Analysis of credit ratings in India

Abstract

Credit ratings came into being because of the huge debt issue by US railroad companies that triggered the need for information about the creditworthiness of these companies. The first ever rating was published in 1909 and since then the rating business has come a long way with credit rating agencies actively providing independent opinions on the creditworthiness of the entities spread across the world. In this study we explored the process followed by the various credit ratings agencies for the determination of credit ratings. The rating process differs across the rating agencies and the same entity may get a different rating from different rating agencies. The rating agencies evaluate different parameters for different industries and the evaluation process also depends on the type of rating (long term, short term, etc) being given. As a proxy to evaluate the capability to payback the resources raised, these agencies also check whether the company can sustain or improve its profitability in the future and whether the industry in which it works would be favorable. We performed an analysis of the credit ratings in India and came up with some interesting insights. For example, the number of ratings has been consistently decreasing over the years. The present outstanding ratings list of CRISIL has only a few number of companies rated below the investment grade. Have all companies been giving robust performance or have the probable lower rated companies said good‐bye to credit ratings? We have also explored this aspect in the study. An analysis of the credit ratings of banks and corporate sector companies in India has been performed. We have derived the differentiating financial parameters across the AAA and AA rated banks. We have also tried to derive a model using Discriminant (for financial factors) and Logit analysis (also including non‐financial factors) which could help to predict whether a particular corporate sector company would be categorized in the default category in the following year, which would become important once banks come under the purview of Basel‐II norms and start following Internal Credit Rating options. An international perspective has also been provided with a comparison of the financial ratios of Indian and Korean banks. The very basic purpose of credit ratings is to predict the probability of default. We performed a study of the defaults happening in India and found that the default rate has been decreasing. A possible explanation can be the decreasing number of rated companies or the current credit rating up‐cycle due to booming economy. We have identified some recent developments which explain the decrease in the number of rated companies. We finally present the problems that we have faced while pursuing this study.