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A REPORT ON

Credit Rating Agencies in India


Submitted towards Partial Fulfillment Of Post Graduate Diploma In Management (Approved by AICTE, Govt. Of India) Academic session 2010 2012

Submitted to: Dr. Vidya Sekhri Professor Finance IMS, Ghaziabad

Submitted by: Abhay Singh Solanki (BM-010003) Abhishek Saini (BM-010009) Arjun Dangwal (BM-010034)

Institute of Management Studies, Ghaziabad

DECLARATION

This is to certify that We, Abhay Singh Solanki, Abhishek Saini and Arjun Dangwal student of Post Graduate Diploma in Management (PGDM- GEN) 4rth trimester have personally worked on the report titled Credit Rating Agencies in India under the guidance of Dr. Vidya Sekhri. The data mentioned in this report were obtained during genuine work done and collected by us. Data obtained from Internet, books, journals and magazines have been duly acknowledged. We, hereby affirm that the work has been done by us in all its aspects and results reported in this study are genuine and true to best of our knowledge.

Abhay Singh Solanki (BM-010003) Abhishek Saini (BM-010009) Arjun Dangwal (BM-010034)

Institute of Management Studies, Ghaziabad

CERTIFICATE

This is to certify that Abhay Singh Solanki, Abhishek Saini and Arjun Dangwal students of PGDM-GEN 2nd year have completed their project under our guidance with full honesty and integrity and submitted this project report towards partial fulfillment of Post graduate diploma in management at IMS Ghaziabad.

Dr. Vidya Sekhri Signature:

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ACKNOWLEDGEMENTS We would then like to thank our faculty guide, Dr. Vidya Sekhri (Professor Finance), Institute of Management Studies, Ghaziabad, for all his valuable inputs and constant support towards us throughout our project and providing us an opportunity to learn outside the classroom. It was a truly wonderful learning experience.

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Credit Rating Agencies in India: An overview and An Analysis in the Light of Various Acts and Guidelines

INTRODUCTION The banking sector in India underwent an unprecedented transformation in the 1990s with the emergence of a large number of private as well as foreign multinational banks entering the country increasing rapidly the number of banks in India due to the economic reforms. So the banking activities increased manifold and affected a large number of areas of operation of banks, particularly in the field of bank lending. Banks operate on the pattern of extending credit against security given by its customers associated with the bank. The facility of extending credit is recognition of the changing times in which banks have to operate in a changing and ever evolving economic scenario. Growing needs and realization of higher rate of investments is giving birth to bank credit in India. The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual. This for even needed to increase the investment on the country. So a need was felt to have a credit agencies maintaining database on the existing customers as in the absence of adequate and structured credit information for the banks and other credit providing agencies, there was always danger of a party obtaining financial accommodation from a large number of banks to an extent not warranted by his/her means or paying capacity, in such a case there is a chance having of bad debts (not retuning of credit) creating an added burden on the existing financial resources of banks. The modern rating system dates back to 1909 when John Moody started rating US railroad bonds. In India in 1962, a Credit Information Division was established in RBI with the view of collection of information from banks and other financial institutions regarding data relating to the prescribed limits sanctioned by RBI even the RBI Act was amended into 1962 given powers to collect information in regard to credit facilities Institute of Management Studies, Ghaziabad 5

granted by individual banks and notified financial institutions to their constituents and to supply to these banks and institutions on application the relative information in a consolidated form. Apart from all the above steps, banks constantly keep a check on the customers by obtaining information from all the other sources pertaining to their customers in any form. The Saraiya Commission also suggested the formation of credit information bureaus on the lines of those prevalent in the US and the UK. Credit rating agency means any commercial concern engaged in the business of credit rating of any debt obligation or of any project or programme requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial, obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal; The credit information bureaus in the US and the UK used to provide information on the history of the business concern, ownership and changes in the business concern, digest of statements of assets and liabilities, results of investigations in the trade, fire records, etc9. Credit Rating Agencies is different from a mercantile credit agency, which usually supplies general information on corporates for the purpose of selling goods on credit.

There are five Credit rating agencies in India, namely, 1. Credit Rating Information Services of India Limited (CRISIL), Associate of Standards & Poors. 2. Investment Information and Credit Rating Agency of India (ICRA), Associate of Moodys Investors Service. 3. Credit Analysis & Research Limited (CARE) 4. Duff & Phelps Credit Rating India Private Ltd. (DCR India) 5. ONICRA Credit Rating Agency of India Ltd.

