PROJECT REPORT

(SUBMITTED FOR THE DEGREE OF B.COM HONOURS IN ACCOUNTING & FINANCE UNDER
WEST BENGAL STATE UNIVERSITY, BARASAT)

TITLE OF THE PROJECT

CREDIT RATING AGENCIES AND THEIR ROLE

Submitted By-
NAME OF THE CANDIDATE : MAHEK PARWEEN
REGISTRATION NO. : 1032122401125
NAME OF THE COLLEGE : BARRACKPORE RASTRAGURU SURENDRANATH COLLEGE
COLLEGE ROLL NO. : 2100754

Supervised By-
NAME OF THE SUPERVISOR : DR. MAYUKH THAKUR
NAME OF THE COLLEGE : BARRACKPORE RASTRAGURU SURENDRANATH COLLEGE

Month & Year of Submission

,2024
 ANNEXURE-I

SUPERVISOR’S CERTIFICATE

This is to certify that Mahek Parween, a student of B.COM HONOURS IN

ACCOUNTING & FINANCE of BARRACKPORE RASTRAGURU
SURENDRANATH COLLEGE under the WEST BENGAL STATE UNIVERSITY,
BARASAT has worked under my supervision and guidance for his project work and prepared
a project report with the title “CREDIT RATING AGENCIES AND THEIR ROLE.”. Her
work is genuine and original to the best of my knowledge.

PLACE: BARRACKPORE Signature:

DATE :

Name : Dr. Mayukh Thakur

Designation : Assistant Professor in Commerce

Name of the College : Barrackpore Rastraguru Surendranath College

Surendranath College

ANNEXURE-II

STUDENT’S DECLARATION

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I hereby declare that the project work with the title “CREDIT RATING AGENCIES AND
THEIR ROLE” submitted by me for the partial fulfillment of the degree of B.COM
HONOURS IN ACCOUNTING & FINANCE UNDER THE WEST BENGAL STATE
UNIVERSITY, BARASAT is my original work and has not been submitted earlier to any
other University for the fulfillment of the requirement for any course of study.

I also declare that no chapter of this manuscript in whole or part has been incorporated in this
report from any earlier work done by others or by me. However, extracts of any literature
which has been used for this report has been duly acknowledged providing details of such
literature in references.

Place : Kolkata Signature :

Date : 2024 Name : MAHEK PARWEEN

Address : G.C Road, Titagarh, Kumharpatty

Kolkata, Dist: North 24 Parganas

Registration No. : 1032122401125

Roll No. : 2100754

ACKNOWLEDGEMENT

I take this opportunity to express a deep sense of gratitude to the honorable principal of our
college Dr. Monojit Ray for his cordial support, valuable suggestions and guidance.

I also take this opportunity to express my profound gratitude and deep regards to my
project supervisor Dr. Mayukh Thakur for his exemplary guidance, monitoring and constant
encouragement throughout the course of this study. The blessing, help and guidance given by
him time to time shall carry me a long way in the journey of life on which I am about to
embark.
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 I am obliged to Department of Commerce of our college for the valuable information
provided by them in their respective fields. I am grateful for their co-operation during the
period of my assignment.

Lastly, I thank my parents and friends for their constant encouragement without which this
assignment would not be possible.

 Name : Mahek Parween

BARRACKPORE RASTRAGURU SURENDRANATH COLLEGE

TABLE OF CONTENTS
CHAPTER 1 : INTRODUCTION
 INTRODUCTION
 NEED FOR THE PROJECT
 OBJECTIVES OF THE STUDY
 REVIEW OF LITERATURE
 METHODOLOGY AND SOURCE OF DATA

CHAPTER 2 : CONCEPTUAL FRAMEWORK

 CONCEPT OF CREDIT RATING
 MEANING OF CREDIT RATING
 MEANING OF CREDIT RATING AGENCIES
 OBJECTIVES OF CREDIT RATING
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 MEANING OF CREDIT RATING AGENCIES
 OBJECTIVES OF CREDIT RATING
 IMPACT OF CREDIT RATING
 LIMITATIONS OF CREDIT RATING
 CRAs IN INDIA

CHAPTER 3 : DATA ANALYSIS & FINDINGS

 ANALYSIS OF DIFFERENT RATING SCALES
 FINDINGS

CHAPTER 4 : CONCLUSION, LIMITATION AND RECOMMENDATION

 CONCLUSION
 LIMITATION
 RECOMMENDATION

CHAPTER 5: BIBLIOGRAPHY AND REFERENCE

 BIBLIOGRAPHY
 BOOKS & REFERENCES

Chapter : 1

INTRODUCTION

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 INTRODUCTION

“Credit Rating” gives you an insight to the most important concept in any
Industry, be it service oriented or a manufacturing firm.

