CARE Ratings Ltd Management Discussions.

A. Industry Structure and Developments Economic Backdrop

FY20 was probably one of the most challenging years in the past decade or so for the entire economy that ended on the note of a shutdown which affected the yearend plans of all enterprises as the usual business targets which are met towards the end of the month could not be fulfilled for most of them. GDP growth slowed down to an all-time low of 4.2% which was much below the 6% plus number projected at the beginning of the year. Lower economic growth has also gone with a major decline in the investment rate as defined by the gross fixed capital formation rate which was down to 26.9%. Investment was affected by lower private sector investment as the government remained the most active player in this space. Capacity utilization for the manufacturing sector was also lower at 68.6% as of the quarter ended December 2019. This was reflective of lower demand conditions in the economy which pushed back capacity expansion.

Overall level of economic activity is important for us at CARE Ratings as it impacts the credit and debt markets which in turn has a bearing on our business. Now with the RBI being fairly active in lowering the repo rate and increasing liquidity, one would have expected the growth in credit to pick up. Yet growth in bank credit was lower in FY20 at 6.8% compared with 12.2% last year. But for us, the lower growth in credit to manufacturing and services, which are the segments primarily rated by CRAs, impacted our bank loan business. Banks were more circumspect when it came to lending against the backdrop of the NPA episode following the AQR. Also, the demand for credit was lower with fewer projects in the infra space.

Interestingly, while the debt market witnessed higher issuances in FY20 at Rs. 6.89 lakh crore as against Rs. 6.46 lakh crore in FY19, the bulk came from the BFSI sector. Also, the PSU component dominated. Both these factors get linked on our ability to charge fees which has a bearing on our topline.

Hence, our overall performance on standalone basis has to be viewed against this background. We had to work harder to generate our revenue in FY20 under these conditions where the overall size of the rateable universe was not growing at an adequate pace.

Impact on our business

The subdued conditions in the debt and credit markets did have an impact on our volume of business. The volume of new debt rated by us came down from Rs 19.91 lakh crore in FY19 to Rs 12.73 lakh crore in FY20. This was mainly due to a decline in the volume of new bank loans rated. The volume of debt issuances was also lower this year but given that we had rated substantially higher volume than the issuances in FY19 (as what is rated is not necessarily issued in the year), the spillover effect was witnessed.

This had an impact on our rating income as the new debt rated volume had come down. Also, the increase in the number of Issuer Not Cooperating (INC) cases during the year meant that the company did not receive fees for surveillances which had to be done with the available information for these companies. Therefore, in a way, it was dual challenge for the company as the prevailing regulatory structure requires credit rating agencies to continue to provide ratings based on best available information in case of non-cooperation from the client. This may be an issue to contend with progressively even in FY21 where the INC cases could increase given that the overall economic conditions are likely to be downbeat for the entire year.

Further, on account of the NBFC crisis which started in FY19, several companies which had defaulted had moved out of the surveillance bucket which affected our surveillance income. On our part, we have taken several steps to strengthen our processes and enhance our market intelligence mechanisms.

Developments on the Regulatory front

The regulators have undertaken various measures to enhance governance standards in CRAs as well as the disclosure norms in rating press releases. Some of the measures are as follow:

• In June 2019, SEBI revised the method of computation of cumulative default rates (CDRs) for CRAs, in variance to the earlier method prevalent from March 2010. As per the new method, CRAs are to calculate CDRs on issuer weighted, marginal default rate basis with monthly cohorts. This, we believe, would bring in granularity to the calculation of CDRs. Further, CRAs are to disclose CDRs in two forms - Long run average of 10 years and short run average of last two years. The regulator has also introduced Probability of Default (PD) benchmarks, to enable investors discern performance of CRA vis-a-vis the standardized benchmark.

• Rating symbols for credit enhanced instruments have been changed from Structured Obligation (SO) symbol to Credit Enhanced (CE). The CE symbol is to be suffixed (instead of SO) to all instruments which are credit enhanced from an external party. Securitization transactions would continue to carry the SO symbol.

• In terms of disclosures, SEBI has introduced new factors that should form a part of the press release - like rating sensitivities (to be quantified to the extent possible) and liquidity indicators.

• CRAs have been advised to devise models to track bond spreads.

