance of reliable and unbiased ratings.

 

RATING SYMBOLS AND THEIR SIGNIFICANCE

Credit rating agencies use various symbols, such as AAA, AA, BBB, B, C, and D, to indicate the level of safety associated with financial instruments. These symbols help investors assess the risk of timely payment of interest and principal. Ratings are categorized into three main groups: high investment grades, investment grades, and speculative grades. Typically, these grades are further divided into 14 to 15 sub-categories to offer a more nuanced view of risk.

Plus (+) and minus (-) signs are often added to these symbols to reflect slight variations in creditworthiness within the same category. For example, FAA- suggests a slightly stronger rating than FA+. Additionally, the ratings assigned to various financial instruments issued by the same company may differ based on their individual risk profiles.

 

Categories of Ratings

High Investment Grades

AAA: Represents the highest level of safety regarding timely interest and principal payments. Issuers with this rating exhibit strong financial health, remaining stable even in adverse economic conditions.

AA: Indicates very high safety, with only a marginal difference from AAA. Timely payment is highly likely, and the issuer is only minimally exposed to risks.

A: Reflects adequate safety, though the issuer may be somewhat vulnerable to unfavourable economic changes, which could impact its ability to meet payment obligations.

 

Investment Grade

BBB: Denotes moderate safety in ensuring timely payments. Although not highly risky, the financial stability of such instruments could fluctuate under stress, pushing them closer to speculative territory.

 

Speculative Grades

BB: Suggests inadequate safety, with the issuer's ability to meet payments being uncertain. External factors can quickly affect the financial capacity to honour obligations.

B: Reflects high risk, where adverse conditions could impair the issuer’s ability or willingness to make timely payments.

C: Indicates substantial risk, suggesting that default is highly likely unless conditions improve.

D: Signifies default, meaning the issuer has failed to meet payment obligations for interest or principal.

 

These ratings reflect the agency's current opinion on the risk associated with a specific instrument. However, they are not recommendations to buy or avoid an investment, nor do they serve as an overall assessment of the issuing company’s financial health. Each rating is linked to a particular financial instrument, rather than the company as a whole.

 

CREDIT RATING INFORMATION SERVICES OF INDIA LIMITED

CRISIL, originally known as Credit Rating Information Services of India Limited, stands out as India's premier credit rating agency, with its inception dating back to 1987. Through the years, it has morphed into a global juggernaut in analytics, providing a gamut of services ranging from corporate ratings to market intelligence and risk advisory.

 

Founded under the patronage of esteemed financial giants like ICICI Limited and UTI, CRISIL embarked on its journey in 1988 from its headquarters in Mumbai. Revered for its impartiality and operational excellence, CRISIL specializes in comprehensive data analysis and research, furnishing invaluable insights to its clientele.

 

With an illustrious history of expansion and innovation, CRISIL has transcended geographical boundaries, establishing its presence in key international markets such as the USA, UK, Poland, Argentina, Hong Kong, China, and Singapore. Noteworthy is its majority ownership by Standard & Poor's, a colossus in the global credit rating arena.

 

Beyond its commercial pursuits, CRISIL actively engages with governments and policymakers across India and emerging economies, actively contributing to infrastructural development and meeting regional needs. Its extensive portfolio encompasses over 5180 SME ratings in India alone, with a cumulative issuance exceeding 10,000 SME ratings.

 

From a financial standpoint, CRISIL flaunts formidable figures, with a staggering revenue of Rs 1,110 Crores, coupled with a net income of Rs 298 Crores and an operating income of Rs 320 Crores. As a dependable ally in the financial landscape, CRISIL continues to wield considerable influence, steering economic growth and fortifying stability on both national and international fronts.

 

ACHIEVEMENTS OF CRISIL

• CRISIL was the world’s first agency to develop criteria for rating instruments carryingpartial guarantees.
• CRISIL was the first agency in India to develop criteria for rating banks, stategovernments, and urban local bodies.
• CRISIL introduced ratings for structured finance instruments in India.
• CRISIL also introduced ratings of healthcare institutions on quality of delivered care.

