|CRISll|FINANCIAL ACTIVITIES TAX |India's Credit Rating Agencies (CRISIl)|
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India’s Credit Rating Agencies
- CRISIL is India’s first credit rating agency, incorporated in 1987 and was promoted by the erstwhile ICICr Ltd, along with UTI and other financial institutions.
- It commenced operations from 1988 onwards. In 1995, in partnership will National Stock Exchange, CRISIL developed CRISIL500 EqUity Index.
- In 1996, it made a strategic alliance with the Standard & Poor’s (S&P)’ Ratings Group and in the follOWing year Standard & Poor’s (S&P) Ratings Group acqliired 9.68% shares in it.
- In services Industry, the CRISIL in 1998 set up the Indian Index Services Ltd as a joint venture with the NSE and in 1999, it developed a Risk Assessment Model (RAM) which became a banking industry standard.
- S&P acquired the majority stake in the company in 2005 and so today CRISIL is a S&P company.
- India’s second credit rating agency is ICRA (Investment Information and Credit Rating Agency) wh’ich
- was set up in 1991. It was promoted by Industrial Finance Coroporation of India (IFCI), other leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency.
- Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA).
- ICRA Limited is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.
- The third Credit rating Agency in India was CARE, that started working in 1993. It was mainly promoted by the lOBI.
- Later another Credit rating agency ONICRA was established which now Onicra Credit Rating Agency Of India Ltd. This is a private sector agency set up by Onida Finance.
- Today it has a niche market and provides assessment, grading and rating models for individuals & MSMES (micro, small and medium enterprises.
- The Credit rating market take a definite shape in India after the SEBI made it mandatory for any debenture that has maturity of more than 18 months maturity.
HOW BANKS ARE RATED IN INDIA?
- The first step towards rating of banks in India was taken up in 1995, when the Reserve Bank of India established the S Padmanabhan C0mmittee to take a fresh look at the banking Supervision.
- S Padmanabhan Committee recommended that Banking supervision should focus on the parameters of the Financial Soundness, Managerial and Operational Efficiency and firmness.
- The Padmanabhan Committee recommended 5 points rating, which was based upon the CAMELS Model.
WHAT IS CAMELS RATING?
- CAMELS ratings is a Banks rating used in United States. The 6 alphabets in CAMELSdenote the following:
- 1. C: Capital Adequacy Ratio
- 2. A: Asset Quality
- 3. M: Management Effectiveness
- 4. E: Eaming (profitability)
- 5. L: Liquidity (using the ALM Asset Liability Mismatch
- 6. S: Sensitivity to market risk
WHAT IS PADMANABHAN COMMITTEE RATING?
- The Padmanabhan Committee recommended the following ratings:
- A: Fundamentally sound in every aspect .
- B: Fundamentally sound but with moderate weakness
- C: Financial, Operational and / or compliance weakness~ and raises supervisory concerns.
- D: Serious or moderate Financial , operational and / or managerial weaknesses that could impair the future viability.
- E: Critical Financial Weakness that has the possibility of failure
INTERNAL RATING: LATEST DEVELOPMENTS :
- In May 2010, the RBI has told the banks that they should be ready with a new methodology of internal rating of Capital Requirement. This is called ALlvanced Internal Rating Based (AIRB) approach.
- As of now the banks had been following the standardized approach, wherein banks assign risk to the asset based on the rating given by extemal rating agencies.
- This makes the banks a step closer to becoming Baselll compliant institution.
- Since the minimum CAR required is 9%, it is low for the borrowers with best rating and higher for lower rating. RBI now wants banks to develop their own methodology
- to rate borrowers rather than rely on external agencies.
FINANCIAL ACTIVITIES TAX
- ‘The Financial Activities Tax’ and ‘Financial Stability Contribution’ were propsoed by G-20. The Interim Report of the G-20 on Fair and Substantial Contribution by the
- Financial Sector of April 201 0 for ‘financial stability contribution’ proposed a flat rate levy on all financial institutions and ‘financial activities tax’ levied on profits and remuneration.
- Purpose of these taxes is to help pay for future financial clean-ups and reduce systemic risk by shrinking the size of the financial sector.
- The proposal was recently discussed at the G-20 meeting at Busan,Republic of Korea in June 2010, which called for implementation of levy taking each nations ‘circumstance and options’. India’s view was that there was need for better and well placed regulation rather than imposing levy on bank balance sheets.