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Summary
 78
Index

SR. NO. PARTICULAR PAGE

NO.
1.
EXECUTIVE SUMMARY
2.
CHAPTER 1- INTRODUCTION 1-39

1.1 Introduction 2
7 3
1.2 Meaning of Credit Rating Agencies 4
1.3 Definition of Credit Rating Agencies 6
11
1.4 Function of Credit Rating Agencies
12
1.5 What is Credit Rating? 18
1.6 Role of Credit Rating Agencies 19
23
1.7 Importance of Credit Rating Agencies 26
7
1.8 What are the factors that affect Credit Rating? 27
30
1.9 Understanding Credit Rating 33
1.10 How do Credit Rating agencies work? 35
17
38
1.11 Types of Credit Rating in India?
1.12 Advantages and Disadvantages of Credit Rating
1.13 Regulations and Market structure of Credit Rating
1.14 Who regulates Credit Rating Agencies?
1.15 What does credit rating indicate?
 81
3. CHAPTER 2- LITERATURE REVIEW 40-48

40
ARTICLE- 1
41
ARTICLE-2
41
ARTICLE-3 41
ARTICLE-4 43
ARTICLE-5 43

4. CHAPTER 3- RESEARCH METHODOLOGY 49-54

2.1 Introduction
6
2.2 Objectives of the study
2.3 Scope of study
2.4 Importance of study
2.5 Research Methodology
2.6 Analysis of Credit Rating
2.7 Country’s Credit Rating
2.8 Drawbacks of Credit Rating
2.9 Limitation of study

5. CHAPTER 4- ANALYSIS AND INTERPRETATION 55-74

OF DATA

6. CHAPTER 5- FINDINGS , SUGGESTION , AND 75-83

RECOMMENDATION
75
9
77
5.1 Findings
78
5.2 Recommendation and Suggestion
5.3 Conclusion

7. BIBLIOGRAPHY 80
ANNEXURE 81
 LIST OF IMAGES

SR.NO. PARTICULARS PAGE

NO.
4.1 Awareness 64

4.2 Meaning 65

4.3 Full Form 66

4.4 Uniqueness 67

4.5 Beginning of CRA 68

4.6 Definition 69

4.7 Investment 70

4.8 Importance 71

4.9 Opinion 72

4.10 Advantages 73

4.11 Assure 74

4.12 Defilement 75

4.13 Reliability 76

4.14 Key Idea 77

4.15 Past Score 78

4.16 Understanding 79

4.17 Ratings 80

4.18 Future Investment Planning 81

4.19 Protocol of CRA 82

4.20 Functions 83
 LIST OF TABLES

SR.NO. PARTICULARS PAGE

NO.
4.1 Percentage of Awareness 64

4.2 Percentage of Knowing 65

4.3 CRA full-form 66

4.4 Term CRA 67

4.5 First CRA in India 68

4.6 Main work of CRA 69

4.7 Investment Decisions 70

4.8 A good credit rating 71

4.9 Indebted money 72

4.10 Advantages of Credit 73

4.11 Reliability 74

4.12 Damaged credit rating 75

4.13 Investments 76

4.14 Importance of Investing 77

4.15 A good credit history 78

4.16 Knowledge on CRA 79

4.17 Instrument Ratings 80

4.18 Investment goals 81

4.19 Regulation of CRA 82

4.20 Main function of CRA 83

 EXECUTIVE SUMMARY

DESCRIPTIVE SUMMARY
49
By levelling the playing field between lenders, investors, and issuers, credit
rating agencies (CRAs) play a key role in the functioning of financial
markets. We can learn about the creditworthiness of people in a nation by
looking at their credit scores. There will be more new businesses created
whenever all investors are given high marks. As the country's GDP rises,
more people will be able to find gainful employment, and fewer will live in
poverty. The Gross Domestic Product (GDP) rises and a nation progresses
when all of its sectors advance. Credit rating agencies are discussed in
detail, as is their direct and indirect impact on national growth. The goal of
this research is to learn how credit ratings affect a country's economic
growth. The
111
study makes use of both analytical and descriptive research
methods. Both primary and secondary sources of information were used to
complete the analysis. The information was gathered from rating agency
sites, academic publications, mainstream media, and financial institution
databases. Having access to banking institutions is useful for learning about
a country's investment climate. The report provides a concise breakdown of
the processes
16
that contribute to a country's progress. This provides valuable
insight on the economic progress and living conditions in a certain country.
The research explains why and how a nation develops the way it does. The
study defined its goals, addressed its hypotheses, defined its terminology,
outlined its assumptions, and outlined its restrictions. Knowing the
country's financial standing and the roles played by various industries in the
country's development is made possible by this research.
55
CHAPTER 1

INTRODUCTION

1.1. Introduction
7
1.2. Meaning of Credit Rating Agencies
1.3. Definition of Credit Rating Agencies
1.4. Function of Credit Rating Agencies
1.5. What is Credit Rating?
1.6. Role of Credit Rating Agencies
1.7. Importance of Credit Rating Agencies
7
1.8. What are the factors that affect Credit Rating?
1.9. Understanding Credit Rating
1.10. How do Credit Rating agencies work?
17
1.11. Types of Credit Rating in India?
1.12. Advantages and Disadvantages of Credit Rating Agencies
1.13. Regulations and Market structure of Credit Rating
1.14. Who regulates Credit Rating Agencies?
1.15. What does credit rating indicate?

1
 1.1 INTRODUCTION

The rigorous evaluation of "enterprise risk" associated with the "open economy" and the
interconnectedness of the money, capital, and foreign currency markets is highly valued
by investors. Investors appreciate a thorough evaluation of these risks due to the rising
26
market orientation of the Indian economy. To protect the small investors who are the major
target of unlisted corporate debt in the form of fixed deposits with firms, credit ratings are
now mandatory. The action was taken to safeguard investors as much as possible.
6
India may have been one of the first developing countries to set up a credit rating agency,
doing so in 1988. As of this writing, the year was 1988. The Reserve Bank of India (RBI)
took the first step towards formalising the role of credit ratings when it made credit ratings
obligatory for the issuance of Commercial Paper (CP). Credit ratings are now required for
46
certain types of debentures and financial instruments after a ruling by the Securities and
Exchange Board of India (SEBI). In June of 1994, the Reserve Bank of India (RBI)
initially required all NBFCs to get ratings. Credit ratings are not required for bonds issued
by PSUs or privately placed non-convertible debentures having a face value of up to 50
million Rupees. Credit ratings are optional and apply to fixed-deposits made by
manufacturing businesses.

1. Origin
New York was the site of the first commercial credit agency, established in 1841 to
evaluate businesses' capacity to meet their debt commitments. Robert Dun eventually
assumed control. As early as 1859, this organisation was putting out its first official
3
grading manual. After the first agency, founded by John Bradstreet in 1849, joined with
3
the second in 1933 to become Dun & Bradstreet, the latter of which acquired Moody's
127
Investors Service in 1962. Moody's has been around for close to a century. Moody's
Investors Service was founded by John Moody in 1900, the same year he released his
"Manual of Railroad Securities."

26
With the 1916 publication of the Poor's Publishing Company's first rating guide, the credit
2
 20
rating business began to grow rapidly in the early 1920s. The Standard Statistics Company
95
and Fitch Publishing Company followed in 1922 and 1924. Originally founded in 1941 as
31
a merger of Standard and Poor's, Standard and Poor's was acquired by McGraw Hill in
1966. No significant new rating agencies were established between 1924 and 1970.
16
However, several credit rating organisations have been established in nations like
Malaysia, Thailand, Korea, Australia, Pakistan, the Philippines, and others since the
1970s. Credit Analysis and Research Ltd. (CARE) was founded in 1994 and succeeded its
26
predecessor, CRISIL (Credit Rating and Information Services of India Ltd.), which had
opened in 1987. The All-India Financial Institutions have backed all three of these
organisations. The rating agencies have shown their credibility thanks to their impartiality,
101
professionalism, diligence, thoroughness, and secrecy. Duff & Phelps Credit Rating India
(P) Ltd. was established in 1996 via a partnership between D&P and two non-banking
financial companies (NBFCs) in India.

52
A person's or a company's credit rating is a numerical indication of their reliability as a
borrower. A person's credit score is a deciding factor in whether or not they are approved
for a loan. The borrower's propensity to make loan repayments on time and in full is
reflected in his credit rating/score, which may help determine whether or not to provide
him credit.
Money is an essential part of human existence. It is a way to ensure one's future well-being
and one's ability to provide for one's immediate needs. Life has gotten more complicated
over the years, making it more important than ever to save money and invest in your future.
Financial resources are crucial for businesses in today's very competitive industry.
60
Companies resort to public issuance of stock and debt instruments in order to raise capital.
The capital market is widely used for funding today's businesses, and the resulting
investment options are many.

available investment choices However, few individuals have both the time and expertise
necessary to choose the most lucrative and risk-free investment opportunity.
Consequently, investors seek the advice of an investing adviser so that their money is put

3
to good use. Because of this need, credit rating companies sprung up to provide investors
with neutral investment advice. These organisations provide ratings for a wide range of
financial instruments, allowing investors to evaluate their relative safety and potential for
payback.
The creditworthiness of people, organisations, enterprises, nonprofits, governments, and
even whole nations may be determined by credit ratings. To determine whether or not
these loan applicants can be relied upon to make timely repayments, specialised credit
rating companies evaluate the risk associated with lending to them.
This score is based on a comprehensive assessment compiled by credit rating agencies that
evaluates a wide range of characteristics, including the borrower's or issuer's track record
of making and repaying debt payments, as well as the issuer's and borrower's current and
expected financial situations.
A high credit score shows that loan payments have been reliably made in the past, which
lends confidence. Financial institutions may use this information to determine whether or
118
not to provide a loan, and at what interest rate to do so.
Credit Rating Agencies: An Explanation (1.2)
38
A debt instrument's credit rating reflects the rating agency's assessment of the issuer's
capacity and willingness to satisfy debt service obligations when they come due. Rankings
are often written using a combination of letters and numbers. Symbols are a
straightforward and basic tool for investors to use in determining the relative
creditworthiness of various financial products. Symbols and the reasoning behind ratings
are both explained in detail by rating agencies in their published materials.

In other words, the rating is an assessment of how likely it is that the issuer of a certain
fixed income asset will fulfil its legal responsibility to pay principle and interest on time
in the future. Over the life of the instrument, which may range from a few days to thirty
16
years or more, the rating estimates the likelihood that the issuer would fail on the security.

32
The credit rating is a symbol representing the consensus view on the issuer's capacity to
meet its debt obligations when they come due, with respect to the rated instrument in

4
question. A credit rating is another definition of a security rating, in which symbols are
used to communicate an opinion regarding the creditworthiness of the issuer of the asset
or instrument.

86
A borrower's creditworthiness is summarised by a three-digit figure known as a credit
score. A credit rating is an assessment of the risk involved in lending money to a certain
person or business. Lenders will look at a borrower's credit history to gauge their
likelihood of repaying a loan.

An person or business is given a rating based on their creditworthiness and other criteria.
An person or business's creditworthiness is determined by their track record of making
and repaying loans and borrowings. A company's creditworthiness is evaluated based on
its financial statements, including its capacity to service debt.

If you ever plan on applying for a sizable loan, it will do you well to keep your credit score
in excellent shape.

Keeping your credit usage ratio below 30% and making on-time payments on all of your
current bills are two of the most important factors in maintaining a decent score.
It basically establishes a link between risk and return. So that one can analyze and
63
assess the risk level and compares the offered rate of return with the expected rateof
16
return. A rating is specific to a debt instrument and not the rating of entity, soit can
never be constructed that credit rating is the rating of the entity, it is just anopinion on
19
the instrument of the issuer. The credit ratings represent the credit rating agency’s
evaluation of qualitative and quantitative information for a company or government;
including non-public information obtained by the creditrating agencies analysts. Usual
46
credit rating is relevant for debt securities, it can be done for other purposes also. It
43
helps investors to determine the relative likelihood that they might lose money on a
given fixed income investment.

1.2 Definition of Credit Rating Agencies

5
 8
One definition of a credit rating is an evaluation of a borrower's propensity to meet
their financial commitments. It is an estimate of an individual's, organization's, or
102
financial instrument's capacity and desire to meet its financial obligations when due.
Credit ratings are assigned to individual financial instruments so that traders may
60
compare them on the basis of credit risk and the obligator's capacity to repay debts in
accordance with the terms of the instrument's underlying agreement. The picture
below illustrates the various credit rating scales: A debt instrument's credit rating is
99
the rating agency's assessment, as of a certain date, on the likelihood that principle
and interest payments will be made by the borrower in a timely manner based on the
instrument's credit risk appraisal. Assessment of default risk and quality rating should
take into account the following three factors:
6
1. Issuer ability to pay.

2. Strength of the instrument owner’s claim on the issue.

3. Economic importance of the marketplace of the issuer.

A credit rating is expressed using a combination of letters and numbers that help an
investor identify different types of financial instruments based on their relative safety.
Demand from the issuer and analysis: An organisation initiates the credit rating
process by submitting an application to a credit rating agency to have a specific
financial instrument assigned a rating. After that, the team consults with the
organization's governance officials and gathers the necessary information. The
following are some of the considerations:

 Achieved Results in the Past

 Budgetary Measures

 Risk Analysis of a Company

 the Market Share, etc.

6
Issuer is not authorised to participate in the Rating Committee, where the expert team
presents the report based on the information received and assessment performance.
9
1
The issuer is informed of the rating decision and given the opportunity to appeal if
they disagree with the assessment.
2
1
a chance to have one's voice heard is provided. In order to file an appeal of the
judgement, the issuer must supply relevant information. Although the committee
reviews the judgement, it has no effect on the final scores.
17
When the issuer gives their stamp of approval to the rating determination, the agency
will release the rating to the public.
The rating agency keeps tabs on the issuer's progress and the industry in which it
works in order to ensure that it maintains the status quo consistent with the rating it
was given.
21

A rated security may be placed on Rating Watch if the rating agency determines that
it requires closer monitoring.
21
Public utilities, transportation, infrastructure, energy projects, Special Purpose
Vehicles, etc. are all included in the scope of Credit Ratings.
21
Credit rating companies including CRISIL, ICRA, CARE, and FITCH provide
ratings.

Investment protection is just one area where credit ratings shine; the whole economy
benefits when people are able to pool their money in this way.
High credit scores make it more likely that loan applications will be accepted by
financial institutions. Your access to credit might be constrained by a low score,
which could indicate an inability to make your minimum required monthly payments.

The duration of your credit history, your repayment history, and your credit usage rate
are the most prevalent elements in determining your credit score. Your credit rating
and score are based on the information gathered by the three credit reporting bureaus.
1.3 Purposes and Roles of Credit Rating Agencies

When a firm files for a credit rating, the agency takes several factors into
7
consideration.
What a typical credit rating agency does is broken down into the following categories:

1. Analyzing the Business

Borrowing businesses are evaluated by credit rating agencies based on how well they
have put their money to use, as opposed to how much profit they have earned. There
will be a focus on ROI and CAC calculations.