• Towards enhancing governance norms, SEBI, in November 2019, stipulated the following

• Constitution of a Rating Sub Committee of Directors, to whom the Chief Rating officer of a CRA would report. In line with the above, CARE has constituted the committee and also devised a charter for the committee detailing the duties and responsibilities of the Sub Committee as well as the CRO.

• One third of the Board of a CRA shall comprise independent Directors, if the Board is chaired by a non-executive Director. In case the Board of the CRA is chaired by an executive Director, half of the Board shall comprise independent Directors. The Board of a CRA shall also have a Nomination and Remuneration Committee which shall be chaired by an independent Director. Being a listed company, CARE Ratings is already in compliance with all of the above.

• CRAs shall meet the audit committee of the rated entity (which carries rating to its listed NCDs), at least once in a year, to discuss issues including related party transactions, internal financial control and other material disclosures made by the management, which have a bearing on rating.

• In order to address this critical gap in the availability of information to investors, listed entities (which are equity listed or have any of their debt securities listed) have been mandated to disclose defaults in their unlisted debt obligations like bank facilities, albeit after persistent default of 30 days.

• To address the issue of Issuer Non-Cooperating (INC) cases, SEBI, in January 2020 mandated that all issuers who are in investment grade and continue to be in INC status for 6 months as of July 1 2020, would necessarily have to be downgraded to sub investment grade. Secondly, no new CRA can rate a facility/instrument if the issuer is in INC status with CRAs for 12 months. We believe that this, especially the second move, would act as a deterrent to issuers for failing to cooperate with CRAs in the rating process and thus, would tend to reduce the INC incidence to an extent.

• These apart, as per SEBI CRA (Amendment) Regulations, 2018, CRAs cannot carry out any activity other than those prescribed by a financial sector regulator, two years from the date of the above notification (i.e., from May 30 2020). Other activities are to be segregated to a separate entity from the above date.

• In March 2020, as a reprieve to issuers due to the onset of Covid-19, SEBI relaxed norms with respect to default recognition and allowed CRAs a differentiation in treatment of default, on a case to case basis to ascertain if such default occurred solely due to the lockdown or loan moratorium.

B. Opportunities and Threats


Our strategy continues to be in the direction of enhancing the rating business by widening the client base and deepening relationships. Both of these elements help in enhancing our business field. The number of clients is very important for us because even if the business procured is of a smaller magnitude, it has the potential to grow in future.

Our conventional businesses covering bank loan and corporate debt would continue to be the focal points and our business teams are classified into various groups to build relations with clients. We do have plans to further strengthen our presence in three areas: securitization, structured products and distressed assets. This we believe will offer more avenues for earning revenue in the coming years and there will be dedicated focus here.

At the same time, going forward, we would like to employ cutting edge technologies in the field of analytics to enhance the efficacy of the rating determination process, through the use of Artificial Intelligence. We would be building capabilities to enhance fraud monitoring systems and also explore partnerships in this area.

For our clients, we would also be offering other services in the fields of customized research, advisory and training through CART, which has already made inroads in these domains. The regulatory fallout of a rating agency allowed to carry out only ratings would mean that the grading products would be handled by CART.

We would also be focusing on our other subsidiary CARE Risk Solutions to augment our Groups business through selling risk solution products to various lending institutions in India and overseas, as well as build on our valuations business.

Going ahead, all diversification of business activity would be channeled through these two subsidiaries as CARE would be involved only with credit ratings. Therefore, growing this business will mean even greater concentration of resources and management time on CART and CRSPL.


The threats confronting our business have their foundation in such risks and concerns as are discussed in Section "Risks and Concerns" of this report.

C. Segment-wise or product-wise performance CARE Ratings

CARE Ratings is the flagship company of CARE ratings Group and was established in 1993. In FY20, in a rather challenging environment, your Companys focus was on building the client base and widening the coverage of debt rated in the market. Since inception, your company has completed a total of 81,874 rating assignments till March 31, 2020. On a cumulative basis, the amount of debt rated instruments increased to Rs. 141.10 lakh crore as of March 31, 2020. The total number of new rating assignments declined by 43.0% in 2019-20. The moderation can, in large part, be ascribed to the decline in bank facility ratings. The total volume of new debt rated decreased by 36.0% from Rs. 19.91 lakh crore in 2018-19 to Rs. 12.73 lakh crore in 2019-20, mainly on account of broad-based decrease in debt rated volume across categories.