Other major innovations include the creation of a software model for assessment and measurement of borrower risks, which has been productized and sold to major Indian banks and institutions.

 

SERVICES OFFERED BY CRISIL

CRISIL is the pre-eminent provider of services in the areas of:

• Credit Rating: Having rated over 1800 companies and 3600 instruments amounting toa debt volume of over 62.11 billion, since its inception in 1987 the rating division workspeaks for itself.
• CRISIL Advisory Services: The consultancy division of CRISIL-CAS offers specialized advisory services in the areas of energy, transportation and urban infrastructure, economy, capital markets, banking and finance, e- consultancy and the like.
• CRISIL Training Services: “Pass on What You Have Learnt” in the mantra of this division. CRISIL has thus leveraged its expertise in assessing credit and investmentrisk as well as its other analytical skill to provide a spectrum of standardize and customized training programs.

 

In addition to above CRISIL also offers a comprehensive range of integrated product and services such as Real Time news, Analyzed Data, Incisive Insights and Opinion and Expert Advice to enable investors, issuers and policy makers to take financial decisions. CRISL delivers opinions and selections that:

• Helps clients to mitigate and manage their business and financial risk
• Make market function better

 

INVESTMENT CREDIT RATING AGENCY OF INDIA

ICRA was established on January 16, 1991, as an independent credit rating agency offering investment information and credit rating services. It was founded with the support of the Industrial Finance Corporation of India, in collaboration with other prominent investment institutions, commercial banks, and financial service firms. The agency began its operations on August 31, 1991. ICRA’s core objective is to provide investors and creditors with reliable information and insights to assess the credit risks linked to debt instruments or financial obligations.

 

ICRA's credit ratings represent its current assessment of the relative credit risks associated with specific debt obligations or issues. These ratings are assigned using a national credit rating scale, applicable to Indian Rupee-denominated debt instruments, and reflect credit risk rankings within the Indian market. It is important to note that ICRA’s ratings are not intended for cross-country comparisons but are focused solely on evaluating credit risks within India.

 

For investment-grade instruments, ICRA’s ratings primarily indicate the likelihood of default, reflecting the probability that the debt obligation may not be fulfilled as agreed. In contrast, other ratings, including those for structured finance instruments, assess both the probability of default and the potential severity of losses in the event of default.

 

In addition to credit ratings, ICRA offers Corporate Governance Ratings and provides performance ratings, gradings, and rankings across various sectors, including mutual funds, construction firms, and healthcare institutions.

 

ACHIEVEMENTS OF ICRA

ICRA has accomplished a few noteworthy breakthroughs in its travel as a driving credit rating organization, contributing to the improvement and solidness of the budgetary markets. Here are a few of ICRA's striking achievements:

1. Setting up Validity: Since its beginning, ICRA has built a notoriety for giving dependable and fair credit appraisals, gaining the believe of financial specialists, backers, controllers, and other partners in the money related community.
2. Showcase Authority: ICRA has developed as a advertise pioneer in India, advertising a comprehensive extend of rating administrations over different segments, counting corporate, budgetary, and foundation, among others.
3. Worldwide Development: Over the long time, ICRA has extended its impression past India, setting up its nearness in key universal markets. This worldwide extension has made a difference ICRA upgrade its capabilities and serve a broader client base.
4. Inventive Arrangements: ICRA has been at the bleeding edge of development in the credit rating industry, presenting modern strategies and approaches to evaluate credit hazard viably. Its inventive arrangements have contributed to way better chance administration hones in the budgetary markets.
5. Commitment to Approach Detailing: ICRA's investigate and examination have played a critical part in forming arrangement choices and administrative systems in India. Its bits of knowledge have been instrumental in tending to key challenges and cultivating development in the budgetary sector.
6. Supporting Financial Development: By giving straightforward and solid credit appraisals, ICRA has encouraged capital arrangement and venture, subsequently supporting financial development and advancement in India and beyond.
7. Acknowledgment and Grants: ICRA has gotten acknowledgment and honors for its fabulousness in credit rating and inquire about. These grants emphasize ICRA's commitment to keeping up tall measures of quality and judgment in its services.
8. Partner Engagement: ICRA effectively locks in with partners through different channels, counting speculator outreach programs, industry classes, and distributions. This engagement makes a difference ICRA way better get it the needs of its clients and guarantees that its administrations stay significant and impactful.