2) Analyzing potential dangers in the manufacturing sector

Every sector faces challenges from environmental factors and economic factors
including rivalry and new alternatives. The company's credit rating will be determined
in part by how seriously it takes the various risks it faces and how well it deals with
them.

3. Industry and market standing of the firm

When requesting a credit rating, what percentage of the market does the firm
represent? With a larger portion of the market comes more danger since the firm must
129
work harder to keep its position. For this reason, a credit rating agency will take into
account the borrower's market share.

4. Successful operation

When evaluating this, capacity utilisation rates are used as a yardstick. When all
available resources are put to use, the firm gains a competitive edge. This might be
doable because of a favourable geographical position or cooperative labour
conditions. The rating firm will investigate these claims.

5. the prospectus's legal standing

8
Everything in the prospectus must be accurate. A credit rating agency will not trust
110
the company's prospectus if it contains exaggerated statements, and as a result, the
company's development will be stunted. It might be seen as deliberate deception to
get access to additional monies. Consequently, the information included in the
prospectus will be taken into account when determining a company's
creditworthiness.

6. evaluating a company's finances based on the accuracy of its books

Accounting standards will be called into question if a borrowing company uses

accrued earnings for the purpose of "window dressing" the balance sheet. Companies
that report just actual cash flow will more accurately reflect their financial health.
Since market circumstances in fulfilling debt obligations are also taken into
consideration, the genuine financial status of the firm will be appraised in this way.

7. a profit and loss statement

For tax purposes, for example, an income statement can be overstated, whereas a
statement created for a different reason might be understated. Once again, the credit
rating agency must investigate the company's actual situation.

8. Protection of Income
Just how similar are the corporations' bottom lines? Is there any evidence of
development? How much money can be made, roughly? These standards will be
applied to all of them.

9. Sufficient inflow of cash

Can all bills be paid and any emergencies handled with the available financial flow?
The rating agencies do take this into account.

9
10. Economic adaptability
Assuming the company's current funding strategy does not play out, how far can it go
to prepare for alternate financial strategies for obtaining its funds? Businesses'
financial adaptability is evaluated by rating agencies.

11 Evaluation of Management

How successful has management been in the past? In what ways do they succeed in
guiding the firm through challenging times? Credit rating firms play an essential role
by providing an assessment of management.

12. The ability to persevere in the face of adversity

The capacity of the company's recovery mechanisms to deal with abrupt,

unanticipated disasters is investigated by the rating agency.

13. Purpose, attitude, and method for achieving goals

What type of organisational aims are pursued in this context? When pursuing a goal,
what methods are used to ensure success? When assessing a company, rating agencies
take into account factors like these.

14. Worker Turnover Rate

To what extent does the nonalignment care about the well-being of its workforce?
How are things like worker punctuality, discipline, and morale? How long do you
anticipate them staying with the company? Such concerns are investigated by a credit
rating organisation.

15 Regulatory and Competitive Setting

The corporation will be better protected under additional rules that limit competition,

10
but the company's efficacy will be put to the test under deregulation that opens the
door to greater competition. Rating agencies investigate the legal and business
climate.

Credit rating agencies will look at the market value and price of the assets with any
provisions that have been made for these assets to determine a final value. The asset
performance will also be considered. The amount of assets classified as good, fair,
uncertain, or poor will also be considered throughout the credit rating process.

Money situation: interest and tax implications

Is it possible to estimate how much of a rise in interest rates the firm might withstand
if those rates were to rise as a result of market conditions? When it comes to the
bottom line, how will this change affect things? And if the government were to raise
income taxes, how much would that cost? How it will affect the bottom line of the
business. All of these things are considered.

When assigning a rating to a corporation, credit rating organisations do some of the

following tasks.

1.4 The Meaning of Credit Ratings

During the last two decades, credit ratings have become more important in the
8
country's financial system. Simply said, a credit rating is an evaluation of an
organization's ability to repay debt. Numerous organisations in the nation provide
ratings to businesses and nonprofits based on their perceived likelihood of being able
19
to repay loans. Credit ratings are used to assess the level of financial risk associated
with various institutions, including but not limited to governments, NGOs, and
nations. Credit rating firms evaluate an organization's commercial and financial risk

11
and provide a rating based on their findings. After considering several other variables,
including the debtor's capacity to make payments, the agencies compile a
comprehensive report. To determine whether or not these loan applicants can be relied
upon to make timely repayments, specialised credit rating companies evaluate the risk
associated with lending to them.

This score is based on a comprehensive assessment compiled by credit rating agencies

that evaluates a wide range of characteristics, including the borrower's or issuer's track
record of making and repaying debt payments, as well as the issuer's and borrower's
current and expected financial situations.
A high credit score shows that loan payments have been reliably made in the past,
which lends confidence. Financial institutions may use this information to determine
whether or not to provide a loan, and at what interest rate to do so.
65
Credit bureaus like Experian, Equifax, and TransUnion use a variant of the Fair Isaac
Corporation (FICO) credit scoring system to assign numerical values between 300
44
and 850 to people's creditworthiness. Credit rating agencies like S&P Global,
Moody's, and Fitch Ratings examine and evaluate the creditworthiness of businesses
and governments. The entity that wants a credit rating for itself or a debt problem
pays these rating firms for their services.

1.5 Credit Rating Agencies

A debt instrument affects the following parties:

1. The capitalist
2. The issuer

3. The financial intermediaries

4. The regulator
Everyone involved in a transaction may profit from a credit rating. This is why credit
rating organisations are so vital to the functioning of the financial system's capital
12
markets.

Credit ratings provide advantages for investors, including:-

Credit ratings are used by investors in making investment choices. The following
advantages accrue to them as a result of them:

Credit ratings let investors assess the safety of a potential investment with just a
glance. They may choose instruments that suit their desired level of risk and reward.
In order to make sure that their ratings still reflect the current state of the issuer and
market, credit rating agencies conduct regular assessments of the ratings. So, if an
investor buys a highly rated asset only to have it subsequently downgraded, he might
choose to sell the item in order to minimise his losses.
131
A high credit rating on an instrument gives buyers confidence in the issuer's financial
stability and the security of their investment.

• Clarity of presentation - Ratings from credit agencies adhere to a common

methodology. Therefore, the investment proposition is clear to potential backers.

It might take a lot of time and energy to investigate the financial stability of a
corporation that is issuing a security. It also requires a degree of financial savvy.
However, the credit rating offered by these expert companies makes sure nothing
crucial is overlooked. Because of this, investors may rest easy knowing they can
depend on these ratings.

Issuers may benefit from credit ratings in the following ways:-

Credit ratings provide the issuing firm with advantages such as:

For the issuing firm, having a corporate image based on facts rather than perception
is preferable. With solid credit scores, a corporation can project an honest image to
the public.
13
113
A good credit rating from a credit rating agency may help a business save money on
its borrowing costs by reflecting the agency's assessment of the company's risk
profile. This implies that if investors are in the market for debt instruments, they will
purchase those offered by the corporation.

for investments with a limited potential for loss. And we're happy to settle for more
reasonable interest rates. In this way, the issuing firm incurs less expense while
seeking investors.

It's easier to borrow money since there are more places to go to get money if your
firm has a high credit score. This is because the vast majority of fund-raising entities
rely on credit ratings assigned by established organisations.
Promotes lesser-known businesses and helps boosts brand awareness When it comes
to investors, many businesses fall flat. As a result, their ability to distribute their debt
instrument is constrained since few people know about it. Investors are more likely to
put money into a firm with a strong credit rating.

Financial intermediaries may benefit from credit ratings in a number of ways: -

The following are some of the advantages that credit ratings provide to financial
intermediaries:

• Credit ratings are self-explanatory and simple to grasp, so there's no need to spend
61
time explaining the risk/return of a debt instrument. Interest rates are expected to be
lower for AAA-rated instruments by investors. If he has a poor tolerance for risk, he
will likely buy it. Brokers and other financial middlemen are therefore relieved of any
need to brief their customers on the potential dangers and rewards of their
investments.

• Lessens reliance; by comparing credit ratings, investors may choose assets best
suited to their investing strategy. This gives individuals freedom and relieves pressure
on financial advisers.

14
Credit Ratings Offer Benefits to Regulators: -

The following advantages are gained by regulators thanks to credit ratings:

Credit rating agencies employ both quantitative and qualitative data about the issuing
firm to arrive at a conclusion on the company's creditworthiness, which increases
transparency. Information that is not readily accessible to the average investor is
included. So, it clears up the murky process of buying financial assets like these.

Credit ratings help authorities tell the difference between successful and unsuccessful
businesses, which is a significant benefit for consumers.

• Quick response Timely action against corporations that fail to pay their bills is made
possible by credit ratings.

1.6 Financial Rating Agencies' Crucial Role in the Economy

66
Instruments such as corporate bonds, government bonds, certificates of deposit, and
43
other collateralized debt instruments are evaluated for their trustworthiness by a credit
rating agency.
These organisations assess the potential debtor's level of risk. This is accomplished
by assessing the debtor's propensity to make repayments based on qualitative and
quantitative data. Default risk analysis measures the potential negative consequences
of delaying debt payments.
These agencies' credit ratings may be used to establish a relationship between an
instrument's potential return and its associated level of risk. Therefore, investors may
use them as a standard by which to evaluate the safety of any given debt instrument
and determine whether or not the potential rewards justify the potential dangers.

Without a credit rating system, investors often judge the safety of a security primarily
on the standing of the issuing company.

The reliability of a borrower is evaluated by an investor with the use of credit ratings.
15
This is why consumers and lenders should care about their credit scores: Borrower
Loan Approval Requirements: A borrower with a high credit score is seen as a safe
bet. That's why financial institutions seldom say "no" to loans applied for by such
businesses.

Interest Rate: The borrower's credit history is a major consideration. Each financial
institution has its own borrowing rates.

Rates of Interest. Therefore, a cheap interest rate and a loan will be more likely for a
borrower with a good credit score.
Security for Lenders: A high credit score indicates that the loan will be repaid in a
timely manner. What this means is that both principal and interest will be protected.

No one is going to risk their money on such a high-risk client. Borrower

creditworthiness may be determined with the use of ratings. Borrower risk may be
better understood using this information.

Therefore, one may make more informed financial choices in light of credit ratings.

Investors and borrowers alike may benefit from the insights provided by credit rating
organisations, which assess the financial stability of entities as diverse as individuals,
businesses, and even whole countries. Investors are able to make more informed
judgements thanks to the credit rating agencies' expert quantitative and qualitative
risk measurement services. Comparing specific financial ratios to predetermined
1
standards is a key part of the quantitative risk analysis performed by credit rating
agencies, while the qualitative study places special emphasis on the nature of
management and the legal, political, and economic climate of a jurisdiction. The
banking system makes it simple for institutions to borrow money without requiring
them to undergo time-consuming and individual credit checks with each lender.
1
Similarly, governments and businesses may issue debt in the form of bonds and
treasuries, respectively, to attract investors who value safety and stability above
return.
16
1.7.1 What Influences a Company's Credit Rating?

A business' creditworthiness may be affected by a variety of external variables, such

as:

The company’s financial history:

a) Lending and borrowing history

b) Past debt

c) Payment history

d) Financial statements

e) Level and type of current debt

Credit ratings are used to determine whether or not a person or company is reliable
enough to be loaned money. Companies, NGOs, local governments, and national
governments all count. Credit rating organisations that have been vetted by the
government award these grades after reviewing a company's financial records and its
32
demonstrated capacity to repay debt.
Credit ratings are used by lenders and investors to determine whether or not to provide
loans or participate in business ventures; a high rating improves a company's access
to capital, lowers interest rates, and promotes more responsible bookkeeping
practises.

17
1.8 An Explanation of Credit Scores
97
Credit risk is one of the most important types of financial risk. It may pertain to a
creditor who has extended credit, a bondholder who has purchased a bond, or a vendor
who has sold goods on open account. Every creditor wants to know the extent of the
damage he stands to incur should a default occur.

To evaluate this kind of threat, credit ratings are used. The old adage says something
like, "You can't manage what you can't measure." The degree of credit risk is
quantified with a number or symbol, and the risk is tracked over time to see whether
109
it remains constant, fluctuates, or decreases. Financial ratings are provided by Credit
Rating Agencies (CRAs), which are separate, unbiased organisations.

Who is responsible for covering the cost of the star rating?

The rating is used by lenders and investors, although often the borrower or issuer (of
62
bonds or debentures) foots the bill for the credit rating agency's services. A potential
conflict of interest exists in this paradigm (for instance, may the issuer agree to pay a
greater charge in exchange for a higher rating?), yet it is widely accepted as the most
useful and is mitigated by strict oversight. The CRA is accountable to the
lender/investor, thus he must maintain "transparency and impartiality" in the rating
process, regardless of the commercial concerns at play.

Evaluation Methods

The borrower typically initiates the rating procedure by visiting a CRA and submitting
a rating mandate along with the required fee. In this last phase, the borrower interacts
with the CRA's Commercial or Business division to finalise the loan. After that, the
Rating Team takes control, and they have no idea what the business conditions are.
After collecting all of the necessary data, information, and documents from the

18
borrower, the team does its own due diligence and analysis to determine the rating
using the appropriate rating methodology. The borrower is informed of this, and only
when he agrees to the terms does the rating become public knowledge. Bad reviews
serve no use. While this was true before the

rating is made accessible to lenders and investors, the CRA is obligated to conduct
periodic monitoring and make the findings public; however, lenders and investors are
not forced to accept the amended rating at that time.

Consideration of Potential Dangers

Business Risk refers to the rating entity itself, whereas "Industry Risk" refers to the
sector as a whole (e.g., the steel industry now faces more risk than the pharmaceutical
sector or the textile sector). Factors such as the unit's location, the technology or
equipment employed, the availability of inputs for production, the market for the
goods, supplier or customer concentration difficulties, market share, etc., may all play
a role. Growth, profitability, promoter involvement, gearing, liquidity, working
capital management, and other operational metrics are all assessed in the context of
financial risk. More emphasis is placed on this risk in most rating models since key
financial statistics accurately indicate the capacity to pay debt in a timely way.
Management Risk is concerned with issues including ownership and management
stability, as well as succession strategies. Promoters' current firms, group activities,
history of debt payment, etc. are often taken into account as well.

Where do credit rating agencies fit into the picture?

Agencies that evaluate and rate the creditworthiness of financial instruments like
bonds and loans provide their ratings to investors. Securities rated AAA, AA, A, and
BBB are generally considered to be of excellent quality and suitable for investment.

19
The increased credit risk or danger of default in a securities with a speculative rating
of BB or below usually comes with the possibility of a bigger return on investment.

Credit rating agencies may utilise alphabetical ratings, although they seldom provide
numerical probabilities of default like 10%, 20%, or 30%. Words to the effect of "the
obligor's (borrower's) ability to satisfy its financial responsibilities on the obligation
(to repay the lender) is exceptionally strong" will be used instead. 1

To be clear, default risk for AAA and AA rated assets is often less than 1%, and it
rises with each succeeding grade.

28
The analysts at a credit rating agency will typically provide a rating recommendation,
and then a committee will vote on that suggestion. As part of their analysis, analysts
will make use of data such as historical trends, management projections, risk
assessments, and anticipated outcomes.

