'The rating transition of some corporate debts or bonds, particularly those issued by financial firms, has been phenomenal - from sound credit to junk'. In view of the above, make a critical assessment of the rating proc

Credit Rating is the analysis and assessment of company's financial securities. Credit Rating is a symbolic indication of the current opinion regarding the relative capability of a corporate entity to service its debt obligations in time with reference to the instrument being rated. It enables the investor to differentiate between debt instruments on the basis of their underlying credit quality. To facilitate simple and easy understanding, credit rating is expressed in alphabetical or alphanumerical symbols. Rating Process and Methodology for NBFCs: The rating methodology for non-banking financial services companies is based on CAMELS model encompassing, Capital adequacy, Asset quality, Management, Earnings, Liquidity, systems and control. The following six parameters are recommended: Capital Adequacy: Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more effective / indicative of the quality of credit decisions made by bankers / credit suppliers. Higher GNPA is indicative of poor credit decision-making. Management: The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance. Earnings: It can be measured as the return on asset ratio. Liquidity: Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, institutions/ banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. Systems and Control: The internal controls, other systems and procedures of banks are considered. Recent steps taken by SEBI to make ratings more effective: In order to further strengthen the disclosures to be made by Credit Rating Agencies and to enhance the rating standards, the following disclosures have been made mandatory by SEBI: Computation of Cumulative Default Rates (CDR) In order to achieve a consistent approach, CRAs, in consultation with SEBI, shall frame a uniform Standard Operating Procedure (SOP) in respect of tracking and timely recognition of default, which shall be disclosed on the website of each CRA. Introducing Probability of Default (PD) benchmarks for CRAs Rating symbol for Instruments having explicit Credit Enhancement feature Disclosure of rating sensitivities in press release Disclosure on liquidity indicators Tracking deviations in bond spreads