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1. CRISIL: The Credit Rating Information Services of India Limited (CRISIL) initiated the concept of credit rating in India. CRISIL was established in 1987 and started operations in January 1998. Currently, five rating agencies are in operation in India, rating bonds, time deposits, CP (Commercial Paper) and structured obligations. All the four Indian rating agencies have tie ups/alliances with international rating agencies. CRISIL is India's leading rating agency, and is the fourth largest in the world. Its business model comprises of three divisions - Debt Rating, Crisil Research and Information Services (CRIS) and Crisil Advisory Services (CAS). Standard and Poor`s (S&P), which holds a 9.6 per cent stake in the company, assists it on developing new rating methodologies for newer securities. With over a 70% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. It is a full service rating agency that offers a comprehensive range of rating services and it also provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business. CRISIL has rated over 6,797 debt instruments worth Rs.13.53 trillion (over USD343 billion) issued by over 4,600 debt issuers, including manufacturing companies, banks, financial institutions (FIs), state government and municipal corporations. It is the only rating agency to operate on the basis of a sectoral specialization, which underpins the sharpness of analysis, responsiveness of the process and large-scale dissemination of opinion pieces. CRISIL Ratings also offers technical know-how overseas. For instance, it has provided assistance and up ratings agencies in Malaysia (RAM) and Israel and in the Caribbean. In March 2004, CRISIL took up an equity stake of about 9% in the share capital of the Caribbean Information & Credit Rating Services Limited (CariCRIS), with an investment of US $ 300,000.

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2. ICRA: ICRA Limited (formerly, Investment Information and Credit Rating Agency of India Limited) was incorporated on January 16, 1991 and launched its services on August 31, 1991, by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment information and credit rating agency. ICRA is a public limited company with its shares listed on the Bombay Stock Exchange and National Stock Exchange. It is an independent and professional company providing investment information and credit rating services. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. As the growth and globalization of Indian Capital markets have led to an exponential surge in demand for professional credit risk analysis, ICRA has actively responded to this need by executing assignments including credit ratings, equity gradings, 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 to the corporate and financial sectors, both in India and overseas, and presently offers its services under three banners namely: 1. Rating services 2. Information services 3. Advisory service

3. CARE: Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. It was established in 1993. CARE has an unparalleled depth of expertise. CARE Ratings methodologies are in line with the best international practices. It has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April 1993. Statutory authorities and other agencies in India for rating services have recognized it. The authorities/agencies include: Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), Director General, Shipping and

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Ministry of Petroleum and Natural Gas (MoPNG), Government of India (GoI), National Housing Bank (NHB), National Bank for Agriculture and Rural development (NABARD), National Small Scale Industries Commission (NSIC). CARE Ratings has also been recognized by RBI as an Eligible Credit Rating Agency (ECRA) for Basel II implementation in India. It was promoted by major Banks/FIs (financial institutions) in India. The three largest shareholders of CARE are IDBI Bank, Canara Bank and State Bank of India. CARE Ratings is well equipped to rate all types of debt instruments like Commercial Paper, Fixed Deposit, Bonds, Debentures, Hybrid instruments, Structured Obligations, Preference Shares, Loans, Asset Backed Securities (ABS), Residential Mortgage Backed securities (RMBS) etc. CARE Ratings has significant presence in all sectors including Banks / FIs, Corporate, Public finance. Coverage of CARE Ratings has extended to more than 1075 entities over the past decade and is widely accepted by investors, issuers and other market participants. It has evolved into a valuable tool for credit risk assessment for institutional and other investors, and over the years CARE has increasingly become a preferred rating agency. 4. Duff & Phelps Credit Rating India Private Ltd. (DCR India): Fitch Ratings India Private Limited, formerly known as Duff & Phelps Credit Rating India Private Ltd. Prior to 2001, is a wholly-owned subsidiary of the Fitch group that started operating in India since 1996.

