Credit rating

1. CREDIT RATING
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Presentation By:-
Pawan Singh Raikhola

2. MEANING
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• 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 debtors ability to
pay back the debt and the likelihood of default.
• Credit rating are determined by credit rating agencies. The credit
rating represents the credit rating agencies evaluation of qualitative
and quantitative information for a company or government;
including non-public information obtained by credit rating agencies
analysis.

3. Continued…
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• Credit ratings are not based on mathematical formulas. Instead,
credit rating agencies use their judgments and experience in
determining what public or private information should be considered
in giving a rating to a particular company or government.
•The credit rating is used by individual and entities that purchase the
bonds issued by companies and government to determine the
likelihood that the government will pay its bond obligations.
• A poor credit rating indicates a credit rating agencies opinion that
the company or government has a high risk of defaulting, based on
the agencies analysis of the entities history and analysis of long term
economic prospects.

4. NEED FOR CREDIT RATING
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• It is necessary in view of the growing number of cases of defaults
in payment of interest and repayment of principal sum borrowed by
way of fixed deposits, issue of debentures or preference shares or
commercial papers.
•Maintenance of investors confidence, since default shatter the
confidence of investors in corporate instruments.
• Protect the interest of investors who are not into merits of the debt
instruments of a company.
•Motivate savers to invest in industry and trade.

5. Objectives Of Credit Rating
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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 help to market participants in the following ways:
•Improves a healthy discipline on borrowers.
•Lends greater credence to financial and other representation.
•Facilities formulation of public guidelines on institutional
investments.
•Help merchant bankers, brokers, regulatory authorities, etc, in
discharging their functions related to debt issues.

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•Encourages greater information disclosure, better accounting
standards and improved financial information.
•May reduce interest cost for highly rated companies.
•Act as a marketing tool.

7. TYPES OF RATINGS
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• SOVEREIGN CREDIT RATING
A sovereign credit rating is the credit rating of a sovereign entity.
i.e. a national government. The sovereign credit rating indicates the
risk level of the investing environment of a country and is used by
investors looking to invest looking to invest abroad. It takes
political risk into account.

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•SHORT TERM RATING
A short-term rating is a probability factor of an individual going into
default within a year. This is in contrast to long-term rating which is
evaluated over a long timeframe. In the past institutional investors
preferred to consider long-term ratings. Nowadays, short-term ratings
are commonly used.
• CORPORATE CREDIT RATINGS
The credit rating of a corporation is a financial indicator to potential
investors of debt securities such as bonds. Credit rating is usually of
financial instrument such as bond, rather than the whole corporation
and have letter designations such as A, B, C. The standard and poor’s
rating scale is as follows, from excellent to poor.

9. BENEFITS OF CREDIT RATING
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To the investors
• Help in investment decisions: 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 vice versa.
•Benefits of rating review: The rating agency regularly review the
rating given to the particular instrument. So the present investors
can decide whether to keep the instrument or to sell it and if the
rating is maintained or upgraded, he may decide to keep the
instruments until the next rating or maturity.

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• 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.
•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.

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•Choice of Instruments : Credit rating enables an investor to
select a particular instrument from many alternatives available.
This choice depends upon the safety or risk of the instrument

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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.

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•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.

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•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.

15. Credit Rating Agencies in India
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• CRISIL ( Credit Rating Information Services of India
Ltd)
• ICRA ( Information and Credit Rating Services Ltd)
• CARE ( Credit Analysis and Research Ltd)
• FITCH India

16. Registration
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• Credit Rating agencies are regulated by SEBI.
• Registration with SEBI is mandatory for carrying out the rating
business.
• A registration fee of Rs. 25000 should be paid to SEBI

17. Promoter
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• A credit rating agency can be promoted by:
• Public Financial Institution
• Scheduled Bank
• Foreign Bank operating in India with the RBI approval
• Foreign Credit Rating agency having at least five years
experience in rating securities
• Any company having a continuous net worth of minimum 100
crores for the previous five years.

18. Eligibility Criteria
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• Is set up and registered as a company.
• Has specified rating activity as one of its main objects in its
memorandum of association.
• Has a minimum net worth of Rs 5 Crore
• Has adequate Infrastructure
• Promotes have professional competence, financial soundness and
a general reputation of fairness and integrity in business
transactions, to the satisfaction of SEBI.
• Has employed persons with adequate professional and other
relevant experience, as per SEBI directions.

19. Grant of certificate of registration
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• SEBI will grant to eligible applicants a certificate of
registration on the payment of a fee of Rs. 5,00,000 subject to
certain conditions.

