CARE undertakes rating exercise based on

• information provided by the company
• In-house database and data from other sources that CARE considers reliable. CARE does not undertake unsolicited ratings.
• The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet debt obligations in adverse conditions.
• The analysis attempts to determine the long-term fundamentals and the probabilities of change in these fundamentals, which could affect the credit-worthiness of the borrower.
• The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first deals with the operational characteristics and the second with the financial characteristics.
• Besides quantitative factors, qualitative aspects like assessment of management capabilities play a very important role in arriving at the rating for an instrument.
• The relative importance of qualitative and quantitative components of the analysis vary with the type of issuer.
• Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative and qualitative factors affecting the credit quality of the issuer.

Definition of Default

CARE defines default as any missed payment on its rated instrument. As an exception, however, cases of missed payments attributable to technical reasons e.g. procedural delays caused by government machinery etc. which are likely to be rectified within a short time, are not placed in the default grade immediately. If, however, such delays are not rectified within a short time, ratings are placed in the default grade.

WHAT RATINGS DO NOT MEASURE

It is important to emphasise the limitations of credit ratings. They are not recommendations to invest. They do not take into account many aspects which influence an investment decision. They do not, for example, evaluate the reasonableness of the issue price, possibilities for capital gains or take into account the liquidity in the secondary market. Ratings also do not take into account the risk of prepayment by issuer. Although these are often related to the credit risk, the rating essentially is an opinion on the relative quality of the credit risk.