Credit Rating

Credit Rating
A credit rating assesses the credit worthiness of an

individual, corporation, or even a country.

Credit ratings are calculated from financial history and

current assets and liabilities.

A credit rating tells a lender or investor the probability

of the subject being able to pay back a loan.

A poor credit rating indicates a high risk of defaulting

on a loan, and thus leads to high interest rates.

Credit Rating
Credit is important since individuals and corporations

with poor credit will have difficulty finding financing, and will more likely have to pay more due to risk of default.
The ratings are expressed in code numbers which can

be easily comprehended by lay investors.

Credit rating, as exists in India, is done for a specific

security and for the company as a whole.

A credit rating does not create fiduciary relationship

between the agency & the users.

Credit Rating Agency

Company that assigns credit ratings for issuers of certain

types of debt obligations as well as the debt instruments themselves.

Also its an agency that performs the rating of debt

instruments.
CRA s scope at present is not only limited to the rating of

debts but they are also undertaking financial analysis & assessment of financial products , individuals ,
Institutions & governments.

Credit Rating Agency

CRA play a key role in the infrastructure of the modern

financial system.
For investors, credit rating agencies increase the range of

investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers & lenders.
This in turn increases the total supply of risk capital in the

economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, start up companies, hospitals, and universities.

Functions
Superior information Low cost information Basis for proper risk, return & Trade off

Healthy discipline on corporate borrowers

Formulation of public policy guidelines on

Institutional investment

Indian Credit Rating Agencies

CRISIL : Credit rating information services of India limited.

ICRE : Investment Information & credit rating agency of

India limited.

CARE : Credit analysis & research limited. ONICRA Credit Rating Agency of India Ltd. Fitch ratings India private limited.(earlier-Duff & Phelps

credit rating )

Fitch is the only international agency with a presence on

the ground in INDIA.

Crisil
The first credit agency setup on January 1, 1988, jointly started by ICICI

and UTI with an equity capital of Rs. 4 crores, as public Ltd company.
CRISIL is India's leading rating agency, and is the fourth largest in the

world.
With over a 60% share of the Indian Ratings market, CRISIL Ratings is the

agency of choice for issuers and investors.

CRISIL Ratings is a full service rating agency that offers a comprehensive

range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business. It offers a comprehensive range of integrated product & service offeringsreal time news, analysed data , incisive insights & opinions &expert adviceto enable investors , issuers , policy makers de-risk their business & financial decision making , take informed investment decisions& develop workable solutions.

ICRA
ICRA was set up by IFCI on 16th January 1991.

It is a public limited company with an authorized share capital

of Rs.10 crores, Rs. 5 crores is paid up.

ICRAs major shareholders IFCI (26%), and the balance by

UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI) .
OBJECTIVE - to provide information & guidance to investors

for determining the credit risk associated with a debt instrument.

CARE
It was setup by IDBI in collaboration with some banks &

financial service companies in NOV 1993.

It offers services such as credit rating of debentures/ preference

shares / F.D / CP / information services & equity research extensive study of the shares listed on major stock exchanges through EIL (economy,industry,company) analysis.

Credit Rating Process

1) Primary Stage Rating Request: An issuer of the instrument makes a formal request or mandate to a rating agency in writing they also pay the initial non refundable rating fee and agrees to pay fee for surveillance Assigning Rating team: It generally consist of two members 2) Fact Finding and analysis Collection of information: rating agency give the required list of information and framework for discussion . The issuer has to supply the information and the data. Seconadary data is also collected

Meetings and plant visits: I this stage companys future plan , competitive edge and financial policies are discussed. plant visit are arranged to know more about the production process, raw material requirement. Technology etc
Preparation of reports: On the basis of the various data collected an organized and detailed report is collected

3) Rating Stage: Preview of meeting: The committee consisting of senior analysist discuss and analyze the finding in details the factors that affect the rating are identified. Based on the discussion an opinion on the rating of the instrument is arrived at. Rating committee meeting: The rating team present its finding about the issuers business and management. All the issues relevant to therating are discussed. The recommendations of the internal committee are considered and analyzed by rating committee. Finaaly rating is assigned 4) Final Stage: Communication & acceptance Surveillance

Rating Symbols
AAA : Highest Safety AA : High Safety A : Adequate Safety BBB : Moderate Safety BB : Sub -moderate Safety B : Inadequate Safety C : Substantial Risk D : Default

RATING METHODOLOGY
Consists of four areas : Business analysis - covers an analysis of industry risk, market

position in the country, operating efficiency of the company & legal position.
Financial analysis analysis of accounting quality, earnings

protection, cash flow adequacy & financial flexibility.