20. CRISIL
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•The first rating agency “Credit Rating Information Services of
India Ltd.” CRISIL was promoted jointly in 1987 jointly by ICICI
and UTI. Other shareholders included ADB, LIC, HDFC Ltd,
General Insurance Corporation of India and several other foreign
and Indian Banks.
• It pioneered the concept of credit rating in the country and since
then has introduced new concepts in credit rating services and has
diversified into related areas of information and advisory activities.
• It became public in 1993.
• In 1996 it formed a strategic alliance with S&P rating group

21. Services offered by CRISIL
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• Credit Rating Services
• Advisory Services
• Credibility first rating and evaluation Services
• training Services

22. Credit Rating Services
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•The principle function of CRISIL is to rate mandated debt
obligations of Indian Companies chit fund, real estate developers,
LPG Kerosene dealers, NBFC, Indian states and so on .
• It includes :-
• Rating of debt obligations
• Rating of structured obligations
• Bond Fund Ratings
• Rating of real state developers
• Bank loan rating
• Collective Investment Schemes
• Grading of health care institutions

23. CRICIL Advisory Services
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• It focuses on consulting services and mitigating risks.
• Services include:-
• Energy group services
• Transport and urban infrastructure group services
• Banking and finance group services

24. ICRA
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• Information and Credit Rating Services (ICRA) has been
promoted by IFCI Ltd as the main promoter and started operations
in 1991.
• Other shareholders are UTI, Banks, LIC, GIC, Exim Bank,
HDFC and ILFS.
• It provides Rating, Information and Advisory services ranging
from strategic consulting to risk management and regulatory
practice.
• The main objectives of ICRA are to assist investors both
individual and institutional in making well informed decisions.
• To assist issuers in raising funds from a wider investor base.
• To enable banks, investment bankers, Brokers in placing debt
with investors.
• To provide regulators with market driven systems to encourage
the healthy growth of capital markets.

25. CARE Ltd
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• Credit Analysis and Research Ltd or 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 also provides advisory services in the areas of
securitization of transactions and structuring Financial
Instruments.

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• It offers services like:
1. Credit rating of debt instruments
2. Advisory services like securitization transactions, structuring
financial instruments, financing infrastructure projects and
municipal finances.
3. Information services like providing information to companies,
industry and businesses.
4. Equity research

27. FITCH India
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• 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.

28. Rating symbols/Grades
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• Rating symbols are a symbolic expression of the
opinion/assessment of the credit rating agency regarding the
investment, credit quality, grade of the debt, obligation instrument.
• CRISIL rating symbols: The rating symbols of CRISIL with
respect debentures, fixed deposits, short term instruments(CPs),
credit assessment, structured obligations, bond funds, bank loans,
collective investment schemes, Indian states, real estate developers
are as follows.

29. Rating symbols for Debentures
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• High Investment Grade:
• AAA-(Triple A ) Highest security- Offer the highest safety
against payment of interest and principal
• AA(Double A) High Safety - Offer high safety against
payment of interest and principal.
• A- Adequate safety- Offer adequate safety against payment of
interest and principal. In adverse conditions might affect such
issues.
• BBB(Triple B)- Moderate safety- Offer sufficient safety
against payment of interest and principal.
Circumstances may lead to weakened capacity to pay interest
and principal.

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• Speculative grades
• BB(Double B)- Inadequate safety- These instruments carry
inadequate safety of timely payment of interest and principal.
• B (High risk)- Instruments rated B have greater risk of
default.
• C (Substantial risk)- Risk of default.
Repayment can only be expected in favorable conditions.
• D (Default) Such instruments are extremely speculative and
default risk is highest.

31. Rating symbols for Fixed deposits.
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• FAAA( F triple A)- Highest safety
• FAA( F- double A)- High safety
• FA- Adequate safety
• FB- Inadequate safety
• FC- High Risk
• FD- Default

32. Rating for credit assessment
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• It indicates the capability of entity to repay the interest and
principal as per the terms of the contract.
The rating symbols are as below-
• 1-Very strong capability
• 2,3,4- Strong capability
• 5,6,7- Adequate capability
• 8,9,10- Inadequate capability
• 11,12,13 –Poor capability
• 14- Default

33. Ratings for bond funds
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• AAAf – Very Strong Protection against losses
• AAf - Strong Protection against losses
• Af- Adequate Protection against losses
• BBBf- Moderate Protection against losses
• BBf - Inadequate Protection against losses
• Cf – vulnerable to credit defaults.

34. Bank Loan Ratings
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• BLR-1: strong likelihood of repayment of interest and
principal on bank loan
• BLR-2: good likelihood of repayment of interest and
principal on bank loan
• BLR-3: satisfactory likelihood of repayment of interest and
principal on bank loan
• BLR-4: moderate likelihood of repayment of interest and
principal on bank loan
• BLR-5: sub standard , vulnerable to loss
• BLR-6: High likelihood of loss

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