Credit Rating Dr Saif Siddiqui Centre for Management Studies Jamia Millia Islamia (A Central University) New Delhi- 110025

What is a credit rating? A credit rating is an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument.

A credit rating is an opinion on the

relative degree of risk associated with

timely payment of interest and principal

on a debt instrument.

What is a credit rating? It assesses the credit worthiness of an individual, corporation, or even a country. calculated from financial history and current assets and liabilities. It tells a lender or investor the probability of the subject being able to pay back a loan.

It assesses the credit worthiness of an individual, corporation, or even a country.

calculated from financial history and current assets and liabilities.

It tells a lender or investor the probability of the subject being able to pay back a loan.

Origin The first mercantile credit agency was set up in New York in 1841 to rate the ability of merchants to pay their financial Obligations. Later on, it was taken over by Robert Dun. This agency published its first rating guide in 1859. The second agency was established by John Bradstreet in 1849 which was later merged with first agency to form Dun & Bradstreet in 1933, which became the owner of Moody’s Investor’s Service in 1962.

The first mercantile credit agency was set up in New York in 1841 to rate the ability of merchants to pay their financial Obligations.

Later on, it was taken over by Robert Dun. This agency published its first rating guide in 1859.

The second agency was established by John Bradstreet in 1849 which was later merged with first agency to form Dun & Bradstreet in 1933, which became the owner of Moody’s Investor’s Service in

1962.

In India CRISIL (Credit Rating and Information Services of India Ltd.) was setup in 1987 as the first rating agency followed by ICRA Ltd. (Investment Information & Credit Rating Agency of India Ltd.) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Ltd. in 1996

CRISIL (Credit Rating and Information Services of India Ltd.) was setup in 1987 as the first rating agency

followed by ICRA Ltd. (Investment Information & Credit Rating Agency of India Ltd.) in 1991, and

Credit Analysis and Research Ltd. (CARE) in 1994.

Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Ltd. in 1996

Importance of Credit Rating Credit ratings establish a link between risk and return. They provide a yardstick against which to measure the risk inherent in any instrument. An investor uses the ratings to assess the risk level and compares the offered rate of return with his expected rate of return

Credit ratings establish a link between risk and return.

They provide a yardstick against which to measure the risk inherent in any instrument.

An investor uses the ratings to assess the risk level and compares the offered rate of return with his expected rate of return

Importance of Credit Rating The risk perception of a common investor, in the absence of a credit rating system, largely depends on his familiarity with the names of the promoters or the collaborators. It is not feasible for the corporate issuer of a debt instrument to offer every prospective investor the opportunity to undertake a detailed risk evaluation.

The risk perception of a common investor, in the absence of a credit rating system, largely depends on his familiarity with the names of the promoters or the collaborators.

It is not feasible for the corporate issuer of a debt instrument to offer every prospective investor the opportunity to undertake a detailed risk evaluation.

Importance of Credit Rating It is very uncommon for different classes of investors to arrive at some uniform conclusion as to the relative quality of the instrument. Moreover they do not possess the requisite skills of credit evaluation.

It is very uncommon for different classes of investors to arrive at some uniform conclusion as to the relative quality of the instrument.

Moreover they do not possess the requisite skills of credit evaluation.

How does a credit rating agency differ from a credit bureau? A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers. Traders are generally the main users of credit bureau information, financial investors typically use credit ratings..

A credit rating agency provides an opinion relating to future debt repayments by borrowers.

A credit bureau provides information on past debt repayments by borrowers.

Traders are generally the main users of credit bureau information,

financial investors typically use credit ratings..

Is credit rating necessary ? Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors .

Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors.

Such an opinion will be of great assistance to investors in making investment decisions.

It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors .

Accountability of a rating agency A credit rating is a professional opinion given after studying all available information at a particular point of time. opinions may prove wrong in the context of subsequent events. Investor is free to accept or reject the opinion of the agency.

