Credit Rating Agency

Credit rating is a symbolic indicator of the current opinion of a rating agency about the capability and willingness of an issuer to fulfill the debt agreement Ratings are usually expressed in symbols as they are easily understandable and helps the investor to differentiate between debt instruments Ratings are specific to a debt and they analysis the credit risk associated with a particular instrument and assess the debt servicing capabilities The primary objective is to provide guidance to investors. It does not recommend to buy or sell or hold an instrument as the rating agency depend upon information provided by different sources Credit rating is mandatory in India for the debts of following nature: 1.Public issue of debentures /bonds 2. Commercial Papers 3. Fixed deposit programmes of non banking financial companies

Functions of Credit Rating

Provides Information based on reliable source which is unbiased .Rating firms has greater ability to assess risk as they have professional resource They gather ,analyses ,interpret information in a cost effective way If rating is done professionally it will increase investors acceptance and confidence

Benefits of credit rating

INVESTOR-----1.It enables the investors to get information at low cost 2.Helps to calculate risk and encourages common man to invest savings in the capital market COPOTATE BORROWERS /COMPANIES----1.Helps the companies to enter capital market with confidence and raise funds at cheaper rates 2.It is used as a marketing tool to create better image among investors, creditors and lenders 3.It makes the job of merchant bankers and brokers easy as they can guide investors in making decision 4.Foreign collaborators always ask for rating and it helps foreign trade 5.Fair and good rating motivate the public and idle savings of the public are channelized for productive uses

SEBI Guidelines
No credit rating can rate a security issued by its promoters Dual rating is compulsory for public and right issue The issuer takes an undertaking to corporate with the rating agencies and to provide factual information Rating agencies can choose the methodology on their own

Types of rating
Bond Rating ----rating of bonds or debt securities issued by a company ,govt. Equity Rating----The rating of equity in the capital market is equity rating Commercial Paper Rating---It is mandatory on the part of companies to obtain rating so as to issue them Sovereign RatingIt means to rate a country as to its creditworthiness and probability of risk

Rating Process
Rating is an exercise that commences at the request of a company as the focus of the evaluation is on the ability and willingness of the company to meet the financial obligation relating to the debt The methodology involves analysis of the past performance of the comapany,assessment of future projects ,judgment of competitive position and evaluation of management The factors considered in raring process are:1.Business Analysis Industry Risk---studies the nature of competition, demand and supply position Market Position of the company within the industry Operating efficiency of the company i.e. location ,labour relations, cost structure Legal position in terms of prospectus, protection against forgery and fraud 2.Financial Analysis Accounting quality---over or under statement of profits ,inventory policy ,depreciation policy auditors qualification Future Earnings in relation to growth , profitability, fixed income Adequacy of cash flows 3. Management Evaluation-----under this the rating agency studies the track record of management their management talent, their capacity to overcome adverse stitution,their goals ,philosophy and strategies 4.Fundamental Analysis------Capital Adequacy i.e. assessment of true net worth ,its volume of business in relation to risk Liquidity Management----matching assets and liabilities ,capital structure Profitability and Financial Position-----past profits, creation of reserves Interest and Tax Sensitivity-----tax law changes and protection against interest change

Credit Rating Agencies

CRA are regulated by SEBI and they have made registration mandatory for all agencies to do it Application for registration should be submitted to SEBI with a fee of RS 50000 A CRA is a body corporate and can be promoted by 1.public financial institution 2.scheduld bank 3.foreign banks operating in India 4. foreign CRA having 5 years of experience ELIGIBILITY CRITERIA for a CRA are:Is set up as a registered company Has rating as one of its main objective in its MOA Its minimum net worth of Rs 5 crore Has adequate infrastructure Its promoters have professional competence ,financial soundness and reputation Has employed persons with adequate experience and professional knowledge The promoters are not involved in any legal proceedings connected with capital market or convicted of any offences It is in the interest of investors and capital market