CARE Advisory Research and Training Limited

CARE Advisory Research and Training Limited (CART) is a wholly owned subsidiary of your Company which was incorporated on September 06, 2016. CART is in the business of Advisory, Research and Training.

Advisory division

CART offers services in the field of transaction advisory (Valuation, IM preparation), Banking services support (TEV, LIE, vetting of resolution plans, Machinery Cost vetting), Corporate Advisory (DPR, Business plan preparation, Financial Improvement Plan, Financial Appraisal) and Risk Management Services (Risk related policy documents, Credit assessment models).

Research Division

CART services a variety of business needs of its Domestic and Multinational clients with credible, high-quality research and analysis on various facets of the Economy and Industries.

Training Division

The Company caters to the training needs of corporates and professionals through its training programmes which are offered through on-line as well class room mode.

CARE Risk Solutions Private Limited (CRSPL)

Our wholly owned subsidiary CARE Risk Solutions Pvt. Ltd (CRSPL) is a leading fin-tech company which provides Risk Management and financial compliance software solutions for Banking, Financial Services and Insurance (BFSI) sectors with its Enterprise Risk Management suite (ERM), Asset Liability Management (ALM), Fund Transfer Pricing (FTP), International Financial Reporting Standards (IFRS) & Financial Reporting Application, Lending suite and Early Warning systems. The focus of the organization is multi-fold and is directed at innovative disruption and digitization to enable financial institutions meet the compliance norms and move towards leveraging risk management from a strategic perspective. It involves robust effort on technology R&D and product compliance to central banks regulation across geographies and rapid and timely implementation.

CRSPL has the soul of an agile start up and the maturity of an established specialist in creating and delivering advanced technology solutions for its customers. CRSPLs exceptional product and immaculate implementation framework has helped them to partner with the best names in the Financial Technology globally and regionally.

Global ventures

Our global subsidiaries such as CARE Ratings Africa and CARE Ratings Nepal Limited are already in operation and would be gradually seeking a wider market in ratings and other allied services. We believe that these companies would become progressively larger in the next few years with their operations becoming scalable. We are also exploring other regions too as part of widening our presence in the global rating space.

CARE Ratings (Africa) Private Limited (CRAF)

CARE Ratings (Africa) Private Limited (CRAF) is the first credit rating agency to be licensed by the Financial Services Commission of Mauritius from May 7, 2015. It is also recognized by Bank of Mauritius as External Credit Assessment Institution (ECAI) from May 9, 2016. In February 2020, CRAF has received the approval of the Capital Markets Authority of Kenya to operate as a Credit Rating Agency in Kenya under the Capital Markets Act and the Regulations and Guidelines issued thereunder.

During FY20, the Company has assigned ratings to 28 corporates of Mauritius including renowned Corporates like The Mauritius Commercial Bank Ltd., Bank One, CIEL, CIM, Leal, Omnicane, Alteo, MUA and ENL. In FY20, CRAF has assigned credit ratings to bank facilities and bond issue aggregating to around MUR 40.0 billion (MUR 21.0 billion in FY19). There has been an increase in awareness about the concept of Credit Rating among Banks and Corporates and clear understanding of the benefits from such Ratings.

CARE Ratings Nepal Ltd. (CRNL)

CRNL is incorporated in Kathmandu, Nepal as a credit rating agency and is licensed by Securities Board of Nepal w.e.f. November 16, 2017. CRNL has done 93 rating assignments in FY20. In short span of time, CRNL has been able to expand its operations and has added more than 200 clients till March 31, 2020 since inception.

D. Outlook

The outlook for FY21 is likely to be exceptionally challenging as it started with the further continuation of a lockdown which was almost absolute in April 2020 and was relaxed only partially in some segments and states in May and June 2020. With the services sector being particularly being affected by social distancing norms, it would take time for most of them to commence even at minimal capacity utilization rate. Labour problems and logistics issues have further compounded problems for industry. The RBI has been proactive in further lowering rates and inducing liquidity into the system but the preference of banks has been for higher rated companies as there is a fairly significant modicum of risk-aversion that is evident.

