Credit rating ppt by www.modelexam.in

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WHAT IS CREDIT RATING,WHAT ARE CREDIT RATING AGENCIES? CREDIT RATING AGENCIES IN INDIA.CRISIL,ICRA,CARE RATINGS SUCH AS AAA+,AA,A,BBB,BB,B,C,D. INVESTMENT GRADE AND SPECULATIVE GRADE RATING.IPO GRADING. LONG TERM,SHORT TERM, MEDIUM TERM RATING.USES OF CREDIT RATING. CREDIT RATING AND BOND PRICE MOVEMENT. RATING METHOD.SEBI GUIDELINES ON CREDIT RATING.SECURITIES AND EXCHANGE BOARD OF INDIA IS SEBI.HOW TO CHECK CREDIT RATING? CREDIT RATING COMPANY

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Credit rating ppt by www.modelexam.in

  1. 1. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988CREDIT RATING & ITS IMPORTANCE Prepared by www.modelexam.inONLINE PRACTICE MOCK TEST FOR NISM,NCFM EXAMS
  2. 2. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Importance of this session.CREDIT Rating is an important innovation in financialservices.Learning will help us to know more about Credit ratingmethodologiesIndepth Knowledge in CREDIT Rating methods has gotimmense career opportunities
  3. 3. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 TOPICS COVEREDWHAT IS CREDIT?WHAT IS CREDIT RATING?WHAT CREDIT RATING IS NOT?USES OF CREDIT RATING FOR ISSUERSUSES OF CREDIT RATING FOR INVESTORSSEBI GUIDELINES FOR CREDIT RATING AGENCIESCREDIT RATING AGENCIES IN INDIA CRISIL ICRA CARELONG TERM, SHORT TERM, MEDIUM TERM CREDITRATINGS
  4. 4. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 TOPICS COVEREDCREDIT RATING MECHANISMIPO GRADINGIMPACT OF CREDIT RATING IN MOVEMENT OFBOND PRICES
  5. 5. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Introduction to Credit Rating
  6. 6. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Introduction to CREDIT RatingWhat is Credit ? Provision of resources by one party to another party. The second party does not reimburse the first party immediately, and instead arranges either to repay or return the resources at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit is important since Individuals and Corporations with poor credit will have difficulty finding financing and will most likely have to pay more due to the risk of default
  7. 7. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a credit rating?A credit rating is an opinion on the relative degree ofrisk associated with timely payment of interest andprincipal on a debt instrument.A Credit rating assesses the Credit worthiness (abilityto pay interest and principal in time) of an Individual,Corporation or even a country.A simple alphanumeric symbol is used to convey acredit rating. Credit Ratings are calculated fromFinancial History, Current Assets and Liabilities of afirm and History of borrowing and repayment.Tells a lender or an investor the probability of default byborrower (not being able to pay back a loan)A poor credit rating indicates a high default risk.
  8. 8. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What credit rating is NOT?Not a recommendation to buy, hold or sell a debtinstrumentA rating is one of the inputs that is used by investors tomake an investment decisionRating do not comment on the return being offered ona debt instrument nor are they offered as guaranteesor protections against default. They are opinions onlyRating is specific to the instrument & is not the rating ofthe issuerRatings are not intended to measure factors such asliquidity risk, pre-payment risk, interest rate risk, risk ofsecondary market loss, or exchange loss risk
  9. 9. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What credit rating is NOT?A credit rating is not an assurance of repayment of therated instrument.It is possible that some highly rated issuers coulddefault.In the US, some instruments rated at even AAA levelshave defaulted. However, such defaults would be lessfrequent amongst highly rated instruments thanamongst instruments with lower ratings
  10. 10. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Uses of Credit Rating
  11. 11. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Uses to Issuers of SecuritiesGood Credit rating decreases the cost of borrowedcapital. Companies may be able to borrow at a lowerinterest owing to their High Credit rating.Good Credit rating serves as an Additional CertificationIncrease the investor population since Investors prefersafety first.Merchant Bankers Job Made easy since marketing ofDebt Instruments with High Rating is EasyForeign Collaborations made easyBenefits the industry as a whole
  12. 12. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Uses to InvestorsLow Cost InformationQuick Investment DecisionIndependent Investment DecisionCan select or distinguish Risky assets from SafetyonesContinuous monitoring by CREDIT Rating agenciesgives Investors a knowledge about the companythroughout the life time of Security and hence he canredeem the security if the rating changes.
  13. 13. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Credit Rating Agencies
  14. 14. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a Credit Rating Agency?Independent Agency who assess the capacity of theissuer of the debt security to pay interest and repay theprincipal as per the terms and conditions.They collect a fee from the Issuers for rating their DebtSecuritiesThey rate an instrument based on parameters like • business risk • market position • operating efficiency • adequacy of cash flows • financial risk, • financial flexibility, and • management and industry environment.
  15. 15. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 What is a Credit Rating Agency?Credit Rating is not one time evaluation of Credit Risk.Agencies continuously monitor the Performance of thecompany till the maturity of Particular Security. This isknown as SURVEILLANCE.Changes affecting the company are taken into accountand the rating, if necessary, is changed, upwards ordownwards. In other words, a rating is valid during thelife of the instrument unless is changed