Overall, ICRA's accomplishments reflect its commitment to brilliance, advancement, and benefit to the monetary community, situating it as a trusted accomplice in driving maintainable development and solidness in the markets.

 

SERVICES OFFERED BY ICRA

ICRA offers a different run of administrations custom-made to meet the advancing needs of its clients and partners in the budgetary markets. Here are a few of the key administrations given by ICRA:

1. Credit Evaluations: ICRA specializes in giving autonomous credit appraisals for different obligation disobedient, counting corporate bonds, commercial paper, bank advances, organized back rebellious, and metropolitan bonds. These appraisals offer profitable experiences into the financial soundness and dangers related with diverse backers and obligation obligations.
2. Hazard Arrangements: ICRA offers hazard appraisal and relief arrangements to offer assistance clients oversee their presentation to credit, advertise, and operational dangers. These arrangements incorporate hazard counselling administrations, hazard modelling, push testing, and situation investigation, among others.
3. Inquire about and Analytics: ICRA conducts in-depth investigate and examination over a wide run of divisions and businesses, giving important advertise insights and experiences to its clients. It inquiries about reports cover financial patterns, industry viewpoints, administrative improvements, and sector-specific analysis.
4. Corporate Administration Evaluations: ICRA assesses the corporate administration hones of companies and allocates administration evaluations based on variables such as board structure, straightforwardness, responsibility, and shareholder rights. These evaluations offer assistance financial specialists evaluate the quality of administration hones and make educated speculation decisions.
5. Execution Evaluations: ICRA gives execution evaluations for shared reserves, development companies, clinics, and other substances. These appraisals assess components such as monetary execution, operational productivity, and administration adequacy, making a difference partners benchmark execution and recognize ranges for improvement.
6. Evaluating and Rankings: ICRA offers reviewing and positioning administrations for different substances, counting shared stores, instructive teach, and framework ventures. These evaluations offer assistance partners assess the quality and execution of substances relative to their peers and industry benchmarks.
7. Counselling and Admonitory: ICRA gives counselling and counselling administrations to offer assistance clients address particular challenges and capitalize on openings in the money related markets. Its group of specialists offers customized arrangements in regions such as credit chance administration, venture methodology, administrative compliance, and commerce transformation.
8. Preparing and Capacity Building: ICRA conducts preparing programs and capacity-building activities to improve the information and abilities of experts working in the money related industry. These programs cover a wide run of themes, counting credit investigation, chance administration, administrative compliance, and budgetary modelling.

 

LIMITATIONS OF CREDIT RATING IN INDIA

The credit rating industry in India experienced rapid growth during the 1990s, with new agencies entering the market and intensifying competition. However, despite its growing popularity, the credit rating system faces several limitations that undermine its effectiveness.