The governments economic package which includes loan guarantees bodes well for industry and could be a positive for bank credit. The same holds for the guarantee being given for NBFC borrowing in the bond market. But with economic growth for FY21 to be negative for sure, investment would drop further and hence buoyancy in the debt and credit markets will be limited and confined to specific sectors and higher rated companies that have not been adversely affected by the lockdown.

While we do expect the third and fourth quarters to show some signs of recovery in specific sectors like infrastructure and related industries, a lot depends on how the government pursues the Unlock policy. This would have a bearing on the funds raised in the system which drives rating business. We would hence be guarded about the overall economic picture for FY21 as we do see negative economic growth and limited upside to credit growth consequently. The actions of the government and RBI would mitigate the effects to an extent but the year for the credit rating business will remain challenging.

We are embarking on a multi-pronged approach to expand business at the subsidiaries. We would be offering services in the fields of customized research and advisory through our subsidiary CART. Our other subsidiary CARE Risk Solutions would augment our Groups business through selling risk solution products to various lending institutions in India and overseas.

This year will remain volatile in terms of opening up of the economy to be interspaced with periodic and localized lockdowns which may also mean disruption in the way we do business including working from home which may be more of a norm than an exception until a solution to counter the pandemic.

We do however believe that the strategies that have been outlined will work significantly to de-risk our business and while the results may not be apparent in the short run will lay the foundation firmly during this period.

It must be mentioned that the Board has appointed Mr. Ajay Mahajan as Managing Director and CEO of our company to steer the ship through these challenging times. He comes with a wealth of experience in the banking and financial sector and would be driving the campaign of taking your company to a new level.

E. Risks and Concerns

As a credit rating agency registered with SEBI, CARE Ratings is subject to various types of risks, in its business and operations. The risk factors may be classified under four headings: operational, business, market and compliance.

Operational Risks

Operational risks encompass people, process, fraud and technology risks. These have all been addressed by your company with appropriate measures.

• Talent is harnessed with continuous training for upgradation of skills and creation of an empowering environment for every individual to ensure that we attract and retain talent.

• The Ratings Operations manual provides a rigorous SOP to be adhered to while executing an assignment with periodic audits to ensure compliance. We have also used the services of an external consultant in this year to make our system even more robust.

• Our fairly comprehensive code of conduct to address issues of fraud and maintenance of confidentiality is ingrained in every employee at the time of joining the organization and buttressed through the year in various sessions organized by the senior Group Heads to drive home these principles.

• CARE has in place a comprehensive IT security policy to address risks involving significant security breaches, breakdowns in computer systems and network infrastructure. We employ security systems, including firewalls and intrusion detection systems, conduct periodic penetration testing for identification and assessment of potential vulnerabilities and use encryption technology for transmitting and storing critical data. We are pleased to inform you that when the nation went for a lockdown, we were able to work from home with minimal disruption especially to our ratings related work which had to be completed by March end.

Business Risk

Business risk is in the areas of competition, availability of information, Issuers not cooperating, reputation risk and non-payment of fees by clients. These have been addressed by working towards creating a niche for ourselves to stay ahead of competition. As there are a total of 7 rating agencies in the rating space, there are challenges on acquiring and retaining clients as well as being able to charge the requisite fee. Non-availability of information impacts the quality of our ratings as is the case with the INC ratings where we have to work with minimum information in the public space. Further, non-payment of fees is a challenge for us as surveillance income is a very important component of our rating income. To address issues on reputation related to our ratings we have streamlined the process even further to ensure that there is more robustness in our processes and hence ratings. Going forward, the processes will get augmented with the use of best digital technologies.

Market Intelligence Risk

Market Intelligence risk includes the ability to have superior prognosis in detecting declining ability of companies to service their debt and sending the signal well in advance. This is something which can also affect the reputation of the firm as any default especially of a market instrument like a bond can affect the individual investor. We are, therefore, working towards strengthening our market intelligence systems to ensure that we are ahead of the curve.

Market Risk (Investment)

We also run the risk of our investment portfolio being affected by changes in interest rates as we do have a fairly sizeable investment portfolio. Here we do have a very conservative investment policy which concentrates more on preserving the shareholders assets by balancing risk with returns.

