ICRA | Services | Rating Methodology | Rating Process | Rating Scale

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 - Services, Rating Methodology, Rating Process, Rating Scale

ICRA – Services, Rating Methodology, Rating Process, Rating Scale

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.

3. Management

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:

Long-term including debentures, bonds and preference sharesMedium-term including certificates of deposits and fixed deposits programmeShort-term including commercial papers
LAAAHighest SafetyMAAAHighest SafetyA-1Highest Safety
LAAHigh SafetyMAAHigh SafetyA-2High Safety
LAAdequate SafetyMAAdequate SafetyA-3Adequate Safety
LBBBModerate safetyMBInadequate safetyA-4Risk prone
LBBInadequate safetyMCRisk proneA-5Default
LBRisk proneMDDefault
LCSubstantial Risk
LDDefault, Extremely speculative

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