Credit ratings provide an opinion on an issuer's ability to meet debt obligations and isolate credit risk evaluation. They assess risk but are not a general evaluation, audit, or recommendation on a security. In India, interest rates transitioned from administered to market-driven as risk assessment became critical. Ratings benefit regulatory authorities, issuers, intermediaries, and investors by facilitating risk identification and market participation. Ratings models evaluate industry, operating efficiency, financial, management, and project risks.

1. What is a Credit Rating?
 Current opinion on credit quality
- Issuers’ ability and inclination to meet
debt obligations in a timely manner
 Performs isolated function of credit risk
evaluation
 Rating is an issue specific view
 Useful in differentiation of credit quality

2. What a Credit Rating is Not
 General purpose evaluation of issuer
 Audit of the issuing company
 One time assessment valid over life of the
instrument
 A recommendation to purchase, sell, or
hold a security

3. Debt Markets in India
Administered
Interest Rates
Protected Business
Environment
Market Driven
Interest Rate Structure
Liberalisation
Assessment of Risk Critical

4. Benefits of Ratings
Regulatory Authorities

Investor protection

Market discipline
Issuers

Accessibility to wider investor base

Encourages financial discipline

Lesser known companies can raise funds
more optimally

5. Benefits of Ratings (contd.)
Intermediaries
- Fixing coupon rates
- Second opinion to supplement own
assessment
Investors
- Eases risk identification and
diversification
- Improves liquidity of security

6. Risk Assessment Model
Operating
Efficiency
Operating
Efficiency
Market
Position
Market
Position
Industry
Risk
Financial RiskFinancial Risk Business RiskBusiness Risk
Management
Evaluation
Management
Evaluation

7. Risk Assessment Model
Business RiskBusiness Risk
Financial RiskFinancial Risk
Management
Evaluation
Management
Evaluation
Existing Risk
Project RiskProject Risk
Overall
Risk Rating

8. Industry Risk
Industry Structure
Industry size and importance to economy
Determinants of revenue growth
Entry barriers
Extent of Competition
Nature and basis of competition
Threat from imports and substitutes
Presence of unorganized sector

9. Market share
Competitive advantages
Brand equity
Pricing flexibility
Product and customer diversity
Proportion of exports
Nature & type of customer diversity
Market Position

10. Cost structure
Manufacturing efficiency
Production flexibility
Technology risk
Raw material sourcing
Location factors
Operating Efficiency

11. Financial Risk Analysis
Accounting Quality
• Income recognition
• Expense capitalisation
• Depreciation and inventory valuation
policies
• Off-balance sheet and contingent
liabilities
• Non-operating income

12.  Earnings Protection
- Profitability measures
- Interest coverage
- Capital structure
- Debt service coverage
- Working capital indicators
- Return on capital employed
Financial Risk Analysis

13.  Adequacy of Cash Flows
- Debt servicing requirements
- Sustainability of funds from operations
 Financial Flexibility
- Ability to raise equity and debt funds
- Alternatives in times of stress
- Liquid assets available
Financial Risk Analysis

14. Management Evaluation
 Strength of linkage to parent/ group
- Operational, financial, managerial support
 Systems and track record
- Project implementation record
 Management talent and succession
 Financial Policies
- Attitude to growth and debt orientation

15. Project size in relation to existing
operations
Means of financing
Funding tie-up
Extent of completion
Adherence to implementation
schedules
Project Risk