1. Questionable Credibility: The reliability of ratings has often been challenged, as some companies that received top-tier ratings later underperformed or even defaulted. This raises doubts about the accuracy and effectiveness of the rating process.
2. Frequent Revisions: Credit rating agencies frequently upgrade and downgrade ratings, creating confusion among investors. Such volatility in assessments can erode trust in the expertise of these agencies and make it difficult for investors to make informed decisions.
3. Lack of Universal Acceptance: Nearly one-third of the ratings provided by credit rating agencies are not accepted by clients. This has led to a competitive dilution of rating standards, as agencies try to attract more business. A better practice would involve mandatory dual ratings for financial instruments, requiring issuers to publish both ratings in prospectuses, advertisements, and newspapers to offer greater transparency.
4. No Independent Auditing: Rating agencies rely solely on the information provided by the issuer without conducting independent audits. If the data provided is inaccurate or incomplete, the quality of the rating becomes compromised, misleading investors.
5. Inconsistent and Biased Ratings: In some cases, a credit rating agency may assign high ratings to certain instruments of a company while simultaneously downgrading other instruments issued by the same entity. This inconsistency can appear biased and causes confusion, resulting in investors losing confidence and incurring financial losses.
6. Inaccurate Financial Forecasting: Credit rating agencies often fail to accurately predict short-term changes in the financial health of borrowers. A notable example is CRISIL’s sudden downgrade of BPL’s non-convertible debentures (NCD) from A to D, representing a fall by 12 levels. Such abrupt changes, without prior warning, leave investors unprepared and unable to exit their investments in time.

While credit ratings serve as an essential tool for investors, these limitations highlight the need for greater transparency, improved auditing practices, and regulatory oversight. A more robust framework is essential to ensure that credit ratings accurately reflect the financial health of issuers and maintain investor trust.

 

CONCLUSION

In conclusion, credit rating agencies play a pivotal role in global financial markets by providing assessments of the trustworthiness of borrowers and issuers. Their ratings, based on both objective and subjective analysis, offer investors valuable insights into the likelihood of timely repayment and potential risk. However, to serve markets effectively, these agencies must operate independently, adhere to robust internal standards, and protect the confidentiality of issuer information to prevent conflicts of interest. Given that the consequences of inaccurate ratings are ultimately borne by investors, it is essential to hold agencies accountable through penalties or derecognition for significant misjudgments.

 

Fostering competition in the rating industry by encouraging niche agencies, particularly in sectors like technology and public finance, could enhance the credibility and depth of ratings. Credit ratings, though valuable, are not blanket evaluations or investment advice but rather opinions on specific financial obligations, reflecting the relative probability of default. While issuers benefit from diversified funding opportunities, investors rely on these ratings to supplement their own evaluations. Regulators, in turn, benefit from reduced information asymmetry, easing their supervisory efforts.

 

Despite their importance, credit rating agencies face criticism for potential conflicts of interest due to issuer-funded models, infrequent updates, and lack of accountability. Therefore, ensuring these agencies maintain independence and transparency is crucial for protecting investors and maintaining the integrity of financial markets. Ultimately, the reputation and trustworthiness of rating agencies will be determined by their adherence to high standards and the informed judgment of market participants.

 

SCOPE FOR FUTURE STUDY

• Investment-grade ratings can elevate a security, company, or country to global prominence, attracting foreign capital and driving economic growth. For emerging market economies, credit ratings are crucial in signaling their creditworthiness to international investors. As these ratings facilitate foreign investments, countries and corporations often aim to maintain or improve them, contributing to political stability and fostering transparency.
• To serve markets effectively, credit rating agencies (CRAs) must function independently, enforce internal standards to avoid conflicts of interest, and safeguard the confidentiality of issuer information. Since investors bear the consequences of inaccurate ratings, CRAs should be held accountable for significant errors through penalties or, if necessary, deregistration.
• In the United States, an oligopolistic market structure has been sustained partly due to the use of varying rating symbols by different agencies. In markets like India, where financial literacy is still developing, such diversity in symbols may create confusion among investors.
• All stakeholders in the financial ecosystem—including issuers, underwriters, and users of ratings—should strive to enhance their processes. Efforts toward greater standardization in reporting and disclosure of underlying assets would further improve the transparency and reliability of credit ratings.

 

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LINKS

• https://www.bloombergquint.com
• https://scroll.in
• https://www.investopedia.com
• https://www.moneycontrol.com
• https://www.crisil.com
• https://www.Paisabazar.com
• https://www.Yourarticlelibrary.com
• http://shodhganga.inflibnet.ac.in
• https://www.slideshare.in