  16. 16. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988SEBI Guidelines on Credit Rating
  17. 17. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Important SEBI GuidelinesCREDIT Rating Agencies should be SEBI RegisteredMinimum Networth of Rs 5 Crore is needed for a CreditRating Agency or an Undertaking to Enhance theNetworth with in a period of 3 YearsSEBI Registration is valid for a Period of 3 Years.NO Company shall make a Public Issue or rights issueof Debt Instruments, unless Credit Rating is obtainedfrom at least one Credit Rating Agency.SEBI has made grading of IPOs compulsory, effectiveMay 1 2007.It shall be mandatory to obtain gradingfrom at least one credit rating agency
  18. 18. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 IPO GradingIPO grading is the grade assigned by a Credit RatingAgency (CRAs) registered with SEBI, to the IPO of equityshares or any other security which may be converted intoor exchanged with equity shares at a later date. IPO grade 1 Poor fundamentals IPO grade 2 Below Average fundamentals IPO grade 3 Average fundamentals IPO grade 4 Above average fundamentals IPO grade 5 Strong fundamentals
  19. 19. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Credit Rating Mechanism
  20. 20. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 Credit Rating Mechanism Credit Risk Industry Risk Business Risk Management Risk Financial Risk Industry Market Position Track Record Existing Fin. Position Characteristics Industry Financials Operating Efficiency Credibility Future Financial Position Payment Record Financial Flexibility Others Accounting Quality• External factors• Scored centrally once in a year • Internal factors • Scored for each borrowing.
  21. 21. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Overview of Credit Rating Agencies in India
  22. 22. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISILCredit Rating Information Services Limited – CRISIL Floated on Jan 1st 1988 Indias Leading rating Agency and the Fourth largest in the world Jointly Promoted by Standard & poor, National Stock Exchange and other financial Institutions
  23. 23. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISIL ratings DescriptionSymbolAAA Highest SafetyAA High SafetyA Adequate SafetyBBB Moderate SafetyBB Inadequate SafetyB High RiskC Substantial RiskD Default
  24. 24. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CRISIL ratings for Short Term Instruments This rating indicates that the degree of safety regardingP1 timely payment on the instrument is very strong. 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 instrumentsP2 rated P1. 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 twoP3 higher categories. 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 lessP4 favorable conditions. This rating indicates that the instrument is expected to be inP5 default on maturity or is in default.
  25. 25. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRAInvestment Information and Credit Rating Agency ofIndia Limited - ICRA An Associate of Moodys Investor Service Second Largest Rating Agency in India Promoted by Leading Banks and Financial Institutions It Provides Rating Services, Advisory Services, Research Services and Economic Research services. ICRA ratings are based on an in-depth study of the industry as also an evaluation of the strengths and weaknesses of the company.
  26. 26. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988ICRA will look into the following before rating asecurity Marketing strategies competitive edge level of technological development operational efficiency competence and effectiveness of management hedging of risks, cash flow, trends and potential liquidity, financial flexibility government policies past record of debt servicing sensitivity to possible changes in business/economy
  27. 27. www.modelexam.inONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA
  28. 28. www.modelexam.inONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 ICRA
  29. 29. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988ICRA Short Term Ratings
  30. 30. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 CARECredit Analysis and Research Limited Established in 1993 IDBI and Canara Bank are major promoters. IL&FS and other Financial Institutions also hold stake in CARE. Services Offered by CARE are • Credit Rating • Equity Research • Economic Research
  31. 31. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Long /Medium -term instruments (NCD/FD/CD/SO/CP)
  32. 32. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988Credit Rating of Debt instruments
  33. 33. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988CREDIT RATING AND ITS IMPACT ON BOND PRICECASE I – Rating Comes Down“AAA” rated Security was trading at Rs 100/-Coupon – 8% P.AYield of “AA” rated Sec then was 10% P.ARating of “AAA” Security comes down to “AA”Price of the Security will come down to Rs 80/- so as toyield 10% P.AInvestors who bought “AAA” rated Security at FaceValue would incur a Capital Loss of 20%RATING COMES DOWN BOND PRICE COMES DOWN
  34. 34. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988CREDIT RATING AND ITS IMPACT ON BOND PRICECASE II – Rating Increases“AA” rated Security was trading at Rs 100/-Coupon – 10% P.AYield of “AAA” rated Sec then was 8% P.ARating of “AA” rated Security becomes “AAA”Price of the Security will increase by Rs 25/- so as toyield 8% P.AInvestors who bought “AA” rated Security at Face Valuewould incur a Capital Gain of 25%RATING INCREASES BOND PRICE INCREASES
  35. 35. www.modelexam.in ONLINE PRACTICE MOCK TEST – NISM,NCFM EXAMS Ph: 98949 49988 WWW.MODELEXAM.IN CLICK THE LINK ABOVE TO WRITE ONLINE PRACTICE MOCK TEST FORNISM,NCFM,BCFM,MUTUAL FUND (EARLIER AMFI) EXAMS

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