5. ONRICA: ONRICA Credit Rating Agency of India Limited was incorporated in 1993. It is an established player in the individual credit assessment and scoring services space in the Indian market. ONRICA is the first in India to launch commercial services and provide individual credit rating and reporting services to the Indian financial market. ONICRA has been acknowledged as pioneers of Individual Credit Rating in the Economic Survey of India 1993-94 issued by Ministry of Finance, Government of India and its services

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have been hailed by the financial sector and in the media. It delivers objective and reliable pre and post disbursement credit validation and information on credit takers and have been successfully doing the employee screening for wide gamut of requirements. It provides Dynamic Customer-Focused solutions that bridges the gap between principals and their prospective / existing customers. It provides spectrum of services which include the services like Credit Rating, Associate Rating, Employee Screening, SSI/SME Rating, Customer Verification, Lifestyle Analysis and Royalty Retention. Currently, it cater to clients in major business segments such as Telecom, Banking, Automotive, Consumer Finance, IT and other Service Industries.

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COMPARISON

OF

REGULATIONS

RELATED

TO

CREDIT

RATING

AGENCIES IN INDIA AND OTHER COUNTRIES INDIA The RBI prescribes a number of regulatory uses of ratings. The RBI requires that a NBFC must have minimum investment grade credit rating if it intends to accept public deposits. Furthermore, unrated or underrated NBFCs in the category of equipment leasing and hire purchase finance companies are required to disclose the fact of their being unrated, to the public, if they intend raising deposits. Finally, as per money-market regulations of RBI, a corporate must get an issue of CP rated and can issue such paper subject to a minimum rating. In the area of investments, SEBI stipulated that ratings are compulsory on all public issues of debentures with maturity exceeding 18 months. SEBI has also made ratings mandatory for acceptance of public deposits by Collective Investment Schemes. If the size of the issue is larger than Rs.100 crore, two ratings are required. Pension funds can only invest in debt-securities that have two ratings, as per the stipulations of Government of India. In India, in 1998, SEBI constituted a Committee to look into draft regulation for Credit rating agencies that were prepared internally by SEBI. The Committee held the view that in keeping with international practice, SEBI Act 1992 should be amended to bring Credit rating agencies outside the purview of SEBI for a variety of reasons. According to the Committee, a regulator will not be in a position to objectively judge the appropriateness of one rating over another. The competency and the credibility of a rating and CREDIT RATING AGENCY should be judged by the market, based on historical record, and not by a regulator. The Committee suggested that instead of regulation, SEBI could just recognize certain agencies for particular purposes only, such as allowing ratings by Credit rating agencies recognized by it for inclusion in the public/rights issue offer documents.

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In consultation with Government, in July 1999, SEBI issued a notification bringing the Credit rating agencies under its regulatory ambit in exercise of powers conferred on it by Section 30 read with Section 11 of the SEBI Act 1992. The Act now requires all Credit rating agencies to be registered with SEBI. Since then, all the four Credit rating agencies in India have been registered with SEBI. SEBI Act now defines credit rating agency, rating, and securities. Details of who could promote a CREDIT RATING AGENCY and their eligibility criteria are specified. The Act also mentions about agreement with clients, method of monitoring of ratings, procedures for review of ratings, disclosure of ratings and submission of details to SEBI and stock exchanges. Promoters have now placed restrictions on Credit rating agencies from rating securities issued or companies connected with promoters i.e. companies in which directors of Credit rating agencies are interested as directors. OTHER COUNTRIES Regulators of both developed and emerging markets rely on credit ratings for a variety of purposes. USA introduced the concept of regulatory use of ratings in 1931. The Office of the Comptroller of Currency used ratings as a means to determine the basis of valuation of bonds. The use of ratings spread to other activities such as determination of capital prescription or margin money for brokers/dealers, disclosure requirements under Securities and Exchange Commission norms, exemption from registration and regulation for certain issuers of asset-backed securities, etc. The National Association of Insurance Commissioners (NAIC), which determines insurance companys regulatory capital charges, also relies on ratings. Japan promoted credit ratings in 1974 and regulators used the ratings of Japan Bond Research Institute (a rating agency) as one of the eligibility criteria for bond issues in the 1980s. The Ministry of Finance relies on ratings in a variety of ways, including regulation of money reserve funds. In 1993, the European Community stipulated capital requirements for market risk for banks and security houses based on ratings. UK adopted rating based Capital Adequacy Directives in 1996. Favored treatment is also accorded to firms engaged in securities business based on rating. France, Italy, Australia, Switzerland, Canada, Argentina, Chile, Mexico, Indonesia, Korea, Malaysia, Philippines, Taiwan

