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Unit 4 credit rating

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Credit Rating

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Unit 4 credit rating

  1. 1. CREDIT RATING S.R.Deepika Assistant Professor Department of BBA Kristu Jayanti College
  2. 2. MEANING  A Credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of 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 a rated debt obligation being repaid in full and on time  A simple alphanumeric symbol is normally used to convey a credit rating.
  3. 3. Cont….  Credit ratings 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.  A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.
  4. 4. OBJECTIVES OF CREDIT RATING The main objective is to provide superior and low cost info to investors for taking a decision regarding risk return trade off, but it also helps to market participants in the following ways:  Encourages greater information disclosure, better accounting standards and improved financial information (helps in investors protection),  May reduce interest costs for highly rated companies  Acts as a marketing tool  Improves a healthy discipline on borrowers  Facilitates formulation of public guidelines on institutional investments  Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues
  5. 5. Credit Rating Agencies in India  CRISIL Limited  Fitch Ratings India Private Ltd.  ICRA Limited  Credit Analysis & Research Ltd. (CARE)  Brickwork Ratings India Private Limited  SME Rating Agency of India Ltd. (SMERA)  Credit Information Bureau India Limited - (CIBIL)
  6. 6. CRISIL  CRISIL, India's first credit rating agency, promoted by the ICICI Ltd, along with UTI and other financial institutions was incorporated in the year 1987 And commenced its operation in the year 1988  A CRISIL rating reflects CRISIL's current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation.  It is an unbiased, objective, and independent opinion as to the issuer's capacity to meet its financial obligations.  So far, CRISIL has rated 30,000 debt instruments, covering the entire debt market.
  7. 7. Cont…  The debt obligations rated by CRISIL include: ◦ Non-convertible debentures/bonds/preference shares ◦ Commercial papers/certificates of deposits/short-term debt ◦ Fixed deposits ◦ Loans ◦ Structured debt  CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex constituent companies and 39 of the NSE Nifty constituent companies, accounting for 80 per cent of the equity market capitalisation.
  8. 8. CRISIL Rating scale for Long-Term Instruments  CRISIL AAA (Highest Safety) - Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.  CRISIL AA (High Safety) - Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.  CRISIL A (Adequate Safety) - Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.  CRISIL BBB (Moderate Safety) - Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
  9. 9. Cont…  CRISIL BB (Moderate Risk) - Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.  CRISIL B (High Risk) - Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.  CRISIL C (Very High Risk) - Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.  CRISIL D Default - Instruments with this rating are in default or are expected to be in default soon.
  10. 10. CRISIL Rating Scale for Short-Term Instruments  CRISIL A1 - very strong degree of safety regarding timely payment of financial obligations & carry lowest credit risk.  CRISIL A2 - strong degree of safety regarding timely payment of financial obligations & carry low credit risk.  CRISIL A3 - moderate degree of safety regarding timely payment of financial obligations & higher credit risk  CRISIL A4 - minimal degree of safety regarding timely payment of financial obligations & very high credit risk and are susceptible to default.  CRISIL D - default or expected to be in default on maturity.
  11. 11. ICRA  ICRA Limited was set up in 1991  Today ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.  Alliance with Moody’s Investors Service - The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.  ICRA’s credit ratings are symbolic representations of its current opinion on the relative credit risks associated with the rated debt obligations/issues.
  12. 12. CARE  CARE Ratings commenced operations in April 1993 and over nearly two decades, it has established itself as the second-largest credit rating agency in India.  CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations.
  13. 13. Popular Credit Rating agencies in the World  Credit rating is a highly concentrated industry, with the "Big Three" credit rating agencies controlling approximately 95% of the ratings business.  Moody's Investors Service and Standard & Poor's (S&P) together control 80% of the global market, and Fitch Ratings controls a further 15%.
