ICRA | Services | Rating Methodology | Rating Process | Rating Scale
Table of Contents
- 1 The Investment Information and Credit Rating Agency of India Limited (ICRA)
- 2 Services of ICRA
- 3 Rating Methodology of ICRA
- 4 Rating process of ICRA
- 5 Rating Scale of ICRA
The Investment Information and Credit Rating Agency of India Limited (ICRA)
The Investment Information and Credit Rating Agency of India Limited was registered in 1994. It was sponsored by the IFCI and a number of other financial institutions. The ICRA has its headquarters in Delhi.
ICRA is an independent company limited by shares with an authorized share capital of Rs.10 crores against which Rs.5 crores is paid up.
Services of ICRA
ICRA was established to provide the following service—
1. Providing information and guidance to institutional and individual investors and creditors;
2. to enhance the ability of borrower to gain access to money and capital markets for tapping a large volume of resources from a wide range of investing public;
3. to assist the regulators in promoting transparency in the financial markets;
4. to help intermediaries with a tool to improve efficiency in the fund raising process.
Rating Methodology of ICRA
All relevant factors that have a bearing on the future cash generation of the issuers are considered in the rating methodology of ICRA. The following are the key areas considered in its rating analysis.
1. Business risk
The rating analysis considers business risks which include— Industry characteristics, performance and outlook, operating position. (capacity, market share, distribution system, marketing networks etc.), technological aspects, business cycles, size and capital intensity.
2. Financial risk
The financial risks considered in the rating analysis include— Financial management (capital structure, liquidity position, financial flexibility and cash flow adequacy, profitability, leverage, interest coverage), projection of cash flow and claims thereon, accounting policies and practices with regard to depreciation, income recognition, inventory valuation, off balance sheet liabilities and claims, amortization of intangible assets, foreign currency transactions etc.
The management of the issuer company is assessed in terms of background and history of issuer, corporate strategy and philosophy, organizational structure, quality of management, personnel policies including succession planning.
4. Environment analysis
Under environment analysis the following factors are considered — Regulatory environment, operating environment, prospects of the economy, areas of special importance to the company, pending litigation, tax status, etc.
Rating process of ICRA
The rating process of ICRA is as follows:
1. Request for rating
ICRA initiates the rating process on the basis of request made by the prospective issuer. The terms of rating assignment relate to some important issues such as — commitment of the credit rating agency to maintain confidentiality of the crucial information submitted by the issuer company, the right to the issuer to accept or not to accept the rating, issuer furnishing the information as required by the credit rating agency for rating.
2. Rating experts
Rating is conducted by a team which is comprised of two members. The members will have expert knowledge in evaluating the business of the issuer.
3. Information needs
The issuers are required to provide a list of information and a broad framework for discussion. As rating process involves a detailed analysis of the financial competence and operating efficiency of the issuer company, various factors are required to be furnished by the issuer.
4. Secondary information
Apart from the information furnished by the issuer, the rating firm gets some secondary information from its own research division. Such secondary information relates to the general background and trend in the industry. Moreover, the credit rating agency is guided by its panel of experts in dealing with specific issues relating to rating.
5. Meetings and discussions with the management
Rating involves assessment of not only quantitative factors but qualitative factors as well. An analysis of qualitative factors is intended to estimate the future earnings of the issuer. This calls for intensive discussions with the management of the issuer company regarding plans, future outlook, competitive position and funding policies.
In addition to this, plants of the issuer are visited to have a thorough understanding of the production processes, assets, equipment and related facilities, quality of technical personnel, and cost of production, etc.
6. Preview meeting
After the analysis is over, the findings are thoroughly discussed by an internal committee comprising senior analysts of the credit rating agency. All the issues having a bearing on rating are carefully identified. Then an opinion on the rating is formed.
7. Meeting of the rating committee
Rating committee is vested with the final authority for assigning ratings. The rating committee presents a brief picture about the business and management of the issuer. Moreover, the issues identified by the internal committee are also discussed in detail. Finally, on the basis the recommendations of the internal committee, rating is assigned by the rating committee.
8. Communication of rating
The rating assigned is communicated to the top management of the issuer. The top management in turn, may or may not accept ratings. If the ratings are not accepted, they may be rejected or requested to be reviewed again. The rejected ratings are not disclosed and complete confidentiality is maintained in the interest of the issuer company.
9. Review of ratings
When the ratings are not acceptable to the issuer, he can appeal for a review of ratings. Such review is made on the basis of further information furnished by the issuer relating to the factors that were considered for assigning the rating. If the results of the review are satisfactory, the committee can revise its initial rating decision.
10. Revision of Ratings
The credit rating agency monitors the accepted ratings over a period of time. As per the terms of the rating assignment, the issuer is bound to provide information to the credit rating agency for the periodical review of the ratings. On the basis of the review, the initial rating can be retained or revised.
Rating Scale of ICRA
The rating scale of ICRA relates to long-term securities (debentures, bonds, preference shares etc.), medium-term deposits and short-term instruments including commercial paper. The following chart presents the ICRA rating scale:
|ICRA RATING SCALE|
|Long-term including debentures, bonds and preference shares||Medium-term including certificates of deposits and fixed deposits programme||Short-term including commercial papers|
|LAAA||Highest Safety||MAAA||Highest Safety||A-1||Highest Safety|
|LAA||High Safety||MAA||High Safety||A-2||High Safety|
|LA||Adequate Safety||MA||Adequate Safety||A-3||Adequate Safety|
|LBBB||Moderate safety||MB||Inadequate safety||A-4||Risk prone|
|LBB||Inadequate safety||MC||Risk prone||A-5||Default|
|LD||Default, Extremely speculative|
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