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|CRISll|FINANCIAL ACTIVITIES TAX |India's Credit Rating Agencies (CRISIl)|

India’s Credit Rating Agencies

CRISIl

  • 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 Credit Rating Agencies

ndia's Credit Rating Agencies (CRISIl)

ICRA

  • 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.

CARE:

  • The third Credit rating Agency in India was CARE, that started working in 1993. It was mainly promoted by the lOBI.

ONICRA

  • 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
  • Considerations)
  • 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.
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