NEED FOR THE PROJECT:

In this project I have tried to analyze the important impact of credit rating, which is an effective
instrument of risk assessment in countries with advanced economy. I have also covered the Rating
Process, Rating Symbols for short term debentures ,long term bonds, Rating Methodology, of
various rating agencies like CRISIL, ICRA, SMERA,ONICRA, CARE and International Rating
Agency.
I hope that my evaluation and conclusion will provide valuable information to all interested parties.
I invite constructive criticism from my teachers and other users for the future improvement of such
projects which I may have to carry out from time to time.

OBJECTIVES OF STUDY:
The project work has been done on following objectives:

• To Conduct a comparative analysis of the leading CRAs.

• To analyze how credit rating agencies work and how ratings impact borrowing costs
and investor decisions.
• To comment on the effectiveness of the credit rating system in promoting financial
stability and efficient allocation of capital.

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 REVIEW OF LITERATURE:
A literature review is a piece of academic writing demonstrating knowledge and Understanding of
the academic literature on a specific topic placed in context. It also includes A critical evaluation of
the material; this is why it is called a literature review rather than a Literature report. It helps to
determine the methodologies used in past studies of the same or Similar topics, assessment of the
current state of research on a topic, identification of the experts on a particular topic, and
identification of key questions about a topic that need further research.
I have got some idea in the preparation of my project work through the published article in the few
websites. We got some idea in the preparation of my project work through the different books of
related subject. In different literature it has been observed that the importance of credit rating
system is undisputable. Data has been collected from the annual reports of various CRAs like
Moody’s , ONICRA, CRISIL,etc.

METHODOLOGY AND SOURCE OF DATA:

The study is based on secondary data. It is a study of SEBI perceived
rating agencies including CRISIL, ICRA, CARE. Corporate credit rating
methodology is used for the study including some variables and short
term instruments.

1. Sources of Data: The project has been prepared on the basis of secondary data, such as,

• Annual Report of Credit Rating Agencies and SEBI

• Related Books.
• Related Websites.

We can use several tools to evaluate the performance of a firm, I have used one of the valuable
tools. This tool is “Credit Rating” Ratings, usually expressed in alphabetical or alphanumeric
symbols, are a simple and easily understood tool enabling the investor to differentiate between
debt instruments based on their underlying credit quality. The credit rating is thus a symbolic
indicator of the current opinion of the relative capability of the issuer to service its debt
obligation in a timely fashion, with specific reference to the instrument bring rated.

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Chapter : 2
CONCEPTUAL
FRAMEWORK

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 CONCEPT OF CREDIT RATING

The evaluation of a people or businesses’ ability and past performance in paying debts. A
credit
rating is generally established by a credit bureau and used by merchants, suppliers, and bankers
to determine whether a loan should be granted or credit extended
A rating is an opinion on the future ability and legal obligation of the issuer to make timely
payments of principal and interest on a specific fixed income security. The rating measures
the probability that the issuer will default on the security over its life, which depending on the
Instrument may be a matter of days to 30 years or more. In addition, long term ratings
incorporate an assessment of the expected monetary loss should a default occur.
“Credit ratings help investors by providing an easily recognizable, simple tool that couples are
possibly unknown issuer with an informative and meaningful symbol of credit quality.”
Standard and Poor’s.

MEANING OF CREDIT RATING

A credit rating is essentially an evaluation of how trustworthy a borrower is. It's like a letter
grade that predicts the likelihood of a borrower being able to repay a loan on time and in
full. There are special credit rating agencies that analyze the financial situation of
borrowers, which can be individuals, businesses.

