WHAT IS CREDIT RATING,WHAT ARE CREDIT RATING AGENCIES? CREDIT RATING AGENCIES IN INDIA.CRISIL,ICRA,CARE RATINGS SUCH AS AAA+,AA,A,BBB,BB,B,C,D. INVESTMENT GRADE AND SPECULATIVE GRADE RATING.IPO GRADING. LONG TERM,SHORT TERM, MEDIUM TERM RATING.USES OF CREDIT RATING. CREDIT RATING AND BOND PRICE MOVEMENT. RATING METHOD.SEBI GUIDELINES ON CREDIT RATING.SECURITIES AND EXCHANGE BOARD OF INDIA IS SEBI.HOW TO CHECK CREDIT RATING? CREDIT RATING COMPANY

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CREDIT RATING & ITS
IMPORTANCE
Prepared by
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Importance of this session.
CREDIT Rating is an important innovation in financial
services.
Learning will help us to know more about Credit rating
methodologies
Indepth Knowledge in CREDIT Rating methods has got
immense career opportunities

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TOPICS COVERED
WHAT IS CREDIT?
WHAT IS CREDIT RATING?
WHAT CREDIT RATING IS NOT?
USES OF CREDIT RATING FOR ISSUERS
USES OF CREDIT RATING FOR INVESTORS
SEBI GUIDELINES FOR CREDIT RATING AGENCIES
CREDIT RATING AGENCIES IN INDIA
CRISIL
ICRA
CARE
LONG TERM, SHORT TERM, MEDIUM TERM CREDIT
RATINGS

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TOPICS COVERED
CREDIT RATING MECHANISM
IPO GRADING
IMPACT OF CREDIT RATING IN MOVEMENT OF
BOND PRICES

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Introduction to Credit
Rating

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Introduction to CREDIT Rating
What is Credit ?
Provision of resources by one party to another party.
The second party does not reimburse the first party
immediately, and instead arranges either to repay or
return the resources at a later date.
It is any form of deferred payment.
The first party is called a creditor, also known as a lender,
while the second party is called a debtor, also known as a
borrower.
Credit is important since Individuals and Corporations with
poor credit will have difficulty finding financing and will
most likely have to pay more due to the risk of default

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What is a credit rating?
A credit rating is an opinion on the relative degree of
risk associated with timely payment of interest and
principal on a debt instrument.
A Credit rating assesses the Credit worthiness (ability
to pay interest and principal in time) of an Individual,
Corporation or even a country.
A simple alphanumeric symbol is used to convey a
credit rating. Credit Ratings are calculated from
Financial History, Current Assets and Liabilities of a
firm and History of borrowing and repayment.
Tells a lender or an investor the probability of default by
borrower (not being able to pay back a loan)
A poor credit rating indicates a high default risk.

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What credit rating is NOT?
Not a recommendation to buy, hold or sell a debt
instrument
A rating is one of the inputs that is used by investors to
make an investment decision
Rating do not comment on the return being offered on
a debt instrument nor are they offered as guarantees
or protections against default. They are opinions only
Rating is specific to the instrument & is not the rating of
the issuer
Ratings are not intended to measure factors such as
liquidity risk, pre-payment risk, interest rate risk, risk of
secondary market loss, or exchange loss risk

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What credit rating is NOT?
A credit rating is not an assurance of repayment of the
rated instrument.
It is possible that some highly rated issuers could
default.
In the US, some instruments rated at even 'AAA' levels
have defaulted. However, such defaults would be less
frequent amongst highly rated instruments than
amongst instruments with lower ratings

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Uses of Credit Rating

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Uses to Issuers of Securities
Good Credit rating decreases the cost of borrowed
capital. Companies may be able to borrow at a lower
interest owing to their High Credit rating.
Good Credit rating serves as an Additional Certification
Increase the investor population since Investors prefer
safety first.
Merchant Bankers Job Made easy since marketing of
Debt Instruments with High Rating is Easy
Foreign Collaborations made easy
Benefits the industry as a whole

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Uses to Investors
Low Cost Information
Quick Investment Decision
Independent Investment Decision
Can select or distinguish Risky assets from Safety
ones
Continuous monitoring by CREDIT Rating agencies
gives Investors a knowledge about the company
throughout the life time of Security and hence he can
redeem the security if the rating changes.

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Credit Rating Agencies

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What is a Credit Rating Agency?
Independent Agency who assess the capacity of the
issuer of the debt security to pay interest and repay the
principal as per the terms and conditions.
They collect a fee from the Issuers for rating their Debt
Securities
They rate an instrument based on parameters like
• business risk
• market position
• operating efficiency
• adequacy of cash flows
• financial risk,
• financial flexibility, and
• management and industry environment.

