This presentation is on Credit rating agencies in India. here I presents it's origin, importants, benefits, objectives, need and about different rating agencies.
2. Credit Rating
Credit rating evaluates the debtor’s ability to pay back
the debt and the likelihood of default.
Credit ratings are determined by credit ratings agencies
like CRISIL, CARE and S&P.
It is the rating agency’s opinion on the likelihood of rated
debt obligation being repaid in full and on time.
A simple alphanumeric symbol is normally used to
convey a credit rating.
3. • According to CRISIL :
“Credit rating is an unbiased, objective and independent opinion as to an
issuer’s capacity to meet financial obligation.”
• Credit rating are not based on mathematical formulas. Instead, credit
rating agencies use their judgment and experience in determining what
public and private information should be considered in giving a rating to
a particular company or government.
• Poor credit rating indicates – high risk of defaulting
Definition
4. The first mercantile credit agency was set up in Newyork 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 Mood’s investor’s
service in 1962.
Origin
5. Origin in India
India’s first credit rating agency CRISIL was set up in 29 January 1987.
It is incorporated, promoted by the erstwhile ICICI Ltd along with UTI and
other financial institutions.
Mr. N Vaghul and Mr. Pradip Shah are CRISIL’s first Chairman and
managing Director respectively.
The first private sector credit rating institution in India was DUFF &
PHELPS CREDIT RATING INDIA PVT.LTD formed in 1995.
6. Importance
• It 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 rating to asses the risk level and compares the offered
rate of return with his expected rate of return.
7. Benefits
Benefits to company:
a) Improved corporate image
b) Good for non popular companies
c) Act as a marketing tool
d) Reduced costs of borrowings
e) Easy to raise resource
f) Helps in growth and expansion
Benefits to investors:
a) Helps in investment decision
b) Choice of instruments
c) Easy understandability of investment proposal
d) Dependable credibility of issuer
e) Advantages of continuous monitoring
8. Provide superior and low cost information to investors
for taking decision regarding risk return trade off.
Encourages greater information disclosure, better
accounting standards and improved financial
information.
May reduce interest costs for highly rated companies.
Act as a marketing tool.
Helps merchant bankers, brokers,etc. in discharging their
functions related to debt issues.
Objective
9. Need
Maintenance of investor’s confidence, since default shatter the
confidence of investors in corporate instruments.
Protect the interest of investors who can not investigate much into the
merits of the debt instruments of a company.
Motivate savers to invest in industry and trade.
10. a) Business Analysis.
b) Financial Analysis.
c) Management Evaluation.
d) Geographical Analysis.
e) Regulatory & Competitive Environment.
f) Fundamental Analysis.
Credit Rating Methodology
11. Business Analysis:
a) Industry Risk
b) Market Position
c) Operating efficiency
d) Legal position
e) Size of business
Financial Analysis:
a) Accounting quality
b) Earning profitability
c) Cash flow analysis
d) Financial Flexibility
12. Management Evaluation:
•The effects on company’s
performance by-
a) Management goals
b) Plans and strategies.
c) Capacity to overcome unfavorable
conditions.
d) Planning and controlling system.
Geographical Analysis:
a) Multinational Presence
b) Geographical advantages enjoyed
by the company.
c) Regional subsidies.
13. Fundamental Analysis:
a) Liquidity management
b) Asset quality
c) Profitability and financial position
d) Interest and tax sensitivity
Regulatory and Competitive Environment:
a) Structure of the Financial System
b) Regulatory framework of the financial system
14. Credit Rating Agencies
Credit Rating and Information Services of India Ltd. (CRISIL)
Investment information and Credit Rating Agency Ltd. (ICRA)
Credit Analysis and Research Ltd. (CARE)
Credit Information Bureau India Ltd. (CIBIL)
SME Rating Agency of India Ltd. (SMERA)
Onida Individual Credit Rating Agency of India (ONICRA)
Fitch Rating India Limited
Brickwork Ratings
Moody’s
Standard & Poor
Fitch Ratings
In India:
Globally:
15. Global analytical company providing ratings, research, and risk
and policy advisory services.
India’s leading ratings agency.
Provides high-end research to the world’s largest banks and
leading corporations.
Majority shareholder - Standard and Poor’s (S&P).
Caters to over 1,200 domestic and global clients, through a
range of research reports, analytical tools, subscription products
and customized solutions.
CRISIL
16. ICRA Limited (formerly Investment Information and Credit Rating
Agency of India Limited) was set up in 1991 by leading
financial/investment institutions, commercial banks and financial
services companies as an independent and professional Investment
Information and Credit Rating Agency.
Today, ICRA and its subsidiaries together form the ICRA Group of
Companies (Group ICRA). ICRA is a Public Limited Company, with
its shares listed on the Bombay Stock Exchange and the National
Stock Exchange.
ICRA’s major shareholders IFCI (26%), and the balance by UTI,
LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank
and banks (SBI) .
Alliance with Moody’s Investors Service.
ICRA
17. CARE is promoted by IDBI jointly with Financial Institutions,
Public/Private Sector Banks and Private Finance Companies.
It commenced its credit rating operations in October, 1993 and
offers a wide range of products and Services in the field of Credit
Information and Equity Research.
It offers services like :
• Credit rating of debt instruments
• Advisory services like securitization of transactions,.
• Information services like providing information to
companies, industry and businesses.
• Equity research
CARE
18. India’s first Credit Information Bureau (India) Limited , incorporated
in year 2000.
It is a repository of factual information on the credit history and
repayment records of commercial and consumer borrowers.
Established by the Government of India and the RBI.
The legislation has enabled banks to submit data to CIBIL without
obtaining borrower’s consent.
In 2016 Transunion acquired 82% stake in CIBIL to become
Transunion CIBIL.
CIBIL
19. SMERA
Only rating agency dedicated to the SME segment offering
qualitative services at competitive prices.
Joint initiative of SIDBI, Dun & Bradstreet and 11 leading banks
operating in SME segment.
Launched on the 25th September 2005 by the Hon. Finance
Minister, Shri P Chidambaram.
Greater acceptability in banks (MOU with 22 leading banks). 14
Banks offer interest rate and security concessions for well rated
SMERA customers.
20. It is the latest entrant in the credit rating business in the country
as a joint venture between the international credit Rating
agency Duff and Phelps and JM Financial and Alliance Group.
In addition to debt instruments, it also rates companies and
countries on request.
Fitch Rating India Limited
21. BONDS
DEBENTURES
FIXED DEPOSITS
COMMERCIAL PAPERS
INTERCORPORATE DEPOSITS
AND MANY MORE ITEMS
Items Rated
22. Symbols
CRISIL’S LONG TERM RATING SCALE:-
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Moderate Risk
B High Risk
C Very High Risk
D Default
23. Demerits of Credit Rating
Possibility of Bias Exit
Improper disclosure may happen
Impact of changing environment
Problems for new companies
Downgrading by Rating Agencies
Difference in Ratings