MEANING OF CREDIT RATING AGENCIES

Credit rating agencies (CRAs), also sometimes called ratings services, are essentially
financial detectives. They act as independent assessors, digging into the financial health of

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 borrowers like governments and companies. Their main objective is to evaluate the
creditworthiness of these borrowers.

OBJECTIVES OF CREDIT RATING

Following are the objectives of cred rating :

(a) Promote Transparency and Informed Decisions.

(b) Facilitate Efficient Debt Financing.

(c) By understanding the creditworthiness of a borrower, they can make informed decisions
about the potential risk of default (not repaying the debt).

(d) To promote market discipline

(e) Help in maintain stability in the financial system by encouraging

responsible borrowing practices.

IMPORTANCE OF CREDIT RATING

Credit ratings hold a significant position in the financial world, impacting both borrowers and
lenders. The usefulness or importance of credit rating s is enumerated below:

(a) A good credit rating (high rating) is like a gold star for borrowers.

(b) High credit ratings unlock doors to a wider range of financial products with more
favorable terms.

(c) Credit ratings are a risk management tool for lenders and investors. A high rating
indicates a lower risk of the borrower defaulting (failing to repay) on their debt. This
allows lenders to make informed decisions with more confidence.

(d) Credit ratings help investors assess the risk involved in different investment options, such
as corporate bonds.

(e) Credit ratings act as a bridge between borrowers and lenders.

(f) Credit ratings promote stability in the financial system by encouraging responsible
borrowing practices.

LIMITATIONS OF CREDIT RATING

Credit rating is not free from limitations. These are stated below:
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 (a) Credit ratings don’t necessarily capture other investment risks, like market volatility or
interest rate fluctuations.

(b) Credit ratings are based on past financial performance and current conditions. They
might not always predict future events that could impact a borrower’s ability to repay.

(c) Critics argue that credit rating agencies might be influenced by conflicts of interest.
Since they are often paid by the issuers of the debt they rate, there could be a bias
towards issuing favorable ratings.

(d) They might not capture all the nuances of a borrower’s financial situation or industry-
specific factors.

(e) Credit rating downgrades can lag behind deteriorating financial conditions.

(f) There have been ongoing discussions about regulating credit rating agencies and
reforming their methodology to address potential biases and limitations.

CREDIT RATING AGENCIES IN INDIA

In the Indian context, the scope of credit rating is limited generally to debt, commercial paper,
Fixed deposits, mutual funds and of late IPO’s as well. Therefore, it is the instrument, which is
Rated, and not the company. In other words, credit quality is not general evaluation of issuing
Organization, i.e. if debt of company XYZ is rated AAA and debt of company ABC is rated
BBB, then it does not mean firm XYZ is better than firm ABC. However, the issuer company
Gets strength and credibility with the grade of rating awarded to the credit instrument it
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 Intends to issue to the public to raise funds. Rating, in a way, reflects the issuer’s strength and
Soundness of operations and management. It expresses a view on its prospective composite
Performance and the organizational behavior based on the study of past results.

CRAs REGISTERED WITH SEBI

 CRI SIL
 ICRA
 CARE
 FITCH INDIA
 BRICKWORKS

COMPANY PROFILE OF A FEW CRAs

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 CRISIL

CRISIL Credit Rating Information Services Of India Limited (CRISIL) has been
promoted by Industrial Credit and Investment Corporation of India Ltd. (ICICI) and Unit Trust of
India Ltd. (UTI) as a public limited company with its headquarters at Mumbai. CRISIL,
incorporated in 1987, pioneered the concept of credit rating in India and developed the
methodology for rating of debt in the context of India's financial, monetary and regulatory system.
It was the first rating agency to rate Commercial Paper Programme in 1989, debt instruments of
financial institutions and banks in 1992 and asset-backed securities in 1992.

The main objective of CRISIL has been to rate debt obligation of Indian companies. Its rating
provides a guide to the investors as to the risk of timely payment of interest and principal on a
particular debt instrument. Its rating creates awareness of the concept of credit rating amongst
corporations, merchant bankers, brokers, regulatory authorities, and helps in creating environment
that facilitates the debt rating.

CRISIL’S RATING SYMBOLS FOR LONG TERM INSTRUMENTS

Investment grade ratings

AAA(Triple A)Highest Safety

Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely payment
of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments
on the instrument.