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Province of China and Thailand are other countries that have regulatory uses for ratings. In fact, the adoption of rating based regulations was the main force leading to the creation of rating agencies in emerging markets in Latin America and Asia. An important issue is the criteria for recognizing a credit rating agency for use of its ratings in regulation. It is now commonly accepted that criteria are : assured continuous objectivity in methodology; independence from outside influences; credibility, though this should not be an entry barrier; access to all parties with legitimate interest; and adequacy of resources. Most regulators stipulate a list of recognized agencies whose ratings can be used to satisfy rating requirements. Broadly, there are three areas where extensive use is made of ratings in the regulatory process, viz., investment restrictions on regulated institutions; establishing capital requirements for financial and disclosure as well as issuance requirements. The issues faced by regulators in use of ratings include reconciling divergent ratings by different Credit rating agencies and deciding cut-off of level of ratings. In the aftermath of the Asian crisis and the scathing criticism on the failure of Credit rating agencies to predict the crisis and later on its role in precipitating it through downgrades, the role of credit rating agencies has been placed under microscopic scrutiny. The merits and demerits of regulating credit rating agencies and the issue of rating the rating agencies have been discussed in many international forums. There is no international regulatory authority overseeing rating agencies. Whether they are regulated or not depends on specific country circumstances. In general, however, countries impose a modest regulation over Credit rating agencies. In USA, Securities and Exchange Commission gives recognition to Credit rating agencies as Nationally Recognized Statistical Rating Organizations (NRSO) for specific purposes. The main form of regulation is USA is in officially recognizing a credit rating agency. Thereafter, there is hardly any regulation. Similarly in UK, recognition as a rating agency is required from the Financial Services Authority (FSA). So is the case in Japan, Australia, France and Spain.

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RBI DRAFT AND SEBI RULES AND REGULATIONS


RBI has the powers to determine the policy of the credit information companies with regard to their functioning. RBI shall give directions to the credit information companies, wherever it thinks it is in public interest, or in the interest of credit institutions, specified users, banking policy and proper management. The use of the words as it deems fit gives a lot of discretionary powers to RBI. The duties of the officials of the company formed under the Act have also been specified like the auditors has been entrusted with the task of ensuring that the credit information company furnishes all the relevant documents to RBI and RBI has simultaneous powers to instruct for an audit of the company under certain circumstances. This audit has been termed as a special audit under the Act. Section 14 of the Act enumerates in substantial detail the functions to be performed by such company, like collection of information pertaining to the financial standing of borrowers, providing credit information to other companies, the relevant provision of credit rating to be done, research activities and any other work as directed by RBI.Directions are also in store for the credit institutions which are to become members of the credit information companies such as requirement of registration and the period within which it is to be obtained for prospective as well as existing credit institutions. The credit information company has been given powers to refuse registration at RBIs discretion. And in due observance of natural justice and other administrative principles law. The problem is that the order of RBI has been given unprecedented finality in terms of its implementation thus taking away the jurisdiction of ordinary civil courts as well as tribunals. The credit information company has been given powers to ask for credit information from its members as and when it thinks necessary, the information being provided to the specified user only and the information so obtained by the credit information company is not to be disclosed to any other person and this applies with equanimity on the specified user as well. The Act was passed with a view to regulating credit information companies and to facilitating efficient distribution of credit and for matters concerned or incidental to it. The Credit Information Companies (Regulation) Act, 2005 required Rules and

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Regulation to be notified under the Act. The Central Government was empowered to make the Rules while the Reserve Bank was empowered to make the Regulations to carry out the purposes of the Act. Therefore the RBI has prepared the Regulations for implementation of the Credit Information Companies (Regulation) Act, 2005 and placed them on the website for feedback.

SUMMARY OF DRAFT RULES AND REGULATIONS Rules: (i) The Rules enumerate the procedure for appeal and other incidental matters when an aggrieved credit information company whose application for certificate of registration has been rejected or whose certificate of registration has been cancelled have the power to approach the Appellate authority designated by the Central Government. (ii) Rules provide that the credit information company should formulate appropriate policy and procedure duly approved by its board of directors, specifying the steps and security safeguards in regard to (a) Collecting, processing and collating of data relating to the borrower; (b) Steps for security and protection of data and the credit information maintained at their end; and (c) Appropriate and necessary steps for maintaining an accurate complete and updated data. Moreover the credit institution or the credit information company should ensure that the credit information is accurate and complete with reference to the date on which such information is furnished or disclosed to the credit information company or the specified user as the case may be. (iii) The specified user should consider and decide such requisite steps for ensuring and verifying the accuracy and completeness of data received from a credit information