14
When grading a security, analysts may also take into account macroeconomic
statistics, data supplied by the firm, bank, or government, and other publicly
14
accessible information. There will be a pre-committee stage, followed by a committee
stage, after the analysts have collected enough data and information to provide a
recommendation.

The purpose of the pre-committee stage is to decide whether or not to go on with the
complete rating process; if not enough data is provided to make a recommendation,
the ratings process may be put on hold. Once it has been determined to go forward,
the suggested rating will be presented to a committee for final approval or rejection.

20
 106
The committee will often be given a review package that details the analysts' findings
and their reasoning for their suggested rating. This group will

evaluate the data presented in the review package and decide whether the analysts'
advice is appropriate.

The committee members will vote on the matter and make a final decision based on
their collective expertise and years of service (though individual agencies may have
somewhat different selection standards). Credit ratings are assigned by majority vote,
therefore members will consider the recommendation and either accept it or offer an
alternative grade.

Additionally, the ratings themselves are only ever offered as the judgements of a
single agency, despite the fact that many agencies are often used by market
participants to arrive at a composite credit risk rating.

Where Can I Learn About India's Credit Ratings?

27
Company, India's Credit Rating Information Services Limited No. 1 (CRISIL)

As one of India's first credit rating organisations, CRISIL has a long history of
13
excellence. It debuted in the nation in 1987, and the following year, the firm went
13
public on the stock market. Founded in 1987 and headquartered in Mumbai, CRISIL
3
expanded into infrastructure grading in 2016. In 2017, CRISIL bought an 8.9 percent
share in the CARE credit rating firm. In 2018, it released the inaugural rupee and
13
dollar versions of India's first index designed to track the performance of foreign
portfolio investors' (FPI) holdings in the country's fixed-income market. A sampling
of the services offered by the firm includes an evaluation of mutual funds, an
21
 3
evaluation of ULIPs, an evaluation of the CRISIL coalition index, and so on.

ICRA Limited, No. 2

20
Founded in Gurugram, India, in 1991, ICRA Limited is a publicly traded corporation.
Investment Information and Credit Rating Agency of India Limited was the previous
3
name of the organisation. Since its inception as a joint venture between Moody's and
numerous Indian financial and banking service organisations in April 2007, ICRA has
grown to become a publicly traded company. Currently, ICRA Group operates four
different companies: ICRA Lanka, ICRA Nepal, ICRA Data Services & KPO, and
3
ICRA Consulting & Analytics. Moody's Investors Service, a global credit rating
agency, is now ICRA's biggest stakeholder. The International Credit Rating Agency
3
(ICRA) provides ratings for a wide variety of financial products, including corporate
debt, financial rating, structured finance, infrastructure, insurance, mutual funds,
33
project and public finance, small and medium-sized enterprises (SMEs), market-
linked debentures, and more.

Third, the Credit Analysis and Research Company (CARE)

3
CARE was established in 1993 and is a provider of credit ratings in the areas of
corporate governance, debt ratings, the financial sector, bank loan ratings, issuer
ratings, recovery ratings, and infrastructure ratings. CARE, based in Mumbai,
133
provides ratings for both long- and short-term debt instruments, both of which may
be used to get financing from a bank. In addition to IPO ratings, the firm evaluates
the financial health of shipyards and provides energy service company (ESCO) and
renewable energy service company (RESCO) rankings. CARE Ratings has expanded
3
into the valuation industry and now provides services for the valuation of stock, debt
3
securities, and market linked debentures. In addition, the firm has joined forces with
3
four partners from South Africa, Brazil, Portugal, and Malaysia to establish a new
22
worldwide credit rating agency called ARC Ratings. The first sovereign ratings for
nations like India have been done as ARC Ratings begins operating.

4 Ratings for Brickwork (BWR)

Canara Bank has actively promoted Brickwork Rating since its inception in 2007.
3
Bank loans, small and medium-sized enterprises, corporate governance, municipal
corporations, capital market instruments, and financial institutions are all rated.
NGOs, tourism, IPOs, property investments, healthcare facilities, IREDA, academic
institutions, Microfinance Institutions (MFIs), and Micro, Small, and Medium
Enterprises (MNREs) are all given Brickwork Ratings is authorised to perform credit
13
ratings in India as an ECAI (external credit assessment agency) by the Reserve Bank
of India (RBI).

Five, India Rating and Research Private Limited.

Among the Fitch Group's many affiliates is India Ratings, which is owned entirely by
the company. Insurance firms, banks, corporations, projects, financial institutions,
leasing and financing businesses, managed funds, and municipal governments are all
3
able to get credit ratings from the agency. The SEBI, the Reserve Bank of India, and
the National Housing Bank are all on record as having acknowledged the firm.

India's Rating Agency for Small and Medium-Sized Businesses (SMERA)

SIDBI, Dun & Bradstreet India, and India's top banks came together in 2005 to form
13
SMERA. IIT Madras, The Bangladesh Rating Agency Limited, CAFRAL, CoinTribe,
and SIES are just few of the notable organisations that have joined forces with
73
SMERA. SMERA has signed memoranda of understanding with more than 30 banks,
23
financial institutions, and trade associations around the nation, in addition to its
shareholder banks.

Acuite Research Limited, No. 7

Listed with the Indian Securities and Exchange Board, Acuité Ratings & Research
115
Limited provides a comprehensive range of credit rating services (SEBI). In 2012, the
3
business obtained RBI accreditation as an ECAI (External Credit Assessment
Institution) for Bank Loan Ratings in accordance with the Basel II Accords on
Standards and Guidelines for Financial Markets. More than 8,300 securities and debt
instruments have been rated by it since then.

as well as the banking facilities of various businesses and organisations located all
throughout the nation and representing various sectors. The company's headquarters
and registered office are located in Mumbai's BKC neighbourhood.

Information Valuation and Rating Private Limited, Infomerics, No. 8

Mr. Vipin Mallik is the current CEO of Infomerics Valuation and Rating Private
Limited, a credit agency that was founded by highly respected figures in the world of
47
finance and is certified by the Reserve Bank of India and registered with the Securities
and Exchange Board of India. The credit bureau's stated mission is to provide NBFCs,
banks, corporations, and SMEs with an objective assessment of their
creditworthiness. Their method of assigning grades and ratings is the basis for their
conclusions on an organization's financial stability. Investors and lenders alike may
benefit from infomerics' ability to level the playing field in terms of information. The
credit bureau's dedication to complete openness in all of its dealings with customers
extends to the provision of detailed and reliable reports and histories.
Credit Rating Agencies: 1.11 Pros and Cons

24
The Benefits Include the Following
Rapid Funding Efforts

If a company's instruments are highly rated, it's much simpler to access the capital
markets. The market will be more at ease with a high grade. It's not the rate of return,
but the stability and convenience of the underlying product, that attracts many
investors.

Company Reputation That's in Good Shape

Raising a company's public profile with highly rated securities. When investors see a
good credit score, they feel more secure making investments. In the end, this
contributes to the company's professional reputation.

Reduce the Price of an Initial Public Offering

The efforts required to raise capital through public issue are reduced for a corporation
having highly rated instruments. The firm benefits from positive attention when its
credit rating is high. Goodwill and corporate image are enhanced for companies with
highly rated instruments among customers, shareholders, investors, and creditors.

Creditors and shareholders both have peace of mind knowing that they will be repaid
on time.

Simple and Reduces Interest Rates on Loans

Raising capital on the market is made much easier for a firm that issues highly rated
debt instruments. Indicating little danger, a high score is ideal. The corporation will
be able to provide a more competitive interest rate because to the high rating of its
instruments. There is less danger to the investors, therefore they can tolerate a lower
rate of return.

25
A higher credit rating opens up more options for the business in terms of financing. It
has easy access to many sources of credit, including banks, investment firms, the
public, etc.

Help Firms With a Poor Reputation

A high credit score provides a corporation with more opportunities. Gaining exposure
for a company's instruments might boost the profile of a previously obscure firm. The
corporation will have an easier time raising capital today.

Improvement in Ratings Promotes Expansion

The management of a firm might be encouraged by a high rating to pursue

development in the form of future expansion or diversification of operations and
output.

26
27
Following are the Disadvantages:-

Non-disclosure of Important Information

A credit rating agency may not get all relevant information about the rated company. Any
action done without this key piece of information might cost investors money.

An element of Bias Could Be Present

31
The credit rating is based on the data gathered from the firm itself. There is a chance that
the rating team's individual biases will find their way into the data they gather.

Emerging Issues at the New Firm

90
Agency ratings are based on data provided by the rated entity. However, a startup business
may not have the records to demonstrate its financial stability. That's why it can drop in
the ratings. If your credit is poor, you may have trouble getting loans.

A natural static 116

The rating is based on a snapshot in time analysis of the company's current and historical
data. The company's operations are affected by a wide range of external influences,
including those in the political, economic, social, and environmental spheres. Alterations
made after a rating has been given might nullify the value of the rating.

A Grade Doesn't Guarantee Safety

Agency ratings for a company's capacity to repay its interest payments are, at best, an
educated guess. The symbols used to rate businesses don't indicate anything about their
viability, the quality of their goods or services, the competence of their management, etc.
In

That is to say, a company's rating is not a guarantee that it is financially stable.

Grade Distinction
There are a variety of reasons why the same instrument might get a different rating from
each rating agency. Investors might be thrown off by this.

1.2 The Market Structure and Regulation of Credit Rating Agencies

62
The financial markets may have benefited from more competition among credit rating
agencies during the 2008 financial crisis. We offer data that the 48
Securities and Exchange
Commission's designation of NRSROs unwittingly established a de facto oligopoly, which
principally propped up three firms: Moody's, S&P, and Fitch. Furthermore, we provide an
explanation for why credit rating companies were awarded NRSRO status in the first
place, showing that this was not done to promote monopoly power or to lessen the
responsibility of investors in selecting a reliable source of information. While CRAs were
28
 26
indirectly limited by the confidence of investors, complacency in the market rose due to a
lack of alternative
2
providers. Market demand for NRSRO ratings was exaggerated by the
government's regulatory use of credit ratings, despite the fact that credit ratings have
become less informative over time. We should expect this type of regulatory framework
to go nowhere but to mismatched incentives among economic players and to skewed
market information that sends the wrong signals to investors and other financial actors.
Despite the excellent intentions of the uses of the NRSRO designation, it is not worth the
expense and should be repealed because of the significance of our capital infrastructure
93
and the influence of credit rating agencies in our financial markets. In order to ensure
financial stability, regulators should stop using credit ratings as a primary indicator.

soundness. In response, the oligopolistic dominance of CRAs and the artificial demand for
their ratings will decrease as a result of these regulatory measures.
Who is responsible for overseeing credit rating agencies?

After the economic collapse of 2008, regulators

68
tightened their grip on credit rating firms.
Of particular note was the 2010 passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act in the United States.

Preventing any one bank from becoming "too large to fail," examining Federal Reserve
(Fed) bank bailouts, and keeping an eye on high-risk derivatives are all goals of the new
law. To assist avoid a recurrence of the financial crisis of 2008, it also created many new
agencies with regulatory authority over the US and international financial systems.

Depending on where in the world you are, a separate group can be responsible for 35
overseeing credit rating agencies. To provide one example, credit rating organisations in
the United States are overseen by the Securities
14
and Exchange Commission (SEC). Credit
rating agencies in Eu rope are governed by the European Securities and Markets Authority
(ESMA), but in the United Kingdom, the Financial Conduct Authority (FAC) will take
over this function after the country has left the European Union. ESMA's mission as a
regulator is to protect investors by guaranteeing "quality ratings, high levels of investor
trust, and the integrity, responsibility, good governance, and independence of credit rating
operations."

What does a high or low credit score mean?

The SEBI-approved symbol for rating long-term debt instruments is
28
Instruments issued by financial institutions having an initial duration of more than one
year are considered long term debt instruments.

Each CRA's initials should before the rating symbol.

15
Symbol Instruments with the respective rating indicates level of safety with
respect to timely servicing of financial obligations
29
 AAA The highest degree of safety
AA High degree of safety
A Adequate degree of safety
BBB Moderate degree of safety
BB Moderate risk of default
B High risk of default
C High risk of default
D In default or are expected to be in default soon.

30
 CHAPTER 2

LITERATURE REVIEW

According to the author’s Tarun Jain and Raghav Sharma an article based
2
on A case of Authority without responsibility dated April 2008 the main idea
69
about the subject is Credit Rating Agencies (CRAs) influence investor

behaviour and regulate issuers' access to financial markets.

Given that securities must be rated by CRAs before trading can begin, they serve as both
quasi-public regulators tasked with implementing good governance principles and
informational mediators protecting investors by eliminating information asymmetry in the
markets. However, the function of CRAs is being questioned worldwide following their
2
culpability in the sub-prime mortgage crisis, and in this article we investigate the role and
placement of the CRAs in the capital markets of India, with a critical eye towards SEBI's
1999 Credit Rating Agencies Regulations. We identify the gaps in the current system and,
2
drawing inspiration from the United States' model of Nationally Recognized Statistical
Rating Organizations (NRSROs) and also the standards proposed by the International
Organization of Securities Commissions (IOSCO), argue that India's current system for
regulating credit reporting agencies (CRAs) should be revised.

Part One: Context

The system cannot function without trust. A greater understanding of the statement's
context can help you understand how fear might bring it to a halt. A low rating may
25
undermine investor confidence, generate panic in the market, and actually paralyse the
system (read more), as Mr. Alan Greenspan implied in his answer to a query and in passing
94
discussion of the significance of the ratings provided by the credit rating agencies.

economy). Perhaps, and rightfully so, there is no room for dissenting views on this point.

31
2
Credit Rating Agencies (hereafter 'CRAs') are there to advise the investor on the viability
of the securities and the benefits and disadvantages of investing in them, which is a
hallmark of good corporate governance.

As an A, do raters' conflicts of interest become their weak spot?

The present most pressing worry is the detection and handling of potential conflicts of
interest, which seems to be the weak spot shared by all the influential CRAs. The problems
they're facing may be summed up as follows:

1.

Considering that (1) CRAs get compensation from issuers for their ratings, they may offer
favourable ratings, gradually degrade them, and then rapidly upgrade them in order to keep
the issuer as a customer. In addition, when analyst pay is contingent on rating fees, the
whole rating process is put at risk.
2.
25
The (2) CRAs are vulnerable to pressure for compromising rating accuracy due to the
prospects of luring the issuers into purchasing these other services by using the threats of
2
lower rating or unfavourable rating modification because they offer ancillary services such
as pre-rating consultancy services, credit risk management services, etc.
3.
2
Thirdly, CRAs or their directors, promoters, or credit analysts may be connected to the
client in some way, such as by ownership of the client or the client's shares or through
other financial or economic links.
4.
Four) Insider trading risks need close monitoring of CRAs due to their access to non-
public information.
Credit Ratings in Regulation and Contracts

32
 10
Private parties depend heavily on ratings by including rating triggers in their contractual
10
commitments, while market authorities use ratings to set investment requirements for
financial institutions or as a prerequisite for releasing securities to investors. This causes
friction between two of the CRA's primary responsibilities: protecting the public and
10
facilitating efficient and effective financial transactions. Since a single premature
downgrading may have enormous financial ramifications for the rated firm, it is important
to I keep investors up-to-date and (ii) be conservative when making adjustments to ratings
10
(particularly downgrades). A single downgrade, for instance, might result in a massive
financial responsibility and bring a firm to the verge of bankruptcy if it has multiple
contracts with rating triggers. The Enron corporation is still a working example of this
impact today.