A credit rating is a professional opinion given after studying all available information at a particular point of time.

opinions may prove wrong in the context of subsequent events.

Investor is free to accept or reject the opinion of the agency.

Accountability of a rating agency A rating agency is expected to maintain the highest possible level of analytical competence and integrity. The credibility of a rating agency has to be built, brick by brick, on the quality of its services

A rating agency is expected to maintain the highest possible level of analytical competence and integrity.

The credibility of a rating agency has to be built, brick by brick, on the quality of its services

Ratings vary from agency to agency The opinions given by two or more agencies will vary it will be very unusual if such differences are very wide. For example, a debt issue may be rated DOUBLE A PLUS by one agency and DOUBLE A or DOUBLE A MINUS by another. It will indeed be unusual if one agency assigns a rating of DOUBLE A while another gives a TRIPLE B.

The opinions given by two or more agencies will vary

it will be very unusual if such differences are very wide.

For example, a debt issue may be rated DOUBLE A PLUS by one agency and DOUBLE A or DOUBLE A MINUS by another.

It will indeed be unusual if one agency assigns a rating of DOUBLE A while another gives a TRIPLE B.

Monitor the issues already rated? A rating is an opinion given on the basis of information available at a particular point of time. As time goes by, many things change, affecting the debt servicing capabilities of the issuer, It is essential that as a part of their investor service, rating agencies monitor all outstanding debt issues rated by them.

A rating is an opinion given on the basis of information available at a particular point of time.

As time goes by, many things change, affecting the debt servicing capabilities of the issuer,

It is essential that as a part of their investor service, rating agencies monitor all outstanding debt issues rated by them.

Who pays for a credit rating? The issuer pays for the credit rating. the issuer-fee model naturally creates a potential conflict of interest (that could lead to higher than warranted ratings)

The issuer pays for the credit rating.

the issuer-fee model naturally creates a potential conflict of interest (that could lead to higher than warranted ratings)

Who regulates a rating agency? The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. SEBI laid down an extensive set of regulations for rating agencies in 1999.

The capital market regulator regulates rating agencies in most regions.

In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.

SEBI laid down an extensive set of regulations for rating agencies in 1999.

CRISIL India's leading rating agency

CRISIL

India's leading rating agency

CRISIL CRISIL is India's leading rating agency, and is the fourth largest in the world. over a 70% share of the Indian Ratings market CRISIL has rated over 6,797 debt instruments worth Rs.13.53 trillion issued by over 4,600 issuers it has provided assistance and training for setting up ratings agencies in Malaysia (RAM) and Israel and in the Caribbean .

CRISIL is India's leading rating agency, and is the fourth largest in the world.

over a 70% share of the Indian Ratings market

CRISIL has rated over 6,797 debt instruments worth Rs.13.53 trillion issued by over 4,600 issuers

it has provided assistance and training for setting up ratings agencies in Malaysia (RAM) and Israel and in the Caribbean .

Range of service CRISIL rates long-term instruments such as debentures/bonds Preference shares and fixed deposits Short-term instruments such as commercial paper and short-term deposits. CRISIL has also pioneered the rating of subsidiaries and joint ventures of MNCs in India

CRISIL rates long-term instruments such as debentures/bonds

Preference shares and fixed deposits

Short-term instruments such as commercial paper and short-term deposits.

CRISIL has also pioneered the rating of subsidiaries and joint ventures of MNCs in India

Range of service CRISIL undertakes credit assessments of state governments it has rated state governments including those of Maharashtra, Gujarat, Karnataka and Andhra Pradesh. CRISIL was the first rating agency in India to rate banks, governments and urban local bodies

CRISIL undertakes credit assessments of state governments

it has rated state governments including those of Maharashtra, Gujarat, Karnataka and Andhra Pradesh.

