2. 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
3. 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
4. Company that assigns credit ratings for issuers of certain
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
5. 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.
Credit Rating Agency
6. 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
Functions
7. 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.
Indian Credit Rating Agencies
8. 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 India's 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.
Crisil
9. 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.
ICRA
10. 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.
CARE
11. 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.
RATING METHODOLOGY
12. 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.
Contd….
13. 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
Rating Symbols
14. 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.
Limitations