(C) Do the Watchdogs Keep an Eye Out?

The US Senate Committee investigating the Enron scandal found that credit rating
agencies (CRAs) had readily accepted Enron's view of its questionable transactions, had
not pressed the company's management with tough questions or conducted independent
research, had not prioritised long-term credit risk, and had therefore awarded the company
2
high marks even though it had acknowledged that its conduct was suspicious and that
market perception was growing to that effect. The recent fallout from this is the subprime
2
mortgage crisis, where preliminary investigations are showing that CRAs, despite being
aware of the deteriorating quality of the underlying assets, failed to act for an entire year
before beginning downgrades of the asset backed securities. This is just one example that
51
aptly illustrates the fact that rating agencies have failed to continuously monitor ratings
and update them in the face of negative information.

The Role of Ratings in Structured Finance (D)

Since CRAs have a larger role in the structuring of the security and get a significant portion
of their money from structured products, it is reasonable to assume that they are invested
33
in the success of these products.

The above-mentioned possible conflicts between financial ratings and other metrics may
become more prominent in the future. Furthermore, CRAs will inevitably confront
40
conflicts when reducing the ratings of insurer firms that offer credit enhancement to the
senior tranches of such structured products (termed "monoline"), since any such rating
reduction may negatively impact all the structured products owned by it. The aftermath of
the US subprime mortgage crisis has not shielded us from these bleak truths.

In closing, (VII)

When it comes to covering and providing for social contact, the law always follows
society, whether it's being used as an instrument of social change or not. This method
necessitates thinking about how social interactions have evolved over time and how we
may want to control those interactions to provide a fair playing field or prevent unintended
2
consequences. Even in the realm of financial law, the rules of the game are determined by
the market regulators based on their perceptions of player behaviour and their desire to
offer opportunities (and, at times, protection) for the smaller but nonetheless major
players. Accordingly, credit rating agencies have developed to facilitate communication
between securities issuers and investors by providing actionable data to the market.

10
Nonetheless, these agencies' freedom (and almost non-regulation) on the qualitative
aspects of the functions they perform, coupled with the fact that they are increasingly
10
relied upon by market players, has made them vulnerable to irresponsible behaviour,
almost to the point of establishing a management command-yielding power but lacking
matching responsibility.
2. Diksha Singh, in an essay titled "Role of Credit Rating Agencies- A Critical Analysis,"
published on 14 January 2021, provides yet another perspective on the industry.

I.
34
 WHO WE ARE AND WHAT WE DO: INDIA'S CREDIT RATING AGENCIES

Investors place a high value on a formal assessment of two types of risk associated with
India's increasingly business-oriented economy: the "risk of payments" and the "risk of
doing business" that arise from the country's open economy and the interconnectedness of
17
its money, capital, and foreign exchange markets. The loss on unlisted corporate debt in
the form of fixed deposits is passed on to small investors. This is why it is essential to have
3
6
a credit score. Simply put, a credit rating is the judgement of a credit rating organisation
about the likelihood that a corporate debt issuer will fulfil his or her debts when they come
due. Investors are able to make an informed choice after considering the interest rate given
7
and the certainty of future principle repayment thanks to the ratings provided by rating
agencies in the form of alphabetic or numeric symbols. In a nutshell, credit rating agencies
do the following:

Investors often rely on credit ratings when making financial decisions. Generally speaking,
credit ratings are accepted as an unbiased estimate of a borrower's propensity to default.
112
When a borrower fails to make timely payments, this is known as a default. Bondholders
28
of an insolvent company often get a return on their investment that is much lower than the
principal owed.

A high credit rating from the agencies allows borrowers to easily obtain the necessary
loans from banks and private investors at reasonable interest rates.
Structured goods are pre-packaged investments that often comprise interest-related assets
61
in addition to one or more derivatives, and the role of credit rating agencies in this market
is an important one. They are linked to a basket or index of assets and support
individualised risk and return goals.

• Obligatory Function Towards Regulators: Credit Rating Agencies are also obligated to
37
perform a role towards regulators such the Securities and Exchange Board of India and the
35
Reserve Bank of India. However, only the six credit rating agencies that are registered
with the SEBI are required to meet such requirements.

Two: What Goes Into Getting Your Credit Score

67
The ratings given by a credit rating agency may be affected by a number of different
variables.

• The likelihood or readiness of the debtor to make his debt repayments. Here, credit rating
134
agencies do the math on the issuer's ability to pay back the principle and interest to the
investor, taking into account factors including the issuer's existing and potential future
cash flows, performance history, market standing, managerial efficacy, etc.

• The total amount and breakdown of outstanding debt.

• The creditworthiness of the borrower or issuer, as well as their earning capacity and
anticipated cash flows.

The interest coverage ratio indicates the frequency with which the borrower was in a
position to safely meet its fixed interest commitments.
The borrower's liquidity is analysed by calculating the asset-to-liability ratio.

Priority of claim protection against the borrower's properties and the value of any collateral
offered as additional security.

III.

8
A METHOD OR PROCESS FOR DETERMINING A BORROWER'S CREDIT
WORTHINESS

36
A credit rating is initiated when a borrower/issuer formally requests that a rating agency
42
evaluate his obligations and assign a rating. All ratings in regard to political, economic,
and financial developments and market trends are continually monitored and recorded by
a credit rating agency. It's fair to say that when it comes to issuing credit scores, almost all
rating organisations use the same criteria.

17
The rating process begins with a formal request from the issuer or borrower firm that wants
to have its obligations under instruments and securities rated. The next step is for the rating
agency and the borrower to enter into a legally binding contract that outlines their
respective responsibilities.

When the credit rating agency receives the aforementioned information, they will allocate
the work of rating to a team of two analysts. These analysts will have the necessary
expertise in the linked sector to complete the assignment.

It is the responsibility of the committee to inform the borrower/issuer of its rating decisions
3
and to provide adequate justification for those decisions. The issuer has the option to
accept or reject the rating, and the agency will not share the rejected rating with anybody.
After an issuer accepts the ratings, the rating agency is obligated to make them public
through a circular or report.

Conclusion:-

The importance of credit ratings as a factor in crucial management choices has been well-
documented for a long time. Yet, studies' conclusions on the effects of credit scores on
capital-allocation choices are not unanimous. It has been argued by some academics that
insufficient data makes it impossible to draw firm conclusions. If a company has a recent
or impending credit downgrade, it may be able to keep its rating by restructuring rather
than debt issuance. In other words, you can't have one without the other when it comes to
safety and risk. The rating agencies' descriptions of rating symbols range from "safety" at
37
the top to "certainty" (or lack thereof) at the bottom. A speculative grade instrument is
defined by a rating agency as having "an insufficient degree of confidence about timely
fulfilment of financial obligation," which provides no more than a rough assessment of the
risk involved. When asked what they thought a speculative grade was, the majority of our
institutional respondents said it was an instrument with a high probability of default, while
the majority of our individual investors said it was high risk. This may suggest that the
respondents in question do not see any danger in using a more sophisticated instrument.
The grading system is not simple to comprehend and decipher. Larger rating agencies in
India likely have amassed enough information at this point to offer default probability
estimates for instruments categorised differently based on their ratings. The problem,
however, is one that should be looked at on a regular basis.
Anand Wadadekar, a third author who authored an essay based on data on CRAs, writes
that CRAs are "a body corporate which is involved in the business of rating securities."

Introduction:-

38
The creditworthiness of a debt instrument is determined by the rating agency's assessment
of the issuer's capacity and desire to satisfy the debt service obligations when they become
3
due. A credit score is a numerical representation of an individual's, a company's, or a
nation's expected return on investment. It's a score given to a borrower based on their credit
report. Lenders often require that credit bureaus provide them with an assessment of a
prospective borrower's creditworthiness, which is also known as a credit rating. Current
assets and liabilities, as well as historical financial data, are used to assign credit scores.
Whether or not a potential lender or investor should provide credit to a certain individual
66
is based in large part on that individual's credit rating. When a borrower has a low credit
score, the creditor sees a greater probability of default on the loan and responds by
charging a higher interest rate or rejecting the loan application altogether. It's important to
8
remember that a credit rating is awarded to the investment instrument, not the issuing firm.
71
Report this ad to a Credit Rating Agency (CRA) A Credit Rating Agency (CRA) is an
organisation that provides opinions on the creditworthiness of companies that create
38
bonds, certificates of deposit, and other financial instruments.
67
In India, there are primarily four credit rating agencies:
8
Investment Information and Credit Rating Agency of India Limited (ICRA), Associate of
25
Moody's Investors Service Fitch Ratings, Associate of Standard & Poor's Credit Analysis
& Research Ltd. (CARE Ratings), and Credit Rating Information Services of India
Limited (CRISIL).
So what if people can't trust credit scores?
:
59
Money Market Funds and Commercial Banks

Financial Institutions, Leasing Firms, Insurance Agencies, and Bond Issuers

As was previously said, a credit rating is the judgement of a neutral third party professional
organisation based on a thorough examination of all relevant elements. When trying to
decide how to allocate their funds, investors would benefit greatly from such a
recommendation. It also facilitates issuers' ability to reach out to investors and earn their
trust, which is crucial for the successful pricing and issuance of debt instruments. Credit
54
ratings are often used by regulators like the Reserve Bank of India (RBI) and the Securities
and Exchange Board of India (SEBI) to establish eligibility requirements for certain
119
products. The Reserve Bank of India, for instance, requires that each Commercial Paper
be assigned at least a certain credit rating by a regulatory-approved rating agency. Credit
scores can serve as an important factor for forming partnerships and other sorts of
commercial ties.
Rating agencies use a specific approach to determine the creditworthiness of debt issuers.
8
Factors such as (for financial institutions) Capital adequacy & Liquidity, Quality of asset,
Asset/Liability structure, Sourcing of funds, cost of funds, and market position are also
considered.

Assigning a rating is just the first step; regular reviews and updates are necessary to ensure
accuracy. Ratings may require updating if there has been a significant shift in the economic
climate, a company reorganisation, the leadership of the organisation, etc. An important
39
thing to keep in mind is that a rating is only someone's opinion based on the data they have
at their disposal right now. The issuer's ability to pay back its debts may be positively or
negatively impacted by a number of factors throughout time. Therefore, as part of their
investment service, it is crucial that

Credit rating firms keep tabs on any outstanding debt difficulties. Rating agencies often
place matters under credit watch in response to developing events and adjust ratings as
needed, although only after engaging issuers in substantial dialogue. Each rating service
has its own unique system of scales by which it assesses various entities. Typical scales
8
include: AAA, AA, A, BBB, BB, B, A+, AA+, B+, etc.

According to the final verdict (Conclusion) of the third author:

Investors need simple tools to help them make investment choices, and this is where credit
ratings come in. A huge step towards making the financial sector more secure would be a
more systematic, open, and fair process of assigning ratings. However, the investor must
74
keep in mind the "Caveat Emptor" principle of Contract Law. 'Let the buyer beware' is the
literal translation of the Latin phrase caveat emptor. Never lose sight of the fact that
nothing is guaranteed and no investment is completely risk-free. Investors should exercise
restraint with their capital and make informed selections about where to put their money.
7
Before making a final decision, investors should do their own research into the investment
products and the legitimacy of the issuers. Individuals may help keep their credit scores
high by making timely loan payments and by abiding by all applicable laws and
regulations regarding investments, taxes, etc. When applying for a loan, it helps to have a
31
solid credit history and a spotless credit report.
the person's future is safe and easy.
According to a January 2008 article by Marwan Elkhoury entitled "Credit Rating Agencies
5
and their Potential Impact on Developing Countries," the credit rating agencies (CRAs)
play a significant role in the financial markets by assisting in the reduction of the
informative asymmetry between lenders and investors.

40
 Introduction:-

125
Credit rating agencies (henceforth CRAs) are a subset of the financial services industry
5
that analyse and evaluate the creditworthiness of corporate and governmental issuers of
22
debt instruments. It is anticipated that CRAs would play a larger role in the management
of corporate and sovereign credit risk under the new financial architecture. The reform of
121
bank capital regulations culminating in Basel II by the Basel Committee for Banking
Supervision (BCBS) has given them a new lease of life.

126
Credit reporting agencies (CRAs) are a solution to the issue of information asymmetry
between lenders and borrowers when it comes to the former's creditworthiness. Interest
41
rates reflect risk premiums, and lower-rated issuers pay greater risk premiums than better-
rated issuers. Additionally, owing to national rules that prohibit investing in speculative-
77
grade bonds, ratings affect whether or not debt and other financial instruments may be
included in the portfolios of certain institutional investors.

Institutions that assign credit ratings in the global financial system

Consideration of CRAs as "opinion makers" and information asymmetry

A credit rating simplifies a wide range of pertinent facts about a bond issuer or other kind
of financial issuer into a single number.

instruments. Therefore, CRAs aid in resolving primary agent difficulties by allowing

lenders to "penetr the shroud of asymmetric information that surrounds loan arrangements
and assist borrowers emerge from that same fog."

CRAs are certain that their evaluations are subjective assessments. They do not address
49
whether or not an investment is suitable for a particular investor and do not constitute a
recommendation to purchase, sell, or hold an asset. Issuers are affected by ratings because
41
they affect the terms and circumstances under which they may get access to debt markets
via different regulatory frameworks. A significant portion of regulators' duty to evaluate
debt risk has been delegated to CRAs. Investors use ratings as a filter to help them decide
what to invest in and how to allocate their investments.

B.

Basel II and Credit Ratings

Credit ratings have taken on new significance as a consequence of Basel II's modifications
to the capital requirements for banks. Varying types of borrowers might be assigned
different risk weights that ultimately determine the minimum capital charges based on
their ratings. Basel II uses "external credit evaluations" to assign credit risk weights to
each supervisory category.

132
Ratings-based rules have been vital to the economic success of the United States since at
least the 1930s, but their impact is most obvious now. Limiting or forbidding the
acquisition of bonds with "poor" ratings is a common provision in these rules, which
5
affects not just banks but also insurers, pension funds, mutual funds, and brokers. While
5
regulations based on ratings are less common in Europe, they are included in the new EU
5
Capital Requirements Directive that will implement Basel II. These include I non-
investment grade or speculative-grade ratings that relax the issuance conditions or
disclosure requirements for securities carrying a "satisfactory" rating, and (ii) an
investment-grade rating.

Methods and Procedures of Credit Rating Agencies

Q. Quantitative and qualitative approaches A.

When establishing credit scores, CRAs utilise a broad variety of techniques and
42
 72
methodologies. The traditional method used by CRAs is based on a quantitative and
qualitative evaluation that is then approved by a rating committee. In recent years,
22
quantitative statistical models based on publicly accessible data have become more
popular, making the evaluation process more mechanical and reducing the need for
sensitive data. There isn't a best-performing model among them. Circumstances have a
great impact on performance.