  14. 14. BENEFITS OF CREDIT RATING To the investors  Helps in Investment Decision : Credit rating gives an idea to the investors about the credibility of the issuer company, and the risk factor attached to a particular instrument. So the investors can decide whether to invest in such companies or not. Higher the rating, the more will be the willingness to invest in these instruments and visa-versa.  Benefits of Rating Reviews : The rating agency regularly reviews the rating given to a particular instrument. So, the present investors can decide whether to keep the instrument or to sell it. For e.g. if the instrument is downgraded, then the investor may decide to sell it and if the rating is maintained or upgraded, he may decide to keep the instrument until the next rating or maturity.  Assurance of Safety : High credit rating gives assurance to the investors about the safety of the instrument and minimum risk of bankruptcy. The companies which get a high rating for their instruments, will try to maintain healthy financial discipline. This will protect them from bankruptcy. So the investors will be safe.
  15. 15. BENEFITS OF CREDIT RATING  Easy Understandability of Investment Proposal : The rating agencies gives rating symbols to the instrument, which can be easily understood by investors. This helps them to understand the investment proposal of an issuer company. For e.g. AAA (Triple A), given by CRISIL for debentures ensures highest safety, whereas debentures rated D are in default or expect to default on maturity.  Saves Investor's Time and Effort : Credit ratings enable an investor to his save time and effort in analyzing the financial strength of an issuer company. This is because the investor can depend on the rating done by professional rating agency, in order to take an investment decision. He need not waste his time and effort to collect and analyse the financial information about the credit standing of the issuer company.
  16. 16. BENEFITS OF CREDIT RATING To the company  Improves Corporate Image : Credit rating helps to improve the corporate image of a company. High credit rating creates confidence and trust in the minds of the investors about the company. Therefore, the company enjoys a good corporate image in the market.  Lowers Cost of Borrowing : Companies that have high credit rating for their debt instruments will get funds at lower costs from the market. High rating will enable the company to offer low interest rates on fixed deposits, debentures and other debt securities. The investors will accept low interest rates because they prefer low risk instruments. A company with high rating for its instruments can reduce the cost of public issue to raise funds, because it need not spend heavily on advertising for attracting investors.
  17. 17. BENEFITS OF CREDIT RATING  Wider Audience for Borrowing : A company with high rating for its instruments can get a wider audience for borrowing. It can approach financial institutions, banks, investing companies. This is because the credit ratings are easily understood not only by the financial institutions and banks, but also by the general public.  Good for Non-Popular Companies : Credit rating is beneficial to the non- popular companies, such as closely-held companies. If the credit rating is good, the public will invest in these companies, even if they do not know these companies.  Act as a Marketing Tool : Credit rating not only helps to develop a good image of the company among the investors, but also among the customers, dealers, suppliers, etc. High credit rating can act as a marketing tool to develop confidence in the minds of customers, dealer, suppliers, etc.  Helps in Growth and Expansion : Credit rating enables a company to grow and expand. This is because better credit rating will enable a company to get finance easily for growth and expansion
  18. 18. DEMERITS OF CREDIT RATING  Possibility of Bias Exist : The information collected by the rating agency may be subject to personal bias of the rating team. However, rating agencies try their best to provide an unbiased opinion of the credit quality of the company and/or instrument. If not, they will not be trusted.  Improper Disclosure May Happen : The company being rated may not disclose certain material facts to the investigating team of the rating agency. This can affect the quality of credit rating.  Impact of Changing Environment : Rating is done based on present and past data of the company. So, it will be difficult to predict the future financial position of the company. Many changes take place due to changes in economic, political, social, technological, legal and other environments. All this will affect the working of the company being rated. Therefore, rating is not a guarantee for financial soundness of the company.
  19. 19. DEMERITS OF CREDIT RATING  Problems for New Companies : There may be problems for new companies to collect funds from the market. This is because, a new company may not be in a position to prove its financial soundness. Therefore, it may receive lower credit ratings. This will make it difficult to collect funds from the market.  Downgrading by Rating Agency : The credit-rating agencies periodically review the ratings given to a particular instrument. If the performance of a company is not as expected, then the rating agency will downgrade the instrument. This will affect the image of the company.  Difference in Rating : There are cases, where different ratings are provided by various rating agencies for the same instrument. These differences may be due to many reasons. This will create confusion in the minds of the investor.
  20. 20. THANK YOU

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