CRISIL was the first rating agency in India to rate banks, governments and urban local bodies

Range of service Credit rating of real estate developers and projects , in association with the National Real Estate Development Council, Credit rating of parallel marketers of liquefied petroleum gas. CRISIL Fund Services provides a range of rating, ranking, risk analytics and valuation tools to the mutual fund industry.

Credit rating of real estate developers and projects , in association with the National Real Estate Development Council,

Credit rating of parallel marketers of liquefied petroleum gas.

CRISIL Fund Services provides a range of rating, ranking, risk analytics and valuation tools to the mutual fund industry.

CRISIL's association with S&P CRISIL's association with Standard & Poor's, a division of The McGraw-Hill Companies, dates back to 1996 when both companies started working together on rating methodologies and joint projects. This partnership has now culminated in Standard & Poor's acquiring a majority shareholding in CRISIL .

CRISIL's association with Standard & Poor's, a division of The McGraw-Hill Companies, dates back to 1996 when both companies started working together on rating methodologies and joint projects.

This partnership has now culminated in Standard & Poor's acquiring a majority shareholding in CRISIL .

CRISIL's association with S&P Standard & Poor's, the financial services business of The McGraw-Hill Companies, is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research, data and valuations. With 6,000 employees located in 20 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure

Standard & Poor's, the financial services business of The McGraw-Hill Companies, is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research, data and valuations.

With 6,000 employees located in 20 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure

Credit Risk Assessment Process Credit Risk Industry Risk Business Risk Management Risk Financial Risk Industry Characteristics Industry Financials Market Position Operating Efficiency Track Record Credibility Payment Record Others Existing Fin. Position Future Financial Position Financial Flexibility Accounting Quality External factors Scored centrally once in a year Internal factors Scored for each borrowing entity by the concerned credit officer

External factors

Scored centrally once in a year

Internal factors

Scored for each borrowing entity by the concerned credit officer

CRISIL Rating Symbols For Long Term Ratings : Investment Grade Ratings AAA (Triple A) Highest Safety Instruments rated 'AAA' are judged to offer the highest degree of safety with regard to timely payment of financial obligations. Any adverse changes in circumstances are most unlikely to affect the payments on the instrument AA (Double A) High Safety Instruments rated 'AA' are judged to offer a high degree of safety with regard to timely payment of financial obligations. They differ only marginally in safety from `AAA' issues. A Adequate Safety Instruments rated 'A' are judged to offer an adequate degree of safety with regard to timely payment of financial obligations. However, changes in circumstances can adversely affect such issues more than those in the higher rating categories. BBB (Triple B) Moderate Safety Instruments rated 'BBB' are judged to offer a moderate safety with regard to timely payment of financial obligations for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for instruments in higher rating categories.

CRISIL Rating Symbols For Long Term Ratings : Speculative Grade Ratings BB (Double B) Inadequate Safety Instruments rated 'BB' are judged to carry inadequate safety with regard to timely payment of financial obligations; they are less likely to default in the immediate future than other speculative grade instruments, but an adverse change in circumstances could lead to inadequate capacity to make payment on financial obligations. B High Risk Instruments rated 'B' are judged to have greater likelihood of default; while currently financial obligations are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal. C Substantial Risk Instruments rated 'C' are judged to have factors present that make them vulnerable to default; timely payment of financial obligations is possible only if favourable circumstances continue. D Default Instruments rated 'D' are in default or are expected to default on scheduled payment dates. Such instruments are extremely speculative and returns from these instruments may be realized only on reorganisation or liquidation. NM Not Meaningful Instruments rated 'N.M' have factors present in them, which render the rating outstanding meaningless. These include reorganisation or liquidation of the issuer, the obligation is under dispute in a court of law or before a statutory authority etc.