AA(Double A)High Safety

Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely payment of
financial obligations. They differ only marginally in safety from `AAA' issues.

SPECULATIVE GRADE RATINGS

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BB(Double B)Inadequate Safety

Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of
financial obligations; they are less likely to default in the immediate future than other
speculative grade instruments, but an adverse change in circumstances could lead to
inadequate capacity to make payment on financial obligations.

B High Risk
Instruments rated ‘B’ are judged to have greater likelihood of default while currently
financial obligations are met, adverse business or economic conditions would lead to
lack of ability or willingness to pay interest or principal.

ICRA

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an
independent and professional company. ICRA is a leading provider of investment information
and credit rating services in India. ICRA’s major shareholders include Moody's Investors
Service and leading Indian financial institutions and banks. With the growth and globalization
of the Indian capital markets leading to an exponential surge in demand for professional credit
risk analysis, ICRA has been proactive in widening its service offerings, executing
assignments including credit ratings, equity gradings, specialized performance grading and
mandated studies spanning diverse industrial sectors. In addition to being a leading credit
rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-
based its services for the corporate and financial sectors, both in India and overseas, and
currently offers its services under the following banners:

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an
independent and professional company. ICRA is a leading provider of investment information
and credit rating services in India. ICRA’s major shareholders include Moody's Investors
Service and leading Indian financial institutions and banks

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RATING SCALE OF ICRA

Long Term- Including Debentures Bonds, Preference Shares

LAAA: Highest Safety:

It indicates fundamentally strong position. Risk factors are negligible. There may be
circumstances adversely affecting the degree of safety but such circumstances, as may
visualized, are not likely to affect the timely payment of principal and interest as per times.

LAA+,LAA, LAA- : High Safety:

Risk factors are modest and may vary slightly. The protective factors are strong and the
prospect of timely payment of principal and interest as per terms and interest under adverse
circumstances, as may be visualized, differs from LAAA only marginally.

Medium Term - including Certificates of Deposits and Fixed Deposits Programmes

MAAA: Highest Safety

The prospect of timely servicing of interest and principal as per terms is the best.

MAA+, MAA, MAA- High Safety

The prospect of timely servicing of interest and principal as per terms is high, but not as high
as in MAAA rating.

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Short Term - including Commercial Papers

Al+, A1 Highest Safety

The prospect of timely payment of debt/obligation is the best.

A2+, A1 High Safety

The relative safety is marginally lower than A1

CARE RATINGS

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 Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating,
information and advisory services company promoted by Industrial Development Bank of
India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial
services companies. In all CARE has 14 shareholders. CARE assigned its first rating in
November 1993, and up to March 31, 2006, had completed 3175 rating assignments for an
aggregate value of about Rs 5231 billion. CARE's ratings are recognized by the Government
of India and all regulatory authorities including the Reserve Bank of India (RBI), and the
Securities and Exchange Board of India (SEBI). CARE has been granted registration by SEBI
under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

RATING SYMBOLS OF CARE

A. Long-Term And Medium Term Instrument CARE AAA (FD)/(CD)/(SO) Instruments carrying
this rating are considered to be of the best quality, carrying negligible investment risk. Debt service
payments are protected by stable cash flows with good margin. While the underlying assumptions
may change, such changes as can be visualized are most unlikely to impair the strong position of
such instruments.

CARE AA (FD)/(CD)/(SO) Instruments carrying this rating are judged to be of high quality by all
standards. They are also classified as high investment grade. They are rated lower than CARE AAA
securities because of somewhat lower margins of protection. Changes in assumptions may have a
greater impact on the long-term risks may be somewhat larger. Overall, the difference with CARE
AAA rated securities is marginal..

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 Chapter: 3
DATA ANALYSIS & FINDINGS

ANALYSIS OF DIFFERENT RATING SCALE OF POPULAR CRAs

COMPARISON OF RATING SYSTEM OF DIFFERENT AGENCIES,2023-24

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COMPARISON OF RATING SYSTEM AMONG SEBI REGISTERED CRAs,2024

FINDINGS:
After the analysis of the impact and role of CRAs , following facts have been observed:

TRIPLE A RATING: The analysis shows the F-test of financial ratio of various companies
which were rated AAA ratings by selected credit rating agencies CRISIL, ICRA, CARE
respectively. This results of analysis of variance through a light on fact that not any financial
ratio have significant F-test. Although the method used by CRISIL while assigning ratings
was consistent and consequent for selected duration for the studies. This reflect same financial
ratio were used to provide ratings.