"measuring the risk that a government may default on its own obligations in either local
or foreign currency," as defined by S&P Global Ratings, "takes into account both the
ability and willingness of a government to repay its debt in a timely manner."

. Only the expected future likelihood of default is taken into account in Standard & Poor's
ratings. They provide no indication of when a default would occur or how it can be fixed
or recovered;

5
. Expected Loss (EL), a function of both Default Probability (PD) and Recovery Rate
(RR), is the primary factor considered in Moody's ratings (RE). This means that EL = PD
(1- RE); and

. There is equal emphasis on PD and RE in Fitch's ratings (Bhatia, 2002). In addition to

looking back at historical data, analysts are also urged to keep an eye out for potential
breaks in continuity between current and future trends, giving them a more overtly hybrid
nature.
52
Standard & Poor's and Moody's credit ratings are determined by committees rather than
individual experts. The final evaluations given by the committees are very subjective.
While credit rating agencies (CRAs) are transparent about the elements they use to give
sovereign ratings, they are less so when it comes to explaining how they assess each aspect.

VI. Conclusions

43
Financial markets rely heavily on credit rating agencies (CRAs) since they serve to level
22
the playing field between lenders and investors in regards to the creditworthiness of
75
corporations (corporate risk) or governments (country risk) (sovereign risk). Basel II,
which includes CRA ratings into the regulations for calculating weights for credit risk, has
further bolstered the importance of CRAs, whose position has grown with the globalisation
of the financial sector.

22
Credit rating agencies (CRAs) evaluate both publicly available and confidential financial
and accounting data, as well as data on economic and political issues that might influence
a government's or company's capacity to make timely payments on their debts. But CRAs
aren't exactly forthcoming with information about their processes.

Ratings are notoriously slow to move even when the market does, and they often overreact
to even minor shifts. Financial instability and global contagion may have resulted from
this response to previous crises. Furthermore, nations' efforts to keep their rating ratings
may be harmful for long-term investment and development if they impose stringent
macroeconomic measures.

As a result of previous corporate failures like Enron, WorldCom, and Parmalat, lawmakers
are taking a closer look at these organisations. There has been a lot of criticism levelled at
the sector because of how concentrated it is, particularly in the United States.

The NRSRO label used by several states reflects a certification and registration procedure
that is unfair to new businesses. The lack of competition has led to a lack of discipline and
stagnant innovation as a result of this concentration.

5
Policy changes in the United States include the Credit Rating Agency Reform Act of 2006,
50
which established new standards for NRSRO registration and certification processes and
gave the Securities and Exchange Commission (SEC) more authority.

44
To date, IOSCO's publishing of its Code of Conduct has been the most significant
endeavour on a global scale. The purpose of this Code is to provide governance norms for
CRAs that will promote better openness, accountability, and independence in the rating
process. The CESR suggested implementing the IOSCO Code and taking a "wait and
5
watch" approach in its 2005 Technical Advice to the European Commission on Potential
Measures Concerning Credit Rating Agencies.
One more article by SAVITA SHANKAR is titled "The Role of Credit Rating Agencies
in Addressing Gaps in Micro and Small Enterprise Financing: The Case of India" and it
was published in March 2019.

1.

INTRODUCTION

There are around 111 million individuals in India's MSME sector, which consists of 63.38
million businesses (Ministry of MSMEs 2017–18). Since micro, small, and medium-sized
enterprises (MSMEs) rely heavily on human labour, they play a crucial role in a country
like India, where expanding employment possibilities for the huge population is a top
governmental priority. However, research shows that there are several challenges that
India's small and medium-sized enterprises (SMEs) encounter.

Lack of data is frequently blamed for MSMEs' inability to get appropriate funding.
Lenders' loan decisions are based on borrowers' ability to repay, but many SMEs lack the
financial records, credit histories, and collateral necessary to do so. Lacking these,
financial institutions are unable to go further with credit risk assessments. Credit ratings
are one solution for overcoming the informational gaps that exist in the industry. In India,
there have been governmental efforts to have credit rating companies provide MSME
ratings.

Utilizing interviews with rating agencies and MSMEs, this research analyses the
45
 4
regulatory actions implemented and explores the possibility for using credit ratings to
assist overcome the gaps in funding MSMEs in India.

2.

4
Small and Medium-Sized Enterprises in India and Their Role in the Economy

Businesses in India are assigned to the MSME category based on their total capital
expenditures for plant and equipment. Businesses in the manufacturing industry

Including capital expenditures on machinery and equipment of up to Rs 2.5 million (about

4
Businesses having annual revenues of up to Rs 2.5 million ($3,500), between Rs 2.5
million and Rs 50 million ($0.7 million), and between Rs 50 million and Rs 100 million
($1.4 million) are all considered small businesses. Investment restrictions for equipment
and machinery in the service industry are as follows: up to Rs 1 million ($14,286) for
4
micro and small businesses, up to Rs 20 million ($0.29 million) for small and medium
4
businesses, and up to Rs 50 million ($0.7 million) for medium and large businesses. Given
the common absence of records and paperwork among MSMEs, the use of investment as
a metric to characterise them makes sense since it is comparatively easy to quantify and
100
verify. Definitions similar to these may be found in the Micro, Small, and Medium-sized
Enterprises Act of 2006. After ten years, the definitions of various investment types need
to be updated to account for inflation, therefore a law was filed in 2015 to do precisely
4
that. Even though the law hadn't been passed yet, in February of 2018, the Indian cabinet
authorised a proposal to change the definition of MSMEs to one based on yearly income
rather than on investment.

3.

PROBLEMS WITH SMALL AND MEDIUM-SIZE ENTITY FINANCING IN INDIA

46
 89
Nearly 93% of India's micro, small, and medium-sized enterprises (MSMEs) do not utilise
4
any external capital, while slightly more than 5% use institutional finance and 2% use
noninstitutional financing. Only a minority of small and medium sized businesses (11%)
actually use bank loans (Ministry of MSMEs 2009).

The lack of collateral that most small and medium-sized businesses (MSMEs) have makes
it difficult for them to get bank loans (IFC 2012). The fact that they often lack credit
records is another major issue. For this reason, financial institutions should exercise
9
caution when considering extending credit to them. One way to lower lending risk for
micro, small, and medium enterprises (MSMEs) is via a thorough loan evaluation.

45
impact the cost of doing business significantly. Such a large transaction cost may make
lending to MSMEs unfeasible because of the low unit value of typical MSME loans.

Credit scoring algorithms are often employed in industrialised nations to speed up the loan
process and lower the interest rates small companies pay for credit. It is necessary,
4
however, to create such models in the Indian context, utilising actual data on loans made
to SMEs in the past. Credit insights might be obtained from historical data to aid in the
evaluation of loan applications submitted by MSMEs without the need of collateral or
prior credit histories. The use of such models may be a cost-effective and time-efficient
means of evaluating loan applications from MSMEs. However, a huge amount of historical
data is necessary for constructing credible and stable models. Due to the fact that MSME
123
finance has been overlooked for so long, there is no comprehensive database of MSMEs
in India.

4.

THE VALUE OF SMALL AND MEDIUM-SIZED ENTITY CREDIT RATINGS

122
Credit ratings help eliminate information gaps on micro, small, and medium-sized
47
enterprises (MSMEs) on a systemic level. Specifically, the credit rating report is useful for
bankers as a reference document since it contains in-depth data on the company's activities,
strengths, and dangers. It is true that banks do their own appraisals before approving loans,
but with the help of the information provided in a credit rating report, the assessment
4
process may be streamlined. This means the micro, small, and medium-sized enterprise
loan application process is much quicker.

35
According to the Reserve Bank of India's (RBI) April 2007 instructions for implementing
the capital adequacy framework under Basel II, banks may also utilise external credit
ratings to estimate the risk weights for their exposures.

82
If a company is rated AAA, AA, or A by the Securities and Exchange Board of India
(SEBI), the bank will apply a 20%, 30%, or 50% risk weight to the loan. For loans where
the risk weight is below 100%, the required reserve capital from the lending institution is
also lower. This money saved may be used to reduce the borrower's interest rate. This
4
means that having access to a credit rating not only speeds up the bank's loan evaluation
process, but also allows the bank to offer the borrower a more preferable interest rate.
Based on discussions with representatives from credit rating agencies and rated SMEs, it
has been determined that a decrease in interest rate of between 25 and 75 basis points is
4
conceivable with a credit rating in the top three notches.

However, there are restrictions on how banks may utilise credit ratings. Financial
institutions are prohibited from relying just on one rating agency's assessment.
4
Furthermore, they should file all claims with the same agency (RBI Master Circular Basle
III Capital Regulations 2013).

Results and policy suggestions

In order to properly finance micro, small, and medium enterprises, three factors must be
considered.
48
The availability of financial resources is the first issue. the government has taken many
measures to increase support for the industry. MUDRA Bank's establishment increases the
availability of resources for "last mile" service providers. The establishment of new banks,
particularly small financing institutions, with a concentration on the industry, has also led
to an expansion in the number of last-mile suppliers. There have also been developments
in market-led finance sources, such as specialist NBFCs and digital lending platforms.

Loans to the MSME sector may or may not be provided, depending on the market
conditions at the time. Inasmuch as it is crucial for lenders to have reliable means of
evaluating

92
decreasing the information gap between lenders and borrowers. The second crucial facet
of MSME loans is this. Here is where credit ratings come into play. Credit ratings are a
135
costly service, which is why the Indian government has started subsidising them. Small
and medium-sized enterprises (SMEs) have a sporadic history of using credit ratings due
to the ebb and flow of budgetary resources as a consequence of several external factors.
45
Many micro, small, and medium-sized enterprises (MSMEs) who are being assessed for
the first time are hesitant to do so without a subsidy since they have no clue what type of
136
rating they would get. The PCRS must maintain its financing in order to serve the country's
significant population of unbanked MSMEs. Given the scheme's historically inconsistent
114
funding, credit ratings will continue to play a small part in determining whether or not
9
micro, small, and medium-sized enterprises (MSMEs) have access to necessary financing.
Other helpful developments include the expansion of businesses offering personal credit
reports and initiatives to give MSME rankings based on credit history. Importantly,
4
prospective lenders may find the availability of GST data, TRDs data, and transaction data
highly beneficial for validating and cross-checking facts given by MSME owners.

17
Lessening the price of loans to SMEs is the third crucial feature of micro, small, and
medium-sized enterprise (MSME) financing. Small and medium-sized enterprises
49
(MSMEs) may thrive with access to affordable financing.
PART III

79
METHOD OF STUDY

2.1 Introduction
Purposes of the Research 2.2
Scope of the Research
2.4 The Value of Education
Methodology, 2.5 Research
Credit Rating Analysis, Version 2.6
Rating of the Country's Credit
Consequences of Having a Low Credit Score
Study Restrictions, or 2.9, for Short

41
2.1 INTRODUCTION
A credit rating agency is a company that employs people who have expertise in
determining the likelihood that debt-issuers will meet their financial obligations. The
creditworthiness of a financial organisation may be estimated by looking at how willing
and how ready it is to fulfil its responsibilities in terms of money, which can be defined as
loans, financial strength, or lending capabilities. Shares get a new rating from credit rating
agencies after they evaluate the company's assets and liabilities. Credit Rating Agencies
(CRAs) were providing assessments on the credit quality of various securities issuers,
including banks.

124
No of the financial strength or otherwise reputation of the Issuer or Sponsor Company,
investors will place more value on a rated security than an unrated security. Credit ratings
provide distinctive guidance for
50
accountants and economists who will be consulted to assess the potential dangers
associated with timely cash compensation for brains and intrigue. Therefore, a "FICO
assessment" is the process of comparing a security or instrument against others on the
market and determining its relative quality and potential using a set of predetermined
23
standards known as "grades" (ordinarily these evaluations are emblematically spoken to,
23
viz. A, AA, AAA and so forth). As the assessed instruments speak for itself about the
sufficiency of the organisation and the quality of the instrument evaluated by the Credit
Rating agency, FICO evaluation is a reliable source of information for certain customers.
. As a quick and easy reference, ratings let financial experts examine the situation with
more clarity. Investors may acquire useful information about the assessed product from
credit rating agencies that they would not have access to otherwise. The goal of rating
agency management is to restore confidence among investors.

13
The Small and Medium Enterprises Rating Agency of India Ltd. (SMERA) was founded
4
in 2005 as a collaboration between the Small Industries Development Bank of India
(SIDBI), the Dun & Bradstreet Information Service (D&B), the Credit Information Bureau
of India Limited (CIBIL), and 11 other leading banks in India. Brickworks Rating (BWR),
35
based in Bangalore, was founded in 2007. It is the fifth Credit Rating Agency in India after
CRISIL (Standard & Poor's), ICRA (

India's Credit Rating Agencies

Financial Services Information Group Ltd. (CRISIL)

107
The Indian Agency for Investment Information and Credit Rating (ICRA).
o
Research and Analysis in the Field of Credit (CARE)
23
Indian Rating and Research Private Limited.
Small & Medium Enterprise Rating Service of India (SMERA)

51
The study's goals are presented in Section 2.2.
Some of the factors of the NSE-listed corporations are evaluated in order to draw
conclusions about the reliability of the rating agencies' criteria. The primary goal of this
article is to verify some of the most crucial deciding variables for stock and bond ratings
used by rating agencies in order to establish whether or not their methods are consistent.
In order to ensure that each rating agency is being reviewed using a same approach, we
will be using a sample of businesses from the same rating category (AAA, AA-/A, and
BBB) for each rating agency to compare.

SCOPE OF THE STUDY 2.3

Globally, corporations are required to maintain a certain credit rating. Different

3
instruments issued by the same firm may have varying ratings due to the fact that the issuer
11
is not rated, but the instrument or asset is. Credit ratings are required because of a lack of
transparency about the issuer and the instrument. The growing reliance of corporations on
public debt to fund projects and meet working capital needs has also led to a proliferation
of debt instruments that, for the sake of investors' security, should be graded. Investors in
India, who often lack the education and information to make sound investment decisions
on their own, often rely on the counsel of intermediaries who advocate on their behalf and
encourage them to pursue a certain course of action.
11
The high levels of default in the U.S. capital markets after the great depression played a
11
crucial role in promoting the growth of the credit rating system. Since the abolishment of
the office of the Controller of Capital Issues and the repeal of the Capital Issues
(Control)Act 1947 in 1992, free pricing of securities of companies and the liberty to go
public without banks or financial institutions stake have made credit ratings the only check
for investors. The expansion was fueled in part by the mandates of regulatory bodies that
public organisations like the government

Institutional investors like pension funds and insurance companies were prohibited from
52
purchasing securities with a rating below a certain threshold. Moreover, investors learned
about ratings and began utilising them as a major risk evaluation tool.
IMPORTANCE OF CREDIT RATE PROVIDERS 2.4

83
In other words, Credit Rating establishes a relationship between potential loss and
potential gain. Therefore, they provide a yardstick by which the inherent danger of every
7
instrument may be measured. An investor uses the rating to determine the amount of risk
involved, and then compares the provided rate of return to his anticipated rate of return
6
4
(for a given degree of risk) in order to find the best possible risk reward trade off. In the
absence of a Credit rating structure, the risk perception of a common investor is dependent
to a large part on his acquaintance with the names of organisations and his perceptions of
85
those organisations. In practise, it would be impractical for a corporate guarantee of a debt
instrument to provide each potential investor a chance to conduct a thorough evaluation of
the risk involved. It is challenging for the average investor to evaluate all of the financial
data at their disposal and use it to make informed risk assessments. Thus, the importance
of having a high credit score in the present cannot be overstated.

