What is the Full-Form of CRISIL?

History

  • In 1987, CRISIL was incorporated by ICICI and UTI. These two institutions additionally acted as the promoters of CRISIL.In 1989, It provided ratings for the program of commercial papersCommercial PapersCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note.read more. It was the first rating agency to do so.Additionally, it was the first rating agency in 1992 to provide ratings for debt instruments of banks and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more and asset-backed securities.In 1992, it offered the assistance of technical nature to the Israeli Securities rating agency. It covered the location of Maalot and Malaysia Berhad.To develop its skills and streamline its processes, it collaborated with Standard and Poors in 1996.In May 2005, S&P acquired major stakeholdership of CRISIL, after which it was classified as the company of S&P.It launched and brought in the concept of real estate star ratings in 2010.In 2011, it further introduced ratings on education, solar grading, gold rating, and GILT index rating.In 2012, it acquired a UK-based business that offered analytics services to global investment banks.In 2013, it launched the CRISIL foundation, which works towards promoting financial awareness and efforts towards environment conservation. This initiative helped enhance financial literacyFinancial LiteracyFinancial literacy refers to an investor’s knowledge and understanding of various financial products that help him with money management, personal finances, investment, and tax planning. It examines how prudently an individual manages his finances, therefore building the necessary requirements such as an emergency fund, a retirement fund, and how they plan to handle insurance, estate planning, paying for education, etc.read more among business owners and prospective investors.In 2015, it pursued the conservation of the environment by taking the help of the foundation and employee volunteers.In the year 2014, it additionally rated the first mortgage-backed securitiesMortgage-backed SecuritiesA mortgage-backed security (MBS) is a financial instrument backed by collateral in the form of a bundle of mortgage loans. The investors are benefitted from periodic payment encompassing a specific percentage of interest and principle. However, they also face several risks like default and prepayment risks.read more that were introduced in India.In 2014, it launched its ratings on fund management’sFund Management’sFund management is the process of a company taking a person’s, company’s, or another fund management company’s financial assets (generally high net worth individuals) and investing them in companies that use those funds as an operational investment, financial investment, or any other investment in order to grow the fund.read more capability for the mutual fund.

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Functions

  • It has broad application in developing and providing comprehensive ratings.It believes in excellence, teamwork, integrity, and accountability to drive an ethical business of ratings.It serves business in eight countries: India, China, Hong Kong, Poland, Argentina, Singapore, the USA, and the UK.Currently, it serves 86 countries, having a customer base of 100,000.It reduces substantial levels of information asymmetry prevalent in the financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more.Therefore, as a credit rating agency, it provides necessary support to the consulting business, financial services, commercial and investment banks, insurance companies, asset management corporations, and private equity players.It offers independent insights and opinions, which becomes a constructive solution.It facilitates businesses to take up comprehensive and conclusive business and investment decisions.It additionally helps small lenders to take up the right lending calls and allow them to make correct business decisions. The agency performs extensive due diligence and financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company’s financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company’s results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more to arrive at a comprehensive rating.Due diligence may include gathering information from several research-based websites, followed by a meeting with the top management.

CRISIL Rating

  • The rating agency provides both long-term and short-term ratings.The rating starts from AAA and ends with SD.It provides credit ratings for long-term scale, short-term scale, structured financeStructured FinanceStructured finance refers to the design and provision of financial products and services to satisfy complex financial requirements.read more, credit enhancement, fixed deposit scale, corporate credit scale, etc.The agency’s rating rationale would focus on drivers that establish ratings, recent news, and developments and update business performance, credit factors, and key performance indicatorsKey Performance IndicatorsKey performance indicators (KPIs) help a company evaluate its overall business performance against the set goals over a period. These can differ depending on the types of firm or industry and the assessment criteria. Also, most firms employ these indicators to stay ahead of the competition.read more.To supplement the rationale, it provides financial commentary on the risk profile of a business.The AAA rating is the highest order, indicating that the borrowers make timely payments. It ensures that the issuer makes timely payments.The AA rating is the rating that indicates the instrument issued of low risk, and it makes timely payments on its due obligations.The A rating is the rating that indicates the instrument issued of low risk and it has adequate safety with minor lapses in servicing obligations.The BB rating is the rating that indicates that the instrument issued is of very high risk and may default.The C rating is the rating wherein the instrument can be regarded as highly risky and has a high probability of default.This rating of D indicates that the issuer of the financial instrument has defaulted on its due obligations.SD rating also applies, indicating that the financial Financial Financial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more issuer has defaulted on the selective asset classes.

Effects

  • The rating offered by the CRISIL helps eliminate information asymmetry and adverse selectionAdverse SelectionAdverse selection occurs when one party takes advantage of the other and holds back information that could potentially put the ignorant party at a loss. An example of adverse selection is when a company takes advantage of the buyer’s ignorance regarding the demerits of a financial asset introduced by them. Resultantly, they succeed in selling it to an unsuspecting buyer by using this information asymmetry.read more.Information asymmetry arises when in a financial transaction between two entities, one entity holds more information than the other entity involved in the business or financial transactionBusiness Or Financial TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more.Adverse selection arises when an investor invests in low-grade instruments.The Ratings, therefore, raise the credibility of the borrower or the issuer of the financial instruments.It helps investors make sound investments as they now access readily available information.It also helps the issuer access funds from the financial markets at a lower cost.Since the application of a good rating on the issuer raises its credibility, it also ensures that the default risk premium applied to the interest rates or finance costsFinance CostsFinancing costs refer to interest payments and other expenses incurred by the company for the operations and working management. An enterprise often borrows money from different financing sources to run their operations in return for interest payments and capital gains.read more is reduced considerably.Default risk premiumDefault Risk PremiumThe default risk premium is an additional amount of interest rate paid by a borrower to lender/ investor as compensation for the higher credit risk of the borrower assuming his failure to pay back the principal amount in future.read more can be defined as the premium applied to the interest rate when the lender feels there are chances of default at the hands of borrowers.

Conclusion

This is the most popular credit rating agency in India. Standard and Poor’s is the parent organization of CRISIL. It helps in the allocation of ratings by employing its comprehensive rating rationale. This ensures the reduction of information asymmetry and helps the business and investors make better investment decisions.

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