DOUBLE A RATING: Reflects results of AA rated companies which were assigned by

CRISIL, ICRA and CARE rating agencies highlights none of the F-test value of selected
financial ratio of companies of AA rating by CRISIL are significant.it means that there is no
significant difference between the value of various ratio of the companies which were rated

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AA rating by CRISIL, therefore analysis depicts consistency in rating methodology of rating
agency during the given period of time. . which implies that there is no significant difference
between the value F value of ratios under AA rating group by ICRA rating agency.

TRIPLE B RATING: The study further reflects results of ICRA’s BBB rated financial ratio
which are not significant to F-test which implies that there is no significant difference in
financial ratio thus similar methods are used for rating of BBB rated companies conducted by
either CRISIL or CARE.

Chapter: 4
CONCLUSION, LIMITATIONS&
RECOMMENDATIONS

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 CONCLUSION

Thus we can say that Credit rating is a qualified assessment and formal evaluation of
company’s credit history and capability of repaying obligations. It measures the default
probability of the borrower, and its ability to repay fully and timely its financial debt
obligations. The main purpose of credit rating is to provide investors with comparable
information on credit risk based on standard rating scale, regardless of specifics of companies,
separate sector of the economy and country as a whole. Credit rating has proven itself to be
effective instrument of risk assessment in countries with advanced economy since it
demonstrates transparency of an enterprise. Credit rating reflects financial, sectorial,
operational, legal and organizational sides of companies, which characterize ability and
willingness duly and in full amount to repay obligations In world practice, credit rating can be
assigned to sovereign governments, regional and local executive bodies, corporations,
financial organizations and etc.

LIMITATIONS

In spite of several precautions, the study suffers from the following limitations or drawbacks:

 Shortage of time : This study is subjected to time-consuming which creates difficulty for
this project, it is a great obstacle to analyze about such a vast topic in this limited period of
time.

 Use of secondary data: This study has been made through the secondary data which is
available in articles, annual reports and online websites. so, the source of information is
narrow.

 Lack of availability of reliable data : Due to lack of reliable data the study is facing some
obstacles. The data on the internet have limited access. Also the informations are not up to
date accordingly

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 RECOMMENDATIONS

 Reduce Concentration: The credit rating industry is heavily concentrated with the “Big
Three” -Moody’s , S&P and Fitch, controlling a vast majority of the market share. This lack
of competition can lead to potential bias. Encouraging the growth of smaller agencies and
fostering competition could bring diverse perspective.

 Increase Transparency: The methodology used by credit rating agencies to arrive at ratings
can be opaque at times. Greater transparency is required and break down of clearer facts to
improve potential public trust.

 Sovereign Debt Focus: Ratings on sovereign debt, or government’s ability to repay its
borrowings, can be particularly sensitive and susceptible to political pressure. Strengthening
the independence of credit rating agencies from political and financial influence would be
crucial.

 Adress Short-Termism: There are concerns that credit rating agencies may have a short-term
view, focusing too much on immediate financial health over long-term potential. Encouraging
a more balanced approach that considers a company’s long-term prospects could be
beneficial.

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 Chapter: 5
BIBLIOGRAPHY & REFERENCE

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 WEBSITES
 www.crisil.com
 www.stretcher.com
 www.careratings.com
 www.care.org.com
 www.sebi.gov.in
 www.hindubusiness.com
 www.wikipedia.org
 www.moneycontrol.com
 www.researchgate.com
 www.journals.sagepub.com

BOOKS & REFERENCE

 Madhurkar V., Sharma M. (2015), A Case study performance of credit rating agencies: An
overview. Journal of production research and Managemnent.
 Hassan O.G.,Barrell R. Accounting for determinants of banks, credit ratings, Economics and
finance working paper series.
 Credit Rating in India: Institutions, Methods and Evaluation by Mamata Arora.
 Credit Rating Agencies in India: An Appraisal by Kuljeet Kaur & Rajinder Kaur.

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