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company and protect the data from unauthorized access; formulate and adopt an appropriate policy and procedure in this behalf duly approved by its board of directors. (iv) The credit information company or credit institution or specified user shall adopt all reasonable procedures to ensure that their managers, officers, employees are obliged to fidelity and secrecy in respect of credit information under their control or to which they have access. (v) The credit information company should maintain a high standard of customer service by maintaining help desk, attending to complaints, feedback, queries, etc., in speedy and efficient manner. Regulations: (i) The Regulations indicate which companies can obtain credit information as specified users (insurance company, cellular/phone company, rating agency, broker, trading member, SEBI, IRDA etc.) in addition to those provided under section 2(l) of the Act. (ii) The Regulations also deal with submission of application, grant of certificate and the form in which application can be submitted and certificate can be issued. (iii) The Regulations provide for the form of business in which credit information companies can engage in addition to those provided under section 14(l) of the Act. (iv)The Regulations give the format in which a credit information company can issue notice to the credit institutions or other credit information companies for calling for the information. (v) The privacy principles which will guide the credit Information companies, credit institutions and specified users have been indicated in the Regulation. These encompass accuracy, security, secrecy, adequacy of data collected as also limitation on the use of data, that is, the purpose for which the Credit Information Reports can be made available and the procedure to be followed by specified uses for getting reports.

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(vi) Regulations provide that the maximum amount of fees leviable to specified users should not exceed Rs.500 for individuals and Rs.5000 for non-individual borrowers. Further, the fees charged to the credit institutions or credit information companies for admission of a credit information company should not exceed Rs.15,00,000. (vii) Regulations provide for the principles and procedures relating to personal credit information in respect of manner and purpose of collection of personal data, solicitation of personal data, accountability in transferring data to third party, protection of personal data etc. (viii) Regulations provide that an individual can file a complaint against a credit information company, credit institution or a specified user for contravening any provision of the Act.

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SECURITIES AND EXCHANGE BOARD OF INDIA (CREDIT RATING AGENCIES) REGULATIONS, 1999 Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 was passed which made even the SEBI keep a watchful eye on the Credit Rating Companies in India with the help of various regulation needed for it. The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 contains: 1. Regulation regarding the registration of credit rating agencies regulating the application for grant of certificate eligibility criteria for promoter of credit rating agency, furnishing of information, clarification and personal representation by the promoter, grant of certificate of the SEBI its conditions validity period, clauses of its renewal, and procedure for refusal of certificate and its effect. 2. General obligations of credit rating agencies regulating the Code of Conduct, Agreement with the client, Monitoring and process of ratings and the Procedure for review of rating, Appointment of Compliance Officer and compiling the letter circulars of the SEBI, maintaining of proper book of Accounts and having regular audits, 3. Restriction on rating of securities issued by promoters or by certain other persons regulating the securities issued by promoter, certain entities, connected with a promoter or securities already rated, 4. Procedure for inspection and investigation regulating SEBIs right to inspect after a due notice and obligations to be fulfilled by taking actions on the inspection or investigation report, 5. Procedure for action in case of default fixing the liability of the credit company.

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CONCLUSION The Credit Information Companies (Regulation) Act, 2005 is a tool of credit risk management whereby information stored about various consumers is stored for the purposes of retrieval, thereby reducing the uncertainty of bad debts and loan amount recovery. Collection of information has now become easy as compared to the past and therefore the functioning of credit information companies has become even more significant. The functioning of the company formed under the Act is subject to the powers of Reserve Bank of India and cannot act in accordance with its own whims and wishes of the various Banks. This is mainly done after the series of co-operative bank failures in Gujarat. RBI acts as the custodian on policy matters concerning the Credit Information Companies Act, 2005 and provides future guidelines and directions for the functioning of a credit information company. The success of a credit information company depends on the credit market in a country or the penetration of credit in the market, for India it is huge because of the development in the industrial, housing and agricultural sector. Therefore with large amount of money supply in the market by way of loans and advances by banks and financial institutions is increasing, it becomes imperative to have a system for tracking down the existing as well as prospective borrowers. Thus the act can be a facilitator in creating a strong credit culture in our country where the money of banks is not lost which effects the common man who are the investors in the bank. RBI should take care that the common man can also take the advantage of this company. Like these companies should be advertised so all become aware of these and thus can keep a check on the progress of their respective creditors. Moreover RBI should make it compulsory for financial institution, banks and other companies giving high amount of credit in any form to make use of credit information company so that can have a secure future.