Compliance and Other Related Risks

The compliance and other related risks arise due to the regulatory structure in which we operate. CAREs software interface maps the entire workflow in the rating process, affixing responsibility of various stakeholders and captures timelines of key activities. The interface also sends out periodic alerts to supervisors on deviations and gives comprehensive MIS reports for monitoring. We also have an internal audit department to look into on an ongoing basis, compliance of various internal and external guidelines. Also, the legal risk arising from companies not being satisfied with our ratings is possible and we do try and ensure that all are processes are robust so that we are ringfenced well in every respect.

Further, there could be a possibility of regulatory actions in the form of adjudication proceedings against CARE on account of any defaults or sharp rating transitions. In the past, such an action has been initiated against CARE and penalty levied. Such actions by the regulator can have adverse impact on the companys performance since it can create negative perception about CAREs ratings in the minds of issuers and investors. We are committed towards strengthening our systems and processes continuously in tune with market requirements and our own studies to critically study past instances and identify root causes of sharp rating transitions.

It may also be noted that a major portion of CAREs ratings business is driven by regulatory requirements or requires accreditation, recognition or approval from government authorities. CARE is recognized by RBI as an eligible credit rating agency for Basel II implementation in India; and commercial paper is mandatorily rated in India. In the event that there are changes to these regulations or norms, there may be a decrease in the demand for ratings. Implementation of the Internal Rating Based (IRB) approach by RBI may make rating non-mandatory by those banks for whom IRB approach is approved by RBI.

During the year, we had appointed external consultants for suggesting improvements to our processes and systems with a view to modernizing the same. During the year, the rating process was also strengthened with sectoral committees and enhanced transparency aided by technology.

Governance and oversight

Your company has a revamped Board of Directors with majority of independent Directors who bring with them rich experience in finance, economics, regulatory affairs and insurance industry. This ensures the provision of cutting-edge guidance to the management to take some innovative decisions.

F. Internal Control Systems and their Adequacy

CARE has implemented an internal control framework to ensure all assets are safeguarded and protected against loss from unauthorized use or disposition, and transactions are authorized, recorded and reported correctly. The framework includes internal controls over financial reporting, which ensures the integrity of financial statements of the company and reduces the possibility of frauds.

The Internal Audit and Criteria Team issues well documented operating procedures and authorizations with adequate built-in controls. These are carried out at the beginning of any activity and all through the process, to keep track of any major changes. As part of the audits, they also review the design of key processes, from the point of view of adequacy of controls.

Companys statutory auditors have audited the financial statements and issued a report on your Companys internal control over financial reporting as defined in Section 143 of the Companies Act, 2013 (the Act). The said report is annexed to the independent auditors report.

G. Discussion on financial performance with respect to operational performance.

Our performance in Financial Year 2019-20

Total income on a standalone basis for the year ended March 31, 2020, was at Rs.250.44 crore, compared with Rs.327.19 crore for the year ended March 2019. PAT for the year was at Rs. 80.50 crore, compared with Rs.134.99 crore in the corresponding previous year.

The volume of debt rated decreased by 36.1% from Rs. 19.91 lakh crore in 2018-19 to Rs. 12.73 lakh crore in 2019-20. During the year, your company rated 5,343 instruments. The decline in the volume of debt rated was on account of decrease of 51.1% in the bank loan rating and long-term instruments by 22.1% compared with that in the previous year. The BFSI sector was dominant in debt issuances as were PSUs in terms of ownership. Being large borrowers in the market, the fees charged is not proportional to the rated amounts.

Operating performance

CARE Groups operating performance at the end of the year were as follows:

Group Operating Performance (Rupees in Crore)


At March 31,2020

At March 31,2019

Growth %

Revenue from operations 243.64 318.97 -23.6
Other Income 31.47 30.39 3.6
(A) Total 275.11 349.36 -21.3
Employee Cost 109.27 102.81 6.3
Depreciation & Amortization 7.77 3.33 133.3
Finance Cost 0.93 -
Other Expenses 53.05 41.50 27.8
(B) Total Expenses 171.02 147.63 15.8
Profit Before Tax (A-B) 104.09 201.73 -48.4
Tax Expenses 20.61 63.66 -67.6
Profit After Tax 83.48 138.07 -39.5

For the group as a whole, the total income came down by 21.3% from Rs 349.36 crore in FY19 to Rs 275.11 crore in FY20. The share of CARE Ratings in the Groups total income is around 90%. As can be seen in the table above, the decline in total income on a consolidated basis was due to a decline in revenue from operations by 23.6%. Total expenses increased by 15.8% mainly due to

1. Increase in employee cost by 13% which was offset by savings on ESOP cost by Rs. 7.39 Crores leading to net increase in employee cost by 6.3% during FY20.

