Rating symbolizes grade of quality.

WHAT IS RATING

• Credit rating is an assessment of the capacity

of an issue of debt security by an independent

agency, to pay interest and repay the

principal as per the terms of issue of debt.

• A credit rating tells investors or lenders the

probability of the issuer of debt to honour the

debt.

WHAT IS CREDIT RATING

• Ratings are expressed in code number, which

can be easily known by investor.

• Credit rating is a ongoing appraisal. It is not

one time evaluation of credit risk. The

agencies keep on modifying the rating as per

the financial condition of the issuer.

• Credit rating provides guidance to

investors/creditors in determining a credit

risk associated with a debt instrument/credit

obligation.

• A rated institution can easily get loan finance

from different financial institutions.

WHY CREDIT RATING

WHY CREDIT RATING

Cont… Cont…

• The foreign collaborators become interested in investing in a company rated well.

• Rating acts as a check post over the performance of the companies to be rated.

• Provides stability in the stock market when

the rated securities are traded.

Contd…Contd…

• establish a link between risk and return

• Credit rating shows the exact worth of the organization

Types of Credit Rating:Types of Credit Rating:

Domestic rating: Domestic rating covers both the

corporates and other institution within any country.

The rating would assess the degree of safety of the

investment and the capacity of the issuer, to serve

without default obligation arising out of the funds

raised.

Sovereign rating: it is the assessment of the economic

health and financial capability of a country, to serve

its obligations against the external borrowings and the

investment received by it from other countries.

• The rating exercise commences at the request

of a company.

• A rating applies to a particular debt obligation

of the company and is not a general purpose

evaluation of the company.

• In evaluation and monitoring ratings, both

qualitative and quantitative criteria are

employed.

• Rating is based on several analysis like-

HOW CREDIT RATING IS

DONE?

HOW CREDIT RATING IS

DONE?

Business Analysis

• Industry Risk like nature and basis of

competition; key success factors; demand-

supply position;

• Market position of the company within the

industry.

• Operating efficiency of the company like

location advantages; labour relationships; cost

structure; technological advantages.

• Legal position in terms of prospectus, trustees

and their responsibilities;

Financial Analysis

• Accounting quality –method of

accountong,qualification of accountant.

• Adequacy of cash flows

• Financial flexibility -alternative financing plans in

times of stress; ability to raise funds.

• Earnings protection -sources of future earnings

growth; profitability ratios; earnings in relation to

fixed income charges; etc.

Fundamental Analysis

• Capital Adequacy-assessment of true net worth of

the company,

• Asset Quality-quality of the company's credit-risk

management; systems for monitoring credit;

• Liquidity Management -capital structure; term

matching of assets and liabilities;

• Profitability and Financial Position

• Interest and Tax Sensitivity -exposure to interest

rate changes; tax law changes and hedge against

interest rate etc.

Resources rated by agenciesResources rated by agencies

• Primary equity issues

• Debt instruments-both long term and short term

• Secured and unsecured bonds-both long term

and short term

• Structured obligations-where securities are

backed by credit enhancement or third party

guarantee

Rating process:Rating process:

Review of the public information on the client

Questionnaire

Meeting with client

Preparation of draft report

Draft report sent to subject client for review as to factual accuracy

Amended report (following client comments) sent to rating committee members

Rating committee meeting/discussion and assignment of rating

Client advised of rating

Rating made public

Credit Rating in India Credit Rating in India

• CRISIL -Credit rating and information services of India ltd

• ICRA -Investment information and credit rating agency of India ltd.

• CARE -Credit analysis and research limited

• ONICRA- Onida Individual credit rating agency

CRISILCRISIL

• It is the first rating agency in India

• It was promoted in 1987 by the Industrial Credit and

Investment Corporation of India Limited (ICICI) and

Unit Trust of India (UTI).

• The head office of the company is located at Mumbai

and it has established offices outside India also.

• CRISIL's principal objective is to rate debt

obligations of Indian companies.

• CRISIL rates debentures, fixed deposit programmes,

short-term instruments like commercial paper,

structured obligations and preference shares.

• CRISIL has rated in all 926 debt instruments issued

by 668 companies.

• CRISIL has introduced CRISIL Card, CRISIL View,

CRISIL Ban Card and CRISIL Rating Digest Service.

Rating process of CRISILRating process of CRISIL

Rating SymbolsRating Symbols

ICRAICRA

• ICRA was established in the year 1991 by the

collaboration of financial institutions, investment

companies, and banks at Delhi.

• It is an associate of moody’s Investors’ service.

• ICRA undertakes rating of debt instruments.

• ICRA provides 'general assessment' report on different

aspects of the company's operations and management.

• Since its inception, ICRA has rated 300 and above

debt instruments.

Rating Symbol:Rating Symbol:

CARECARE

• It is promoted by the Industrial Development Bank of

India (IDBl) jointly with Canara Bank, UTI, private

sector banks and financial services companies.

• CARE, incorporated on April 21, 1993, commenced

its operations in October 1993.

• CARE undertakes rating of all types of debt

instruments like commercial paper, fixed deposits,

bonds, debentures.

• Its services includes credit rating and information

services.

Rating Symbol:Rating Symbol:

ONICRAONICRA

• It is the first credit agency in India which is

promoted by ‘ONIDA’ groups for consumer

durables.

• It formulates methodology for assessing small

and medium enterprises.

Credit Rating Mandatory in IndiaCredit Rating Mandatory in India

Credit Rating is mandatory in India for the issuance of

certain debt instruments of the following nature:

• Public issue of debentures/bonds with

conversion/redemption period exceeding 18 months.

• Commercial paper can be issued in India, inter alia, if

the programme has a rating not below 'A2' from ICRA

(or its equivalent from the other rating agencies) and

• Fixed deposit programmes of all non-banking finance

companies with net owned funds above Rs. 200 lakh

need to be compulsorily rated.

Major Agencies Renowned GloballyMajor Agencies Renowned Globally

• Moody investors services (MOODY’S)

• Standard and poor’s corporation (S&P)

• Duff and phelps credit rating co. (DCR)

• Japan credit rating agencies (JCR)

• Thomas bank watch.

DISADVANTAGES OF CREDIT RATINGDISADVANTAGES OF CREDIT RATING

• Biased rating and misrepresentation,

• Static study,

• Concealment of material information,

• No guarantee for soundness of the company,

• Human bias,

• Reflection of temporary and adverse conditions,

• Present rating may change (down grade),

• Differences in rating of two agencies.

ANY QUESTION