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The four issues that need to be looked into, are: 1. Credit Rating quality: The literature on Indias credit rating industry is scanty. However, the few studies available point to the low and unsatisfactory quality. In Gill (2005), ICRAs performance in terms of credit rating and provision of timely and complete information on the rated companies has been studied. Analysing the ICRA ratings for the period 1995-2002, the study finds that many of the debt issues that defaulted during the period were placed in ICRAs investment grade until just before being dropped to the default grade. These were not gradually downgraded, rather they were suddenly dumped into default grade at the last moment from an investment grade category. Further, companies rated in the same category by CRISIL reflected a wide variety of creditworthiness, implying the lack of discriminatory power of the ratings vis--vis the credit-worthiness of the entities in the same rating category. The literature on credit rating identifies lack of unsolicited rating as an important factor leading to poor quality of credit rating. In India all ratings are solicited, i.e. all ratings are paid for by the rated entity. 2. Low penetration of Credit Rating: The second important issue in Indias credit rating industry is the low penetration of credit rating in India. A study in 1999 revealed that out of 9,640 borrowers enjoying fund-based working capital facilities from banks, only 300 were rated by major agencies. As far as individual investors are concerned, the level of confidence on credit rating in India is very low. In an all-India survey of investor preference in 1997, it was found that about 41.29 per cent of the respondents (out of a total number of 2,819 respondents) of all income classes were not aware of any credit rating agency in India; and of those who were aware, about 66 per cent had no or low confidence in the ratings given by credit rating agencies. The legitimacy brought about by Basel II for credit ratings of borrowers will definitely increase the penetration of the industry. However, until such time, most loans will be given 100 per cent risk weightage (since an unrated claim gets 100 per cent weightage); thus leading to no significant improvement of Basel II over Basel I.

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3. Issuer Ratings: Presently credit rating in India is restricted to issues (the instruments) rather than to issuers. Ratings to issuers become important as the loans by corporate bodies and SMEs are to be weighted as per their ratings. Of late agencies like ICRA and CARE have launched issuer ratings for corporations, Municipal bodies and the State government bodies. Further, all agencies, with direct support from the Government of India, have launched SMEs rating. Until such efforts pick up rapidly, issuers will be assigned 100 per cent weightage, leading to no improvement in the risk-sensitive calculation of the loans. Thus, in this account too, the implementation of Basel II would not lead to significant improvement over Basel I. 4. Effect of the Credit Rating scheme on Small and Medium Enterprises (SMEs) and Small Scale Industry (SSI) lending: Besides agriculture and other social sectors, Small Scale Industry is treated as a prioritylending sector by RBI. SSI accounts for nearly 95 per cent of industrial units in India, 40 per cent of the total industrial production, 35 per cent of the total export and 7 per cent of GDP of India. In spite of its importance on Indian economy, SSI receives only about 10 per cent of bank credit. As banking reforms have progressed, credit to SSI has fallen. The SSI sector in India is so far out of the reach of the credit rating industry. Under the proposed Basel II norms, banks will be discouraged to lend to SSI that is not rated because a loan to unrated entity will attract 100 per cent risk-weight. According to the Third All India Census of SSI conducted during 2001-02 by the Ministry of Micro, Small and Medium Enterprises, average output per unit of SSI in India in 2001-02 was about Rs. 4 lakh. Thus, with the subsidy, SSI units will have to spend 2-5 per cent of their output as fees for credit rating. Without the subsidy, the percentage of fees to output is in the range of 7-11 per cent. This additional cost of credit rating is bound to affect the economic viability of a large number of SSI units. While introduction of credit rating for the SMEs (including SSIs) may, in the long run, improve the accounting practices of the SSI, there is also a possibility that

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SMEs will continue to rely on the existing system of informal credit as formal credit is likely to become more expensive due to the credit rating requirement of Basel II.

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Bibliography and References

Books 1. The Indian Financial System: Markets, Institutions And Services, 2/E 2. Financial Services in India: Concept and Application 3. India's financial markets: an insider's guide to how the markets work 4. Credit Rating In India Institution Methods And Evaluation

Sites 5. http://www.egyankosh.ac.in/ 6. http://www.journaloffinance.in/ 7. http://xa.yimg.com/ 8. http://www.sebi.gov.in/

Journals and Articles 9. http://articles.timesofindia.indiatimes.com/

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