Credit Rating A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.
Credit Rating Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will more likely have to pay more due to risk of default. The ratings are expressed in code numbers which can be easily comprehended by lay investors. Credit rating, as exists in India, is done for a specific security and for the company as a whole. A credit rating does not create fiduciary relationship between the agency & the users.
Credit Rating Agency ratings for issuers of certain Company that assigns credit types of debt obligations as well as the debt instruments themselves. Also its an agency that performs the rating of debt instruments. CRA ‘s scope at present is not only limited to the rating of debts but they are also undertaking financial analysis & assessment of financial products , individuals , Institutions & governments.
Credit Rating Agency CRA play a key role in the infrastructure of the modern financial system. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers & lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, start up companies, hospitals, and universities.
Functions Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment
Indian Credit Rating Agencies CRISIL : Credit rating information services of India limited. ICRE : Investment Information & credit rating agency of India limited. CARE : Credit analysis & research limited. Fitch ratings India private limited.(earlier-Duff & Phelps credit rating ) Fitch is the only international agency with a presence on the ground in INDIA.
Crisil The first credit agency setup on January 1, 1988, jointly started by ICICI and UTI with an equity capital of Rs. 4 crores, as public Ltd company. CRISIL is Indias leading rating agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business. It offers a comprehensive range of integrated product & service offerings-real time news, analysed data , incisive insights & opinions &expert advice-to enable investors , issuers , policy makers de-risk their business & financial decision making , take informed investment decisions& develop workable solutions.
ICRA ICRA was set up by IFCI on 16th January 1991. It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up. 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) . OBJECTIVE - to provide information & guidance to investors for determining the credit risk associated with a debt instrument.
CARE It was setup by IDBI in collaboration with some banks & financial service companies in NOV 1993. It offers services such as credit rating of debentures/ preference shares / F.D / CP / information services & equity research – extensive study of the shares listed on major stock exchanges through EIL (economy,industry,company) analysis.
RATING METHODOLOGY Consists of four areas : - Business analysis - covers an analysis of industry risk, market position in the country, operating efficiency of the company & legal position. Financial analysis – analysis of accounting quality, earnings protection, cash flow adequacy & financial flexibility. Management evaluation – study of track record of the management’s capacity to overcome adverse situations, goals, philosophy & strategies. Fundamental analysis – analysis of liquidity management, asset quality, profitability & interest & tax sensitivity.
Contd…. Information is collected & then analyzed by a team of professionals in an agency. If necessary , meetings with top management suppliers & dealers & a visit to the plant or proposed sites are arranged to collect additional data. This team of professionals submits their recommendations to the rating committee. Committee discusses this report & then assigns rating. Rating assigned is then notified to the issuer & only on his acceptance , rating is published. Assures confidentiality of information. Once the issuer decides to use & publish the rating, agency has to continuously monitor it over the entire life of instrument….called Surveillance.
Rating Symbols High investment grades: – AAA & AA – Highest safety A – Adequate safety BBB – moderate safety Speculative grades :- BB - inadequate safety B – high risk C – substantial risk D - default
Limitations Institutions whose instruments were given highest rating didn’t perform well. For eg. CARE gave the highest rating to CRB capital, which failed, it created a panic among investors & credit agencies. Frequent revision of grading creates confusion questioning credibility of the expertise of rating agencies. No audit, only rely on information provided by the issuer which may be inaccurate & incomplete. Biasing investors lose their investments. Rating agencies often fail to correctly predict a borrower’s financial health in the short term. The latest case is NCD issue of BPL which was downgraded by CRISIL from A to D. Investors who depends on these ratings is not given any warning by rating agencies to wind down his investment in time.