Several organisations in India rate the safety of borrowing and investing in different forms
of debt and capital. Investors may use the offered rating to learn more about the level of
risk associated with the assets. At the same time, these ratings are assigned to people,
companies, and organisations based on their credit histories and propensities for making
130
payments on time. The better a person, organisation, or corporation's credit score, the
easier it will be to recruit investors. The following are the most crucial aspects of a credit
score:

105
• A person's creditworthiness may be evaluated quantitatively with the use of a credit
rating.

• The credit rating assigned to a debt or investment instrument allows buyers to monitor
the security's risk profile and make an educated choice.
53
Businesses with high credit ratings have an easier time luring investors, and their visibility
increases across the board.
• A strong credit rating is a useful resource for firms seeking emergency funding.
Creditworthy people will have an easier time getting low-interest loans in a timely manner.
Large mutual fund pools provide more financial market participation, which in turn boosts
market efficiency and broadens access to the market. We analysed the market, analysed
the trends in the financial markets, and made an educated choice to diversify our holdings.
We don't have to speculate or place bets on long shots. A stable market is the result of all
decisions being data-driven. Investors gain confidence and financial stability when they
know exactly what to anticipate from their portfolios thanks to full disclosure of
investment techniques and projected returns.
2.5 METHODS OF STUDY DESIGN

SECTOR OR SCIENTIFIC UNIVERSE:

The research relied only on previously collected information from the public domain.
Corporate credit rating methodology is employed for the research, with certain
characteristics (such as a company's profitability and solvency ratio) taken into account.
23
The data used for this rating consistency study spans from April 16th to March 20th. Debt-
53 53
equity ratio is one example of a long-term ratio, whereas current ratio and quick ratio are
103
examples of short-term ratios. Profit before interest and taxes (PBITA) is a measure of a
company's financial health that takes into account both the pretax and posttax portions of
its earnings.

ratios of profitability have been analysed as well. Data like this is taken into account in the
research since credit rating organisations factor in this percentage when assigning grades
to different businesses.

2.6 CREDIT RATING ANALYSIS

54
The issuer-to-be approaches the credit rating agency first for an assessment. Experts in
banking analysis should be trusted with full access to necessary resources so they may do
thorough research on the financial institution's strengths and flaws. These are the most
important things to keep in mind:

1.

The Analysis of a Business or a Company

As part of this process, we assess our legal standing, operational efficiency, market
position, and exposure to risk within the industry.

• Industry risk: competition kind and basis, critical success elements, demand/supply
balance, industry structure, government regulation, etc.
19 1
Where the firm stands in terms of the industry's market in terms of things like market
share, competitive advantages, selling and distribution agreements, product and customer
diversity, etc.
• The effectiveness of the company's operations in comparison to those of its rivals. This
104
includes the company's locational advantages, labour connections, cost structure, and
manufacturing.
• Legal Standing: Prospectus Terms; Trustees and their Duties; Payment and Forgery
Protection Mechanisms, etc.

2.

Forecasting Economic Conditions

An in-depth investigation of the numerous economic activities and an analysis of the

1
features unique to the industry whose problem the analyst is concerned with are necessary
for a proper evaluation of an instrument. It would be foolish to disregard these elements,
55
as each company is always exposed to a new environment, and as economic activities have
an effect on corporate profitability, investor attitudes and expectations, and the value of
the instrument. Thus, we cannot dismiss the importance of factors like GDP growth,
national income, and government spending. Economists utilise polls and a wide range of
economic data and indexes to make their projections.

3.

Economic Forecasting

Accounting, profits, cash flow security, and cash flow flexibility are all factors to be
considered.

42
Overstatement or understatement of earnings; auditors' qualifications; techniques of
income recognition; inventory value and depreciation policies; off-balance-sheet
obligations, etc.

• Earnings Security — Methods for Increasing Profits in the Future; Profitability Ratios;
Earnings in Relation to Stable Revenue.
19
• The sufficiency of cash flows in light of debt, fixed, and working capital requirements;
the uncertainty of future cash flows; the adaptability of capital expenditures; the efficiency
with which working capital is managed, etc.
• Monetary Modularity: Contingency Funding Strategies in Times of Stress; Access to
Additional Capital for Asset Redeployment
4.
Measurement of Administration Performance

a) Proven management planning and control system, strong bench of capable managers,
well-thought-out plans for the future.
Analyzing resilience to adversity (b)
56
c) Objectives, guiding principles, and methods.

5.

Analysis of the Earth's Geography

There are benefits and drawbacks depending on where you are.

Added value for the business, department, or section in the past.

6.

Analytical Foundations

The evaluation of financial institutions requires a thorough application of fundamental

analysis. The company's interest and tax sensitivity, profitability, and liquidity
management are only some of the factors that will be examined.

1
• Liquidity Management: Capital Structure; term matching of assets and liabilities policies
and liquid assets in respect to financing obligations and maturing deposits.
• Asset Quality: The effectiveness with which a corporation handles credit risk (including
sector risk, individual borrower exposure, issue credit management, and so forth).
1
Historical earnings, spread on fund deployment income on non-fund base services,
accretion to reserves, etc.
• Interest and Tax Sensitivity—Exposure to Interest Rate Changes, Hedging Against Tax
Decreases, etc.

57
Rating of the Country's Credit

A country's credit rating indicates the cost-effectiveness with which it may borrow money
from foreign investors. Investments in countries with low credit ratings come with steep
discounts, a high return, and a significant degree of risk. The possibility of a negative
event, such as a default, is a risk. Credit ratings are based on the analysis of a country's
external financial statements and macroeconomic conditions, with an eye towards the
future. Whenever a nation is being considered for a high credit rating, the following factors
must be taken into

• Increases in GDP and GDP per capita, population, infrastructure, financial management,
savings rate growth, manufacturing output, agricultural output, service sector expansion,
etc.
1
• Trade and payment balances; exports; export pricing; export market diversification;
global competition; import substitution; etc.
The ratio of a country's debt service to its GDP is a measure of its openness to outside
influence. This metric measures the proportion of a country's foreign debt to its overall
external profits, which might come from a variety of sources including exports, tourism,
etc.
1
• The breakdown of debt, including details on interest rates, commercial borrowings, the
interest rate structure, and the percentage of external debt.
50
• Liquidity consists of the amount of reserves, the amount of foreign exchange reserves,
the ratio of reserves to imports, and the amount of assets, such gold, guaranteed by the
currency.
Socio-religious disputes, considerable resistance to the government, uneven economic
distribution, ties with neighbouring nations, and unpredictable political forces all
contribute to an environment that is neither stable politically or internally.
1
Fiscal imbalances and enforcing austerity measures; inflation and price stability; political
obstacles; economic change and policy agreement;

58
1
While political and economic dynamics are obviously a primary determinant of sovereign
credit risk in emerging market nations, the financial constraints due to fiscal indiscipline
pose danger to liquidity issues and default, which in turn affects a country's credit rating.
Improvements or declines in creditworthiness are most readily correlated with
government's ability to rein on spending.

Consequences of Having a Low Credit Score

A few of credit ratings' downsides include the following:

• The ratings process is an effort to help investors and creditors assess the dangers of a
certain financial instrument or debt obligation. Market conditions and individual risk
tolerance are not considered in any effort to provide a recommendation.
Some fundamentals are used as the foundation for the rating system. For example, the
organisation does not conduct audits. As a result, it can only utilise data that the user
actively inputs. Therefore, the grading process is undermined to the degree that the
information given is erroneous and incomplete.
• If a certain business's instruments tend to have lower ratings, that company may have an
incentive to seek out the highest possible rating, undermining confidence in the reliability
of ratings overall.

3.0 RESTRICTIONS IN THE STUDY

Credit rating in India has several restrictions. Credit ratings have many advantages, but
there are also certain areas of worry that must be addressed, such as economic and political
situations and the need for control of rating organisations. Negative aspects of India's
credit ratings are as follows.
1.
There is no standardisation across Indian rating agencies.
3
There is little consistency among the credit rating agencies in India, notably among
CRISIL, CARE, and ICRA, making it difficult for the typical Indian investor to make
59
sense of the ratings.

2.

No unified grading system:

Credit ratings for the same instruments are not standardised among rating organisations.
There are six tiers of fixed deposits and five tiers of promissory notes.

3.

In India, rating agencies do not have a set charge structure.

There is a lack of consistency in the borrowing community due to the fact that credit rating
companies charge varying charges for their services.

4.

Deficiencies in Distinction
However, no differentiation is made between stock instruments and mutual funds. That's
a big problem with credit ratings in India.

5.

Rating exercises should be required of equity instruments and mutual funds. Investors in
India need to be aware of the pros and cons of the several private mutual funds available
to them.

6.

Distinctions between two credit-rating services:

Another drawback is that if two separate credit rating companies give you a different score,
60
you have no recourse in India. Someone could rate it as "safe," while someone another
would rate it as "risky." Can you tell me what kind of recourse I have in this situation?

32
to the general public? A credit rating from a third credit rating agency is required in similar
circumstances in other nations.

7.

Credit Ratings in India Cannot Be Trusted:

There seems to be no way to prevent the failure of even AAA-rated businesses in India.
For instance, when CRB Capital Markets, which had an annual turnover of Rs.1,000 crores
37
and a 'A' credit rating, collapsed, neither the Securities and Exchange Board of India nor
the Reserve Bank of India could save the investors. The Indian credit rating agency is not
open to the public.

87
As a result of the proliferation of credit rating agencies, the nation has recently seen a stock
market collapse and the demise of CRB Capital Markets. Credit rating agencies that are
still operational will look bad as a result of this.

61
 CHAPTER 4

DATA INTERPRETATION AND ANALYSIS

1. Are you aware about the term CRA before?

Table 4.1: Percentage of awareness

Yes No Maybe

52% 38% 10%

Fig 4.1

Interpretation:- To draw the inference there are 52% of the people who were
aware about the concept of Credit Rating Agencies and 38% were unaware with
10% who might have basic knowledge about it.

62
2. Do you know what is a CRA?

Table 4.2: Percentage of knowing

Yes No Not sure

50% 34% 16%

Fig 4.2

Interpretation:- Credit Rating is a concept that is not familiar with a lot of

people. As it deals with different entities of a company to know its
creditworthiness. Here with 50% of people who knows what is CRA, there are
people with 34% who doesn’t know about it and unlike other 16% who are not
sure what it means.

63
3. What do you think CRA stands for?

Table 4.3: CRA Full-form

Credit rate agents Credit rating agencies Credit research

associate
10% 90% -

Fig 4.3

Interpretation:- It is quite obvious that topic itself is named as Credit Rating

Agencies and respondents knows about it.

Around 90% of the respondents are acquainted with it and 10% aren’t.

64
4. What's the first thing comes in your mind the term CRA?

Table 4.4: Term CRA

Financial Institution A rating firm A venture capital

38% 54% 8%

Fig:4.4:

Interpretation:- It is very important to first understand what is CRA.

Considering the responses of previously asked questions in the survey it is

quite obvious that many responders are aware of the term CRA. But some
people got confused between institution and a firm.

Around 54% thinks it is a rating firm which actually it is.

People with 38% elected the term financial institution and surprisingly 8%
thinks that it is a venture capital which is completely different part of it.

65
5. Do you know India's first Credit Rating Agency ?

Table 4.5: First CRA in India

Yes No

40% 60%

Fig: 4.5

Interpretation:- It is difficult but responders who have knowledge they mightknow.

It is obvious that 60% of the majority people don’t know India’s first creditrating
while surprisingly 40% of the responders knows the answer.

9
CRISIL was the first Credit Rating Agency in India

66
 20
6. In your opinion what do you think is the main work of Credit Rating
Agencies?

Table 4.6: Main work of CRA

To assess the To evaluate To evaluate and To check the

money market finance 47holding assess the documentation
power of the creditworthiness process related
company of the company to loan

8% 32% 50% 10%

Fig 4.6:
84
Interpretation:- The main work of rating agencies is to evaluate the
33
creditworthiness of the company. These agencies have the authority to rate
companies, state governments, non-profit organisations, countries, securities,
local government bodies, and special purpose entities.

Nearly 50% of the people have responded correctly. Other responders such as
32% thinks that the main job of the company is to hold finance power of the
company than any further reasons mentioned above.

67
7. Do you use credit ratings in making investment decisions?

Table 4.7: Investment Decisions

Yes No Maybe

38% 34% 28%

Fig 4.7
9
Interpretation:- Credit rating provides investors with rating symbols which
carry information in easily recognisable manner for the benefit of investors to
perceive risk involved in investment. Rating symbol gives them the idea about
the risk involved or the expected advantages from the investment.

20
Around 38% of the investors take quick decisions about the investment to be
made in any particular rated security of a company. Other 34% doesn’t invest in
as such.

68
 12
8. What do you think is a good credit rating is established by?

Table 4.8: A good credit rating

Being nice Making Not making any Being a terrible

person payments on payments in your person
time credit

6% 84% 8% -

Fig 4.8

Interpretation:- It is well obvious that making payments on time boost up the

credit score and your credit utilization ratio increases significantly, thus
increasing the risks of default.

Nearly 84% people think building up good credit score can be established by
doing payments on time. Other 8% and 6% responders have different perspective
towards a good credit ratings.

69
 12
9. In your opinion if a person or business that is owed money is?
Table 4.9: Indebted money

Creditor Debtor Investor None

32% 38% 26% -

Fig 4.9

Interpretation:- When someone owes the money, they are known as creditor
and the person who owns their money is debtor.

So 38% of the people think it as debtor and 32% of the people think they are
creditor. Remaining 26% are the investors.

70
 12
10.From the list below, pick an advantage of using credit to complete a
purchase?

Table 4.10: Advantages of credit

Impulse buying Overbuying Financial Instant

Difficulties Enjoyment

30% 8% 40% 22%

Fig 4.10
39
Interpretation:- Credit can be a powerful tool that helps you improve your
finances, get access to better financial products, save money on interest etc.
The biggest benefit of good to excellent credit is saving money.

Nearly 40% of the people believe a good credit will help them to overcome their
financial difficulties. Other 30% looks for buying which helps them for a good
score in the future. Credit has other benefits too which help 22% of the people to
fulfil their needs and enjoyment.

71
 20
11. In your view, are the ratings provided by all the agencies equally
reliable?

Table 4.11: Reliability

Yes No Not sure

28% 28% 44%

Fig 4.11
18

Interpretation:- Credit rating agencies such as CRISIL, ICRA, CARE ratings

etc exist to provide an independent evaluation creditworthiness of a company
issuing a bond. Investors and institutions rely on these agencies’ ratings to plan
their portfolio and investments.
18
Rating agency downgrades in many cases have been after the fact. Many a time
these agencies even completely miss the existing stress in a company.
So 28% of responders choose yes as they think it’s is reliable, were most of the
responders i.e around 44% are unaware or not sure and remaining 28% doesn’t
no about it.