2. Increase in Other expenses by 27.8% in FY20 due to one-time expenses incurred on forensic audit and consultants engaged for process improvement assignments.

With total expenses increasing and total income coming down, profits before tax declined by 48.4% and PAT by 39.5%.

The table below gives some important ratios for the CARE Group of companies.

Important ratios: Group Companies


FY 2019-20

FY 2018-19

Debtors Turnover 5.96 6.75
Current Ratio 4.95 5.71
Operating Profit Margin (%) 29.8% 53.7%
PAT Margin (%) 30.3% 39.5%
Return on Net worth (%) 15.4% 25.0%

Due to the decline in profits, the profitability ratios have been affected as can be seen in the table above where Operating Profit Margin, PAT margin and RoNW have declined in FY20. PAT margin stood at 30.3% (39.5% last year) and return on net worth was 15.4% (25.0% last year).

Property, Plant, Equipment

Groups Property, Plant, Equipment and Intangible assets at the end of the last two years were as follows:

Property, plant and equipment as of March 31 (Rs. Crore)




Growth %

Property, plant, equipment etc. 109.40 92.32 19
Less accumulated depreciation 15.77 9.22 71
Net Block 93.63 83.10 13
Depreciation as % Total income 3 1 196
Accumulated depreciation as % gross block 14 10 44

There was a 18.5% increase in property, plant and equipment mainly due to IND-AS 116 impact for right to use assets.


The Groups investment and treasury position as of the end of the year and comparable figures for previous year is presented below.

Group Investments as of March 31 (Rs. Crore)




Growth %

Non-Current Investments
Investments in Equity instruments (Unquoted) 13.80 13.66 1.0
Investment in Mutual Funds & Others (Quoted) 212.30 235.81 -10.0
(A) Total 226.10 249.47 -9.4
Current Investments & Treasury
Investment in Mutual Funds & Others (Quoted) 112.85 189.19 -40.4
Cash and Bank Balances 6.99 19.82 -64.7
Fixed Deposits 107.28 10.02 1051.76
(B) Total 227.13 219.03 3.7
Grand Total (A) + (B) 453.23 468.50 -3.3

Overall, there was a minor decline in total investments from Rs 468.50 crore as on March 31, 2019 to Rs 453.23 crore as on March 31, 2020. There was a decline in non-current investments by 9.4% while current investments and treasury increased by 3.7%. Within non-current investments, there was a decline in investment in mutual funds and others from Rs.235.81 crore to Rs.212.30 crore. Within current investments, there was a decline of 40.4% in investments in mutual funds & others (by Rs 76.34 crore) and an increase in fixed deposits by Rs 97.26 crore.


The Groups trade receivables are presented below.

Groups Trade Receivables as of March 31 (Rs. Crore)




Growth %

Ratings & other services (Net) 36.02 43.14 -16.5
Non-Ratings 4.87 4.12 18.2
Total 40.89 47.26 -13.4

There was a decline in receivables on ratings business by Rs 7.12 crore while those on non-ratings increased marginally by Rs 0.75 crore. Reduction in trade receivable is due to consistent efforts for recovery through the year.

H. Material Development in Human Resources / Industrial Relations front, including number of people employed.

The level of analytical expertise has a bearing on the quality of the ratings assigned by a credit rating agency wherein human resources play an important role in the business. We have always believed in picking up the right talent to ensure that the right skills and competencies are available for executing the business objectives and encouraging them to think independently while working in teams in order to enhance the quality of rating. We further enrich their talents by way of conducting induction and training programmes which are conducted by experts in the field. In addition, systematic training programs have been conducted to build and enhance key functional and behavioural competencies for both new recruits and existing employees.

As on March 31, 2020, we had 646 employees (P.Y.:633). Around 90% of the staff is professionally qualified in the areas of management, CA, CS, legal, economics, engineering etc. holding professional or post graduate degrees.