Why is Rakesh Jhunjhunwala holding CRISIL in his portfolio?

 CRISIL is India's Leading Ratings, Financial News, Risk and Policy Advisory company. It offers a comprehensive range of rating services. CRISIL is the only rating agency to operate on the basis of a sectoral specialisation, which underpins the sharpness of analysis, responsiveness of the process and large-scale dissemination of opinion pieces.

In addition, CRISIL also offers services to the mutual fund industry through CRISIL Fund Services, a leading provider of fund evaluation services and risk solutions in India. With over Rs. 7.8 trillion of debt, 5,600 issues and 3,000 issuers rated to date, CRISIL continues to play a key role in the development of India's debt markets.

CRISIL’s association with Standard & Poor's , a division of The Mc Graw Hill Companies, dates back to 1996. This has now culminated in Standard & Poor's acquiring a majority shareholding in CRISIL. The partnership helps CRISIL to anticipate new market challenges and introduce value-added rating methodologies. CRISIL Ratings and Standard & Poor's collaborate on several projects in the U.S. and in East Asia, and jointly promote business and services in India. CRISIL Ratings also offers technical know-how overseas. For instance, it has provided assistance and training for setting up ratings agencies in Malaysia (RAM) and Israel and in the Caribbean. In March 2004, CRISIL took up an equity stake of about 9% in the share capital of the Caribbean Information and Credit rating Services (CariCRIS) with an investment of US $ 300,000. The Caribbean rating agency is a unique initiative -- it is the world's first regional credit rating agency. It will offer rating and other services in 19 countries. CRISIL will also provide technical assistance to the agency to establish and stabilize its operations.

Standard & Poor is    world's leading rating agency came out with an open offer some time last year with CRISIL and so it becomes a majority shareholder of CRISIL with a holding of 58.5%. This shall integrate CRISILS operations with   Standard & Poor's and to fully leverage opportunities both in India and abroad. Crisil, with its talented analytical pool and strong management, shall play an integral role in the  Standard & Poor's and The McGraw-Hill Companies global network. It shall be benefited with the brand image of  Standard & Poor's.  In recent years, Standard & Poor's commissioned Crisil in an increasing number of global analytical projects that have deepened the relationship and contributed to Crisil's growth and diversification.

CRISIL's analysis of the Indian Banking Sector reveals that there are several similarities between the current period and the mid-1990s: these include sharp credit expansions, high economic growth, and increasing interest rates.

The new Basel Accord with its three pillars –

1. Minimum capital requirements,
2. Supervisory Review process and
3. Market discipline is aimed at developing risk sensitive standards in the banking industry.

The First Pillar

The first pillar sets out minimum capital requirements. The new framework maintains both the current definition of capital and minimum requirements of 8% of capital to be risk weighted assets.

For measuring credit risk of a bank, there are two different approaches being proposed.

• Standardized Approach:

Ø       Under the Standardized approach, ratings assigned by the Credit Rating Agencies (CRA) is to be used.

Ø       It is likely to be implemented in some key Asian markets like India, Malaysia, Philllipines, Japan, and Honkong.

Ø       It shall give a unique opportunity to the domestic CRA’s (Credit Rating Agencies) 

• Internal Rating – based approach:

Ø       The use of the IRB (Internal Rating Based) approach will be subject to approval by the supervisors based on the standards established by the committee.

Ø       Some of the risk weights shall depend on the Credit worthiness of the borrowers.

Ø       The IRB is to follow after Availability of data and systems with banks, and regulator’s comfort with such data.

Second Pillar

The Supervisory review process ensures that the bank has sound internal processes in place to assess the adequacy of capital based on a thorough evaluation of its risks. The new framework stresses the importance of banks management developing an internal capital assessment process and setting targets for capital that are commensurate with the banks particular risk profile and control environment. Supervisors are responsible for evaluating how well the banks are assessing the capital requirement needs relative to their risks.

Third Pillar

The third Pillar aims to bolster market discipline through enhanced disclosure by banks. Effective disclosure is essential to ensure that market participants can better understand risk profile and the adequacy of their capitalalisation.

With the Basel Accord,

Ø  A significant portion of the capital requirement will depend upon ratings assigned by CRAs.

ØCRA’s to play a key role in the financial sector. Quality of ratings and the process – critical to regulators

ØTo ensure quality and consistency of ratings, the Accord has recommended qualitative and quantitative parameters:

1.    Qualitative - Process for recognition of domestic CRAs

2. Quantitative - A mapping process across rating agencies, so that appropriate risk weights are assigned to comparable ratings of different CRAs.

The Indian banking system is today better positioned than ever before in terms of its business and financial health. CRISIL believes that despite the high credit growth rates across the banking sector, the systemic liquidity will be manageable over the medium term. The core profitability of the sector is expected to remain range-bound, despite the increase in the cost of funds in 2005-06. The incremental capital requirement for the sector on the implementation of Basel II norms, are manageable on a systemic basis. Asset quality is also better than ever before.

EARNINGS SNAPSHOT