72
 6
12. What is the main reason if an established credit rating can be damaged?

Table 4.12: Damaged credit rating

Borrower fails to A person income A person expense None

12
repayment terms increases decreases
an agreement

64% 14% 12% 10%

Fig 4.12

Interpretation:- It is quite obvious when borrower fail to pay off the borrowed
amount even after a certain period of time it will cause severe affect on their credit
history.

The analysis shows that 64% of the people choose first option as they are sort of
right. 14% of the respondents would prefer a person income increases and 12%
would go for person expense decreases. 10% of the people think it won’t damage.

73
13.In your view, are ratings reliable as a source of information for making
investment decisions?

Table 4.13: Investments

Agree Disagree

74% 26%

Fig 4.13
1
Interpretation:- Credit ratings are an important parameter to consider while
investing be it in fixed deposits (FDs), company deposits, NCDs or other
investments. For equity, initial public offerings of shares are also rated.

So merely 74% of people agree rating as a reliable source of information. While

26% disagree with same.

74
14.How important is credit rating in the set of information you use in
making investment decisions?

Table 4.14: Importance of Investing

Better Investment Worse Don’t Know

Decision

80% - 18%

Fig 4.14
1
Interpretation:- A rating downgrade essentially means that the company's ability
to service/repay that particular financial instrument has declined which inturn
hampers the company's ability to borrow further.

1
However, one should not base one's investment decision solely on the credit
rating of an instrument or company. This is because ratings are not constant
and, there is every possibility that it can change during your investment period.
Credit rating should be used as one of the parameters in your decision.Around
80% responders believe it’s a better decision and 18% aren’t sure.

75
 12

15. How you can start building a good credit history by?

Table 4.15: A good credit history

12
Attending college Getting a part- Buying a few All of the above
regularly time job things on credit
and paying the
bills promptly

6% 20% 50% 24%

Fig 4.15
29
Interpretation:- A good or excellent credit score will save most people hundreds of
thousands of rupees over the course of their lifetime. Someone with excellent
credit gets better rates on mortgages, auto loans, and everything that involves
financing.
Merely 50% of the responders consider buying things on credit and pay on time
will help them in future with a good credit history. 20% thinks all of the above
come up the good credit. Remaining 6% and 20% thinks attending college and
getting part-time job will boost up their history.

76
16. Which of the following describe your knowledge for CRA?
Table 4.16: Knowledge on CRA

Basic Knowledge Good Knowledge Not sure

62% 18% 20%

Fig 4.16
34
Interpretation:- A credit rating is company that assigns the credit rating, which
rate a debtor’s ability to pay back debt by making timely principal and interest
payments.

So around 62% of the responders have basic knowledge on credit rating. While
18% have an excellent knowledge and 20% are unaware about the same.

77
17. If an instrument is rated 'AAA', what does it convey to you?
Table 4.17: Instrument Ratings

Best Better Worst

70% 26% -

Fig 4.17
24
Interpretation:- AAA is the highest possible rating that may be assigned to an
issuer's bonds by any of the major credit rating agencies. AAA-rated bonds have
a high degree of creditworthiness because their issuers are easily able to meet
financial commitments and have the lowest risk of default.
6
Since AAA-rated bonds are perceived to have the smallest risk of default, these
instruments tend to offer investors the lowest yields among bonds with similar
maturity dates.

Nearly 70% of the responders have chosen best as AAA rating and 26% as a
better.

78
18.Apart from ratings, what other information do you use for making
investment decisions?

Table 4.18: Investment goals

117
Return on Risk Investment Inflation Rate
Investment Period

54% 24% 16% 6%

Fig 4.18
30
Interpretation:-Investment decision- It relates to as how the funds of a firm are
to be invested into different assets, so that the firm is able to earn highest possible
return for the investors.

Almost 54% of the responders have chosen return on investment which is first thing comes in
every investors mind. While 24% have chosen risk which comes after (ROI) how much risk is
involved while investing.
Other 16% and 6% have chosen Investment period and Inflation rate

79
19. Do you know who regulates Credit Rating Agencies in India?
Table 4.19: Regulation of CRA

SBI SEBI SIDBI

22% 70% 8%

Fig: 4.19
58
Interpretation:- In India, the Securities and Exchange Board of India (SEBI)
primarily regulates credit rating agencies and their functioning. Where State Bankof
88
India (SBI) is a multinational public sector bank and financial services.
56
SIDBI is the Primary Financial Institution for promoting, developing and
6
financing MSME. Besides focussing on the development of the MSME, SIDBI
also promotes cleaner production and energy efficiency.

So 70% are correct by answering SEBI. Other 22% and 8% are unaware about it.

80
20. In your opinion which is one of the main function of CRA?

Table 4.20: Main function of CRA

Provides quality Education Policy Social awareness Industrial

info taxation

66% 20% 8% 6%

Fig 4.20

Interpretation:- There are different types of function operated by rating agencies

but its main
27
function is to give quality information and the rating is provided
based on the creditworthiness of an individual or a company is decidedbased on
the lending and borrowing transaction done in the past.

So 66% of responders have chosen quality information regarding rating which

27
is determined after weighing the statements of liabilities and assets, and their
ability to meet the debt obligations.

20% have chosen education policy which is not’s its part. Other 8% and 6%
responders thinks it’s a social awareness and industrial taxation which is again
not their part.

81
 Findings
59
• While India's G-sec market is well established, the country's corporate bond market is
still in its infancy. When compared to the global debt market, the corporate debt market is
minuscule. Seven credit rating agencies
2
(CRAs) are legally allowed to grade debt
securities in India, but just three—CRISIL, CARE,
28
and ICRA—control 80% of the market.
It is generally agreed that creditworthiness is the most important consideration when
handling
2
debt. The Credit Rate is a numerical indicator of how creditworthy an individual
is. Credit Rate, credit-rating
32
agencies (CRAs), and a credit-rating model were all topics of
our literature research. Credit ratings are assigned by credit reporting agencies (CRAs) to
help banks and other financial institutions make decisions about which debtors to provide
credit to. In order to identify areas ripe for additional study in the field of credit ratings,
this article reviews the literature published in this area from January 2001 through
November 2020.

To make sense of the current literature, bibliometric analysis is used. Then, via a procedure
called a "structured review," we go further into the ideas behind and practises of research
and CRAs.
• Additionally, a mashup of bibliometric and structured reviews of scholarly articles from
well-known databases is created to form a hybrid literature review.
To find the blanks in the credit-rating landscape and figure out how to fill them in, we
collected and analysed data from 153 studies.
Our research shows that majority of these studies are a direct result of the consequences
of the financial crises of 2008 and 2016.
The evaluation found that 48% of the studies emphasised the creation of a new credit-
rating mechanism without conducting a thorough analysis of the current system. 2
• This report adds to the current body of knowledge by urging academics and CRAs to
create a sector-specific credit-rating system by analysing existing

using cutting-edge methods like Multiple Regression, Neural Networking, and AI to

enhance existing models.
•
We've laid up a workable plan of action for future credit-ratings research.
•
In this analysis, we found that the parameters used to determine creditworthiness vary
depending on the industry.
•
Over the years, India's debt market has grown. The number of services provided by rating
companies to provide ratings and grades has also increased significantly.
•
Increased rivalry among rating agencies in India is a natural consequence of this
development. It would be useful to analyse the level of competition and market
concentration among rating agencies.
•
82
 2
Here, the Herfindahl-Hirschman Index (HHI) and its inverse are used to quantify levels of
market concentration and examine levels of competitiveness.
•
Concentration in an industry is measured by this metric, which takes into consideration
the total number of companies as well as their individual market shares.
•
In order to calculate this metric, we factor in the quantity of outstanding securities in each
category as well as the rating revenues of credit rating organisations.
•
The information utilised in this analysis was collected from publicly available sources,
including the CRAs' mandatory regulatory filings.
•
80
From the 2011-12 academic year to the 2015-16 academic year, this analysis covers five
years of data. This analysis indicated that the market for CRAs is extremely consolidated,
with CRISIL, CARE, and ICRA holding the vast majority of the market share based on
rating income.
•
2
The market is • a) highly concentrated in financial institutions and structured obligations;
• b) moderately concentrated in corporate securities; and • c) less concentrated in
government and co-operative societies, as measured by the number of outstanding
securities in each category.

We also find that although market concentration has been reducing for corporate,
government, co-operative society, and structured obligation categories, it has been
growing for financial institutions.
•
Many players in India's financial sector are required to use credit ratings, which is seen to
have contributed to the industry's dysfunction by stifling competition.

Conclusions and Suggestions 5.2 Recommendation:-

Although CRAs are crucial to the functioning of the financial system, there are
fundamental issues with how they are governed. Authorities in a number of regions are
working to address these issues by drafting new regulations.
120
As a result of SEBI's efforts, CRAs in India are subject to stringent rules and guidelines.
However, there are some worries about

Getting rid of potential biases -

• The 'issuer pays' paradigm and long-term connections that potentially jeopardise
impartiality are at the heart of the rating activity conflict of interest.
Employees, analysts, and CRAs at SEBI should be rotated gradually.
By revising the CRA Regulations, SEBI may make it possible for CRAs to switch to
alternative payment methods like the exchange-pays model, and it can also undertake
83
feasibility studies on the subject.

To Lessen the Practice of Rating Multiple Products -

A well-rounded strategy is required to counter rating-shopping practises.

As such, SEBI should think about creating a system to publish all ratings.

The reasons for withdrawing ratings should be reevaluated by SEBI so that a broader range
of scenarios are amenable to removal.

Instead of outright forbidding early rating projections, SEBI should instead build a
structure to control them.

Investors should be allowed to hold CRAs responsible

• Credit rating agencies (CRAs) should be held responsible by the investors who rely on
their ratings. While reputational damage hasn't been enough to encourage responsibility,
a real threat of lawsuit might assist.
• SEBI should solicit information from investors that may be used to look into CRAs'
operations and take corrective measures if necessary.
With proper protections in place,98 SEBI should include a clause that holds CRAs
accountable for repaying investors for losses incurred as a result of a false or careless
rating.
Reducing the mechanical dependence on credit ratings and regulating rating operations
beyond securities grading-

Instead of relying only on the circular, SEBI should regulate all rating operations of CRAs
that affect the financial system by amending the CRA Regulations to encompass ratings
other than rating of securities.
Regulators should only expand dependence on ratings when they are sufficiently
controlled, and in no circumstance should they extend mechanical reliance on credit
ratings. • The CRA rules and instructions issued by SEBI should address the particular
risks that emerge for various products and entities.

Suggestions:-

To 108
establish such an organisation, a new mindset is required, one that questions the status
quo of the rating agencies from before the financial crisis. Analysts are the first step; they
need not be full-time employees of a rating agency. Consumers of rating agency research 70
for a long time have a good idea of what a rating agency should provide, and they may be
market players from the buy-side and the sell-side, investors and bankers, as well as
researchers. They are aware of the existence of a better strategy.

84
The plan to strengthen credit rating agencies should outline two potential futures. To
begin, it must adhere to a set of professional standards that places a premium on meeting
the requirements of its customers. Second, it has to promise to only accept the most
accurate rating, one that takes into account the future and excludes any prejudice that isn't
based on evidence. The difficulty is in bringing all of these disparate approaches together
into a unified, cross-asset-class culture that can resist the industry's negative trends. All
rating agencies will have to rise to the occasion if they are serious about restoring public
and stakeholder confidence in their services.

Clients need to be actively involved in the process, according to agency experts.

Agencies providing credit ratings should interact with their customers rather than ignore
them. Understanding that their customers' time is important and their job is market-
dependent is essential. Agencies need to
137
be reachable and available for even the most basic
tasks, including answering phone calls in a timely manner.

Transparency on the part of credit rating companies is crucial.

As counterproductive as it may seem, they need to realise that working in isolation in an

ivory tower is not the way to go about things. It causes late-stage unpleasantness for the
bank or issuer much too frequently.

ratings procedure or to a trader juggling many holdings. Clients benefit from a deeper
understanding of ratings agencies' processes when those processes are made clear to them.

The credit rating industry has to work hard to eliminate internal silos.

Ratings might involve coordination across different types of assets. As a result of the asset
classes' constant communication and cooperation, all trades are handled in the most
streamlined and well-considered manner. The results are optimal if you do that.

In order to improve their ratings, credit agencies need to commit to thinking outside the
box and provide fresh insights into the credit industry. It's possible that this will lead to
more reliable ratings overall. For instance, in legacy analysis, there is an excessive focus
on the past. What investors care about most is considerably harder to evaluate, though: a
feel for what the future holds. There is no need to act like you can see the future. However,
they might still outline the important credit factors and potential situations that would be
taken into account as part of the rating assessment.

Rating agencies need to include natural selection -

The past should serve as a guide, but not a prison. It's important to keep up with the
changing credit strengths and risks indicated in ratings, since they affect firms,
governments, and assets. Not only should these characteristics be considered, but also any
85
potential changes in those characteristics34down the road.
The transformation of the banking sector in the wake of the 2008 financial crisis is a prime
example of this. Even the most jaded observer is aware of the significant internal shifts,
such as the fortification of firm balance sheets, and the important external influences, such
as the tightening of regulations and the increased discipline of the market. Despite this,
ratings in the industry have not recovered from their post-crisis lows. Yes, we get it

It's possible that if a crisis occurred once, it may occur again, but we don't believe that
approach serves investors well since it's simple and ignores change.

We must move away from model-based credit ratings.

Credit analysis, in our
96
opinion, may be seen of as more of an art than a science if one is to
be really informed. Credit rating agencies need not use models to guide rating results due
to the fact that there is no universally applicable model. Every issuer, whether in the public
or private sector, has its own unique income and expenditure profiles and, by extension,
its own unique purpose. While it's important to take performance measure trends into
account, they only provide a partial picture. In addition, evaluations of important 48
qualitative elements, such as management's risk tolerance, development strategy, the level
of competition in the market, or the political and economic climate, may be very
speculative. Ratings rely heavily on insights into these characteristics, although they are
difficult, if not impossible, to predict.

Market awareness is essential for credit rating companies.

Not bond analysts, but rather credit analysts. However, markets are important indicators
for credit rating agencies because of the information they provide about the economy as a
whole, individual companies, and whole industries. The habit of often asking oneself
"What am I missing that the market is seeing?" is a good one. That way, no one can ever
say that you're burying your head in the sand.

Conclusion

Both investors and companies seeking investment might benefit from a credit rating.
Having a security, firm, or country rated as "investment grade" puts it on the map
internationally, making it more likely to receive foreign investment and so bolstering an
economy. Indeed, the credit rating is essential for developing market economies to
demonstrate their worthiness of money to international investors; as a result, many
governments and firms would endeavour to preserve and increase their ratings, providing
a stable political climate and improved transparency.