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What is a Credit Rating Agency?
Credit Rating is not one time evaluation of Credit Risk.
Agencies continuously monitor the Performance of the
company till the maturity of Particular Security. This is
known as SURVEILLANCE.
Changes affecting the company are taken into account
and the rating, if necessary, is changed, upwards or
downwards. In other words, a rating is valid during the
life of the instrument unless is changed

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SEBI Guidelines on Credit
Rating

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Important SEBI Guidelines
CREDIT Rating Agencies should be SEBI Registered
Minimum Networth of Rs 5 Crore is needed for a Credit
Rating Agency or an Undertaking to Enhance the
Networth with in a period of 3 Years
SEBI Registration is valid for a Period of 3 Years.
NO Company shall make a Public Issue or rights issue
of Debt Instruments, unless Credit Rating is obtained
from at least one Credit Rating Agency.
SEBI has made grading of IPOs compulsory, effective
May 1 2007.It shall be mandatory to obtain grading
from at least one credit rating agency

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IPO Grading
IPO grading is the grade assigned by a Credit Rating
Agency (CRAs) registered with SEBI, to the IPO of equity
shares or any other security which may be converted into
or exchanged with equity shares at a later date.
IPO grade 1 Poor fundamentals
IPO grade 2 Below Average fundamentals
IPO grade 3 Average fundamentals
IPO grade 4 Above average fundamentals
IPO grade 5 Strong fundamentals

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Credit Rating Mechanism

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Credit Rating Mechanism
Credit Risk
Industry Risk Business Risk Management Risk Financial Risk
Industry Market Position Track Record Existing Fin. Position
Characteristics
Industry Financials Operating Efficiency Credibility Future Financial Position
Payment Record Financial Flexibility
Others Accounting Quality
• External factors
• Scored centrally once in
a year
• Internal factors
• Scored for each borrowing.

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Overview of Credit Rating
Agencies in India

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CRISIL
Credit Rating Information Services Limited – CRISIL
Floated on Jan 1st 1988
Indias Leading rating Agency and the Fourth largest in
the world
Jointly Promoted by Standard & poor, National Stock
Exchange and other financial Institutions

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CRISIL ratings
Description
Symbol
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default

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CRISIL ratings for Short Term Instruments
This rating indicates that the degree of safety regarding
P1 timely payment on the instrument is very strong.
This rating indicates that the degree of safety regarding
timely payment on the instrument is strong; however, the
relative degree of safety is lower than that for instruments
P2 rated 'P1'.
This rating indicates that the degree of safety regarding
timely payment on the instrument is adequate; however, the
instrument is more vulnerable to the adverse effects of
changing circumstances than an instrument rated in the two
P3 higher categories.
This rating indicates that the degree of safety regarding
timely payment on the instrument is minimal and it is likely to
be adversely affected by short-term adversity or less
P4 favorable conditions.
This rating indicates that the instrument is expected to be in
P5 default on maturity or is in default.

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ICRA
Investment Information and Credit Rating Agency of
India Limited - ICRA
An Associate of Moodys Investor Service
Second Largest Rating Agency in India
Promoted by Leading Banks and Financial Institutions
It Provides Rating Services, Advisory Services,
Research Services and Economic Research services.
ICRA ratings are based on an in-depth study of the
industry as also an evaluation of the strengths and
weaknesses of the company.

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ICRA will look into the following before rating a
security
Marketing strategies
competitive edge
level of technological development
operational efficiency
competence and effectiveness of management
hedging of risks, cash flow, trends and potential
liquidity, financial flexibility
government policies
past record of debt servicing
sensitivity to possible changes in business/economy

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ICRA

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ICRA

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ICRA Short Term Ratings

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CARE
Credit Analysis and Research Limited
Established in 1993
IDBI and Canara Bank are major promoters. IL&FS
and other Financial Institutions also hold stake in
CARE.
Services Offered by CARE are
• Credit Rating
• Equity Research
• Economic Research

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Long /Medium -term instruments (NCD/FD/CD/SO/CP)

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Credit Rating of Debt instruments

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CREDIT RATING AND ITS IMPACT ON BOND PRICE
CASE I – Rating Comes Down
“AAA” rated Security was trading at Rs 100/-
Coupon – 8% P.A
Yield of “AA” rated Sec then was 10% P.A
Rating of “AAA” Security comes down to “AA”
Price of the Security will come down to Rs 80/- so as to
yield 10% P.A
Investors who bought “AAA” rated Security at Face
Value would incur a Capital Loss of 20%
RATING COMES DOWN BOND PRICE COMES DOWN

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CREDIT RATING AND ITS IMPACT ON BOND PRICE
CASE II – Rating Increases
“AA” rated Security was trading at Rs 100/-
Coupon – 10% P.A
Yield of “AAA” rated Sec then was 8% P.A
Rating of “AA” rated Security becomes “AAA”
Price of the Security will increase by Rs 25/- so as to
yield 8% P.A
Investors who bought “AA” rated Security at Face Value
would incur a Capital Gain of 25%
RATING INCREASES BOND PRICE INCREASES

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