CRISIL Rating Symbols For Short Term Instruments P-1 This rating indicates that the degree of safety regarding timely payment on the instrument is very strong. P-2 This rating indicates that the degree of safety regarding timely payment on the instrument is strong; however, the relative degree of safety is lower than that for instruments rated 'P-1'. P-3 This rating indicates that the degree of safety regarding timely payment on the instrument is adequate; however, the instrument is more vulnerable to the adverse effects of changing circumstances than an instrument rated in the two higher categories. P-4 This rating indicates that the degree of safety regarding timely payment on the instrument is minimal and it is likely to be adversely affected by short-term adversity or less favourable conditions. P-5 This rating indicates that the instrument is expected to be in default on maturity or is in default . NM Not Meaningful Instruments rated 'N.M' have factors present in them, which render the rating outstanding meaningless. These include reorganisation or liquidation of the issuer, the obligation is under dispute in a court of law or before a statutory authority etc.

Corporate Credit Rating Scale CCR AAA ("CCR Triple A") A 'CCR AAA' rating indicates highest degree of strength with regard to honouring debt obligations. CCR AA ("CCR Double A") A 'CCR AA' rating indicates high degree of strength with regard to honouring debt obligations. CCR A A 'CCR A' rating indicates adequate degree of strength with regard to honouring debt obligations. CCR BBB A 'CCR BBB' rating indicates moderate degree of strength with regard to honouring debt obligations. CCR BB A 'CCR BB' rating indicates inadequate degree of strength with regard to honouring debt obligations. CCR B A 'CCR B' rating indicates high risk and greater susceptibility with regard to honouring debt obligations. CCR C A 'CCR C' rating indicates substantial risk with regard to honouring debt obligations. CCR D A 'CCR D' rating indicates that the entity is in default of some or all of its debt obligations. CCR SD A 'CCR SD' rating indicates that the entity has selectively defaulted on a specific issue or class of debt obligations but will continue to meet its payment obligations on other issues or classes of debt obligations. Note: CRISIL may apply "+" (plus) or "-" (minus) modifiers for ratings from 'CCR AA' to 'CCR C' to reflect comparative standing within the category.

CRISIL Rating Symbols For Real Estate Projects PA1 Highest Ability The rating indicates that the developer's ability to build the project as per the specified quality level and time schedule and to transfer a clear title is the highest. PA2 High Ability The rating indicates that the developer's ability to build the project as per the specified quality level and time schedule and to transfer a clear title is high. Project risks are marginally higher in this category than in compared to projects in the 'PA1' category. PA3 Adequate Ability The rating indicates that the developer's ability to build the project as per the specified quality level and time schedule and to transfer a clear title is adequate. Changing circumstances are likely to adversely affect these projects more than those in the higher rating categories. PA4 Inadequate Ability The rating indicates that the developer's ability to build the project as per the specified quality level and time schedule is inadequate. Uncertainties facing the project could result in the developer's inability or unwillingness to complete the project. PA5 Inability This rating indicates inability of the developer to complete projects or transfer clear title. Note: CRISIL may apply "+" (plus) sign for ratings from 'PA 1' to 'PA 3' to reflect comparative standing within the category.

CRISIL Rating Symbols For Real Estate Developers DA1 Excellent The developer's track record in executing real estate projects as per specified quality levels within the stipulated time schedule, and ability to transfer clean title, are excellent. DA2 Very Good The developer's track record in executing real estate projects as per specified quality levels within the stipulated time schedule, and ability to transfer clean title, are very good. DA3 Good The developer's track record in executing real estate projects as per specified quality levels within the stipulated time schedule, and ability to transfer clean title, are good. DA4 Unsatisfactory The developer's track record in executing real estate projects as per specified quality levels within the stipulated time schedule, and ability to transfer clean title, are unsatisfactory. DA5 Poor The developer's track record in executing real estate projects as per specified quality levels within the stipulated time schedule, and ability to transfer clean title, are poor. Note: CRISIL may apply "+" (plus) sign for ratings from 'DA1' to 'DA3' to reflect comparative standing within the category.

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