Credit Rating

Nitin kumar Banka

(PUMBA)
Banka_nitin@yahoo.co.in
 Agenda
 Definition of Credit Rating
 Personal credit ratings

 RBI and Basel II Norms

 Risk Weights for Long-term and Short-term

Exposure
 Methodology for Rating of Corporates

 Credit rating agencies

 Definition
 A credit rating assesses the
credit worthiness of an individual, corporation,
or even a country
 Credit ratings are used by investors, issuers,
investment banks, broker-dealers, and
governments.
 Personal credit ratings
 An individual's credit score, along with his or
her credit report, affects his or her ability to
borrow money through financial institutions
such as banks.
 The factors which may influence a person's
credit rating are:
§ ability to pay a loan
§ interest
§ amount of credit used
§ saving patterns
§ spending patterns
§ debt
 RBI and Basel II Norms

 Under Basel II norms, RBI has prescribed risk

weights for different levels of ratings.
 As per RBIs guidelines, all fresh sanctioned
and renewals of unrated exposures in excess
of Rs 50 crore will attract a risk weighting of
150% from 31 March 2008.
Risk Weights for Long-term and
Short-term Exposure
Methodology for Rating of
Corporates
 Qualitative Analysis – Industry risk; Operating
environment; Market position; Management,
Accounting and Corporate governance
 Quantitative Analysis – Earnings and cash flow,
Capital structure and Financial flexibility
 Earning Measures – Analysis of EBITDA,
EBITDAR, After tax cash flows, Net free cash flows,
Coverage ratios, EBITDA/Gross interest expense,
EBITDA/Cash interest expense
 Leverage Measures – Debt/EBITDA (Cash