Credit rating agencies serve markets best when they are free to make28
their own decisions,
when they have adopted and strictly adhere to internal procedures to prevent conflicts of
interest and safeguard sensitive information acquired from issuers, and when they are able
to function freely. If credit rating agencies make mistakes, they ought to be held
86
responsible.
16
It is widely acknowledged that credit rating agencies play a crucial role in the financial
market by bridging the gap in information between lenders and investors, on the one hand,
and issuers, on the other, with regards to the financial stability of businesses (corporate
risk) and nations (country risk) (sovereign risk).
When a credit rating is downgraded in a high-income country, the bank's stock price tends
to fall, and vice versa in a middle-income country.
If a security, business, or country has an investment-grade rating, it will be more visible
on the international stage, which will bring in more foreign investment and help the
economy.
Indeed, establishing creditworthiness is essential for developing market economies to
attract international investment.

Financial strength ratings aid securities market authorities in their pursuit of efficiency and
order. Ratings improve the efficiency and openness of marketplaces.
Credit ratings' principal use has been to help investors evaluate the relative safety of
different debt obligations.
With the emergence of new financial instruments and investors'128growing appreciation for
the indispensable services provided by credit rating agencies, it's inevitable that credit
rating will carve out a useful role in the investment decision-making process and
contribute to greater investor protection.
36
Rating agencies play a vital role in the global market and can best serve the market if they
are able to function forever, develop and implement internal norms to minimise conflicts
of interest,
36
and preserve sensitive information obtained from concerns.
Since it is the investor who ultimately pays the price for the credit rating agency's errors,
the agency can ill afford to make too many of them.
Credit specialised rating companies focusing on state government IT should increase
competition in the rating agency industry.
Regardless of the characteristics57of firms, various sectors of the economy, and countries
as a whole, the primary goal of credit ratings is to provide investors with similar
information on credit risk based on a standard rating scale.
21
It's a gauge of the borrower's likelihood of default and of its capacity to meet its financial
debt obligations both in whole and on schedule.
As far as bank loans go, it checks all the 9boxes. Where there is never a bank failure. In
nations with a more developed economy, credit ratings have shown to be a reliable tool
for risk assessment since they attest to a company's openness to scrutiny. Companies'
capacity and desire to timely and in full return their commitments are reflected in their
credit ratings, which are based on these factors as well as others, including their financial,
sectorial, operational, legal, and organisational profiles.
76
Therefore, we may define a credit rating as an authoritative opinion on the reliability of a
corporation to meet its financial commitments.
87
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https://www.accountinglearning.com

https://www.wikipedia.org

htttps://investortonight.com

https://www.ig.com

https://www.entrepreneur.com

https://www.elearnmarkets.com

https://www.researchgate.net

https://www.bstudies.co.za

https://www.academia.edu

https://www.cleartax.in

88
https://corporatefinanceinstitute.com

https://www.unctad.org

htttps://www.accountingtools.com

https://www.capital.com

https://www.fincash.com

https://regularinnovations.com

https://www.blooomberg.com

https://www.livemint.com

https://www.indiaratings.co.in

https://www.bankbazzar.com

https://www.experian.com

https://www.forbes.com

https://www.ft.com

https://www.thestreet.com

https://www.guardian.com

https://www.godigit.com

https://www.bajajfinserv.in

89
https://www.cnn.com

https://www.etmoney.com

Annexure

1. Are you aware about the term CRA before?

a) Yes
b) No
c) Maybe

2. Do you know what is a CRA?

a) Yes
b) No
c) Not sure

3. What do you think CRA stands for?

a) Credit Rate Agents

b) Credit Rating Agencies
c) Credit Research Associate

4. What's the first thing comes in your mind the term CRA?

a) Financial Institution
b) A Rating Firm
c) A Venture Capital

5. Do you know India's first Credit Rating Agency ?

a) Yes
b) No

90
6. In your opinion what do you think is the main work of Credit Rating
Agencies?

a) To assess the money market

b) To evaluate finance holding power of the company
c) To evaluate and assess the creditworthiness of the company.
d) To check the documentation process related to loan

7. Do you use credit ratings in making investment decisions?

a) Yes
b) No
c) Maybe

8. What do you think is a good credit rating is established by?

a) Being a nice person

b) Making your payments on time
c) Not making any payments on your credit card
d) Being a terrible person

9. In your opinion if a person or business that is owed money is?

a) Creditor
b) Debtor
c) Investor
d) None of the above

91
 10. From the list below, pick an advantage of using credit to complete
a purchase?

a) Impulse buying
b) Overbuying
c) Financial Difficulties
d) Instant enjoyment

11. In your view, are the ratings provided by all the agencies equally
reliable?

a) Yes
b) No
c) Not sure

12. What is the main reason if an established credit rating can be

damaged?

a) A borrower fails to repayment terms of an agreement

b) A person’s income increases.
c) A person’s expense decreases
d) None of the above

13. In your view, are ratings reliable as a source of information for

making investment decisions?

b) Agree
c) Disagree

14. How important is credit rating in the set of information you use in
making investment decisions?

a) Better Investment decision

92
b) Worse
c) Don't Know

15. How you can start building a good credit history by?

a) Attending college regularly and getting good marks

b) Getting a part-time job
c) Buying a few things on credit and paying the bills promptly
d) All of the above

16. Which of the following describe your knowledge for CRA?

a) Basic Knowledge
b) Good Knowledge
c) Not sure

17. If an instrument is rated 'AAA', what does it convey to you?

a) Best
b) Better
c) Worst

18. Apart from ratings, what other information do you use for making
investment decisions?

a) Return on Investment (ROI)

b) Risk
c) Investment Period
d) Inflation Rate

93
19. Do you know who regulates Credit Rating Agencies in India?

a) State Bank of India

b) Securities and Exchange Board of India
c) Small Industries Development Bank of India

20. In your opinion which is one of the main function of CRA?

a) Provides Quality and Dependable Information

b) Education Policy
c) Social Awareness
d) Industrial Taxation

94
 Similarity Report ID: oid:9832:30921843

19% Overall Similarity

Top sources found in the following databases:
16% Internet database 3% Publications database
Crossref database Crossref Posted Content database
13% Submitted Works database

TOP SOURCES
The sources with the highest number of matches within the submission. Overlapping sources will not be
displayed.

forum.venture.com.bd
1 1%
Internet

researchgate.net
2 1%
Internet

mu.ac.in
3 1%
Internet

econstor.eu
4 <1%
Internet

uniassignment.com
5 <1%
Internet

coursehero.com
6 <1%
Internet

docshare.tips
7 <1%
Internet

mbaclubindia.com
8 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

pdfcoffee.com
9 <1%
Internet

National University of Study & Research in Law, Ranchi on 2021-11-20

10 <1%
Submitted works

slideplayer.com
11 <1%
Internet

uwaterloo.ca
12 <1%
Internet

bankbazaar.com
13 <1%
Internet

Coventry University on 2021-07-09

14 <1%
Submitted works

educba.com
15 <1%
Internet

slideshare.net
16 <1%
Internet

inet.vidyasagar.ac.in:8080
17 <1%
Internet

indmoney.com
18 <1%
Internet

dokumen.pub
19 <1%
Internet

documents.mx
20 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

Queen Mary and Westfield College on 2022-03-14

21 <1%
Submitted works

Zambia Centre for Accountancy Studies on 2021-10-10

22 <1%
Submitted works

ijcrt.org
23 <1%
Internet

Mercer University on 2020-03-18

24 <1%
Submitted works

studymode.com
25 <1%
Internet

niilmuniversity.in
26 <1%
Internet

cleartax.in
27 <1%
Internet

"The Rating Agencies and their Credit Ratings", Wiley, 2012

28 <1%
Crossref

investopedia.com
29 <1%
Internet

Buckinghamshire Chilterns University College on 2021-12-03

30 <1%
Submitted works

Open University of Mauritius on 2021-12-04

31 <1%
Submitted works

fr.slideshare.net
32 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

indiafreenotes.com
33 <1%
Internet

media.smartleadersias.com
34 <1%
Internet

Kaveri Krishnan, Arnab Mukherji, Sankarshan Basu. "Market responses...

35 <1%
Crossref

University of Wales central institutions on 2010-03-07

36 <1%
Submitted works

University of Hong Kong on 2021-06-05

37 <1%
Submitted works

canadalifefinancial.com
38 <1%
Internet

Los Angeles Pierce College on 2020-12-04

39 <1%
Submitted works

Indian Institute of Management, Bangalore on 2010-09-26

40 <1%
Submitted works

University of Cape Town on 2016-09-19

41 <1%
Submitted works

gopalancolleges.com
42 <1%
Internet

scribd.com
43 <1%
Internet

Coventry University on 2022-04-14

44 <1%
Submitted works

Sources overview
 Similarity Report ID: oid:9832:30921843

SP Jain School of Global Management on 2022-10-02

45 <1%
Submitted works

icsi.edu
46 <1%
Internet

notesale.co.uk
47 <1%
Internet

University of Lancaster on 2020-10-23

48 <1%
Submitted works

gdbridge.org
49 <1%
Internet

unctad.org
50 <1%
Internet

Gujarat National Law University on 2012-04-22

51 <1%
Submitted works

University of Wales, Bangor on 2021-09-01

52 <1%
Submitted works

Excelsior College on 2018-05-24

53 <1%
Submitted works

Symbiosis Institute of Research & Innovation on 2011-12-22

54 <1%
Submitted works

eprints.usm.my
55 <1%
Internet

IMS Unison University on 2020-12-24

56 <1%
Submitted works

Sources overview
 Similarity Report ID: oid:9832:30921843

University of Stellenbosch, South Africa on 2013-11-19

57 <1%
Submitted works

itatonline.org
58 <1%
Internet

Higher Education Commission Pakistan on 2011-04-28

59 <1%
Submitted works

doku.pub
60 <1%
Internet

groww.in
61 <1%
Internet

Aston University on 2022-09-02

62 <1%
Submitted works

Cardiff University on 2016-11-09

63 <1%
Submitted works

The WB National University of Juridical Sciences on 2014-04-24

64 <1%
Submitted works

University of Wales, Bangor on 2022-09-01

65 <1%
Submitted works

payrollheaven.com
66 <1%
Internet

sist.sathyabama.ac.in
67 <1%
Internet

dokumen.tips
68 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

Amity University on 2020-03-30

69 <1%
Submitted works

Bocconi University on 2019-11-04

70 <1%
Submitted works

University of St. Gallen on 2009-11-13

71 <1%
Submitted works

City University on 2009-04-14

72 <1%
Submitted works

Aligarh Muslim University, Aligarh on 2019-09-06

73 <1%
Submitted works

Campbellsville University on 2022-10-12

74 <1%
Submitted works

Management Development Institute Of Singapore on 2022-02-09

75 <1%
Submitted works

Misr International University on 2011-03-31

76 <1%
Submitted works

University of Cape Town on 2016-12-10

77 <1%
Submitted works

de.slideshare.net
78 <1%
Internet

wealthmbamgt.files.wordpress.com
79 <1%
Internet

facilitiesnet.com
80 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

grin.com
81 <1%
Internet

Indian Institute of Management, Raipur on 2014-07-16

82 <1%
Submitted works

Panjab University on 2016-04-30

83 <1%
Submitted works

University of Lancaster on 2021-01-22

84 <1%
Submitted works

Zambia Centre for Accountancy Studies on 2021-10-10

85 <1%
Submitted works

"Debt restructuring options", University/Education/Teaching, 2010-03-12

86 <1%
Publication

Deniz Coskun. "Credit rating agencies in a post-Enron world: Congress ...

87 <1%
Crossref

Kurukshetra University on 2019-04-25

88 <1%
Submitted works

connect-world.com
89 <1%
Internet

vdocuments.net
90 <1%
Internet

Bharati Vidyapeeth University Institute of manageent & research on 20...

91 <1%
Submitted works

Birla Institute of Management Technology on 2016-07-08

92 <1%
Submitted works

Sources overview
 Similarity Report ID: oid:9832:30921843

British University in Egypt on 2009-10-11

93 <1%
Submitted works

Christ College of Law on 2013-02-24

94 <1%
Submitted works

City University on 2011-11-03

95 <1%
Submitted works

Foundation for Liberal And Managment Education on 2019-04-08

96 <1%
Submitted works

Napier University on 2012-04-04

97 <1%
Submitted works

O. P. Jindal Global University on 2022-05-30

98 <1%
Submitted works

University of Melbourne on 2014-06-11

99 <1%
Submitted works

University of Stirling on 2010-09-10

100 <1%
Submitted works

es.scribd.com
101 <1%
Internet

indianotes-live-04da772e042e45f4b8c979-e467ae7.aldryn-media.com
102 <1%
Internet

online.pubhtml5.com
103 <1%
Internet

theintactone.com
104 <1%
Internet

Sources overview
 Similarity Report ID: oid:9832:30921843

answers.com
105 <1%
Internet

ig.com
106 <1%
Internet

telegraphindia.com
107 <1%
Internet

American University in Cairo on 2019-05-13

108 <1%
Submitted works

Amity University on 2014-03-27

109 <1%
Submitted works

Australian Institute of Business on 2017-04-17

110 <1%
Submitted works

BPP College of Professional Studies Limited on 2021-03-16

111 <1%
Submitted works

BPP College of Professional Studies Limited on 2023-01-10

112 <1%
Submitted works

Birkbeck College on 2015-09-24

113 <1%
Submitted works

Coventry University on 2011-01-27

114 <1%
Submitted works

Indian Institute of Management on 2012-01-28

115 <1%
Submitted works

Indian School of Business on 2022-09-21

116 <1%
Submitted works

Sources overview
 Similarity Report ID: oid:9832:30921843

Intercollege on 2022-05-07
117 <1%
Submitted works

New York University on 2007-05-01

118 <1%
Submitted works

Olfa Berrich, Halim Dabbou. "Tunisian corporate bond market liquidity: ...
119 <1%
Crossref

Parimala Veluvali. "Retail Investor in Focus", Springer Science and Busi...

120 <1%
Crossref

Phoebus L. Athanassiou, Aikaterini Theodosopoulou. "Reducing Over-R...

121 <1%
Crossref

Sheffield Hallam University on 2021-01-29

122 <1%
Submitted works

Subhadip Mukherjee, Rupa Chanda. "Tariff liberalization and firm-level ...

123 <1%
Crossref

TAR University College on 2018-11-30

124 <1%
Submitted works

The University of Notre Dame on 2016-05-13

125 <1%
Submitted works

University of Cape Town on 2022-06-08

126 <1%
Submitted works

University of Hong Kong on 2009-02-23

127 <1%
Submitted works

University of Leeds on 2013-09-09

128 <1%
Submitted works

Sources overview
 Similarity Report ID: oid:9832:30921843

University of Wisconsin - Stout on 2012-12-11

129 <1%
Submitted works

VHS Virtual High School on 2016-08-15

130 <1%
Submitted works

corporate.americancentury.com
131 <1%
Internet

defenseassistance.org
132 <1%
Internet

indialendsblogs.azurewebsites.net
133 <1%
Internet

pubhtml5.com
134 <1%
Internet

fishpond.com
135 <1%
Internet

smartkeeda.com
136 <1%
Internet

www2.law.uu.nl
137 <1%
Internet

Sources overview