Management evaluation study of track record of the

managements capacity to overcome adverse situations, goals, philosophy & strategies.

Fundamental analysis analysis of liquidity management, asset

quality, profitability & interest & tax sensitivity.

Contd..
Information is collected & then analyzed by a team of professionals in an

agency.
If necessary , meetings with top management suppliers & dealers & a visit to the

plant or proposed sites are arranged to collect additional data. This team of professionals submits their recommendations to the rating committee.
Committee discusses this report & then assigns rating. Rating assigned is then notified to the issuer & only on his acceptance , rating is

published.
Assures confidentiality of information. Once the issuer decides to use & publish the rating, agency has to continuously

monitor it over the entire life of instrument.called Surveillance.

Benefits of Credit Rating

A) TO THE INVESTORS :-1. Assessment of Credibility Rating assess the strength / weakness of the company/debt instrument on the basis of certain predetermined factors. Judiciously and Impartial assessment. Beneficial to understand the credibility of the issuing industry. 2. Risk Indicator Credit rating agency rates the instrument after analyzing the various aspect of the company. all the investor may not possess the required knowledge and information for credit evaluation. In this context investor can identify the risk associate with the symbol assign the instrument by the credit rating agency. They can also compare the return and the risk involve in investing in particular security.

3. Protect against Bankrupty The financial strength of issuing is assessed through credit rating. High rating assign to the debt security of a company indicates the safe investment 4. Easy to understand
The rating is given in the form of symbols it is easy to understand and use them no analytical knowledge is required

5. Enables quick decision

There is no need for an investor to study or know the fundamental of the company , its actual strength financial standing etc. an investor takes quick decision based upon the rating

6. Independent Decision
The investor can bulid its own portfolio without the help of portfolio managers. By carefully watching upgrades and downgrades of the credit rating , he can enter his portfolio mix.

7. Portfolio diversification
Large investor may use credit rating for portfolio diversification by selecting appropriate instrument from the broad spectrum of investment option.

8. Rating surveillance
Rating is not the one time business it is a continuous process. Rating agency is continually watch the financial strength and other related factors to give them rating .the investor has to reorganized its portfolio and the company has to look for alternate ways of strengthening its credit rating

(b) TO THE issuers

1. Lower the cost of borrowing
The higher rating of safety provided by a rating agencies builds the investors confidence in the payment of principle and intrest. The issuing company can capitalised on this by lowering the rates of interest .

2. Widens investors baseThe issuer of rated securities are likely to have access to a much wider investor base. The opinion of the rating agency build up investors confidence which could enable the issuer to raise funds even in a slumped market. The rating itself is used as an advertising tool to raise funds in various media.

3. Fosters a better imageThe financial and the managerial performance of an issuer is analyze and rating are assigned to their instruments thus rating creates the better image

4. Induces self discipline- rating requires the discloser

of accounting system ,financial reporting and management pattern. This discloser imposes self discipline on the functioning of the company 5. Lower the cost of issueThe higher rating makes it more accessible to the investor. There is no need to a wide publicity or adopt other ways of publicity thus it reduces the cost of the public issue 6. Motivates growth- rating instill a feeling of confidence and encourages the entrepreneurs to undertake new project and expands its existing projects. With the higher credit rating a company can mobilize the needed funds from the public and financial institutions

(c) TO THE intermediaries

1.

It enables proper planning pricing underwriting and placement of the issues

2. This saves their time, cost, energy, and manpower in

analyzing the investment risk

3. Rating is also used in securitization of assest and

helps the special purpose vehicle to repackage the assests.

Limitations
Institutions whose instruments were given highest rating didnt perform

well. For eg. CARE gave the highest rating to CRB capital, which failed, it created a panic among investors & credit agencies.
Frequent revision of grading creates confusion questioning credibility of the

expertise of rating agencies.

No audit, only rely on information provided by the issuer which may be

inaccurate & incomplete.

Biasing investors lose their investments. Rating agencies often fail to correctly predict a borrowers financial health

in the short term. The latest case is NCD issue of BPL which was downgraded by CRISIL from A to D. Investors who depends on these ratings is not given any warning by rating agencies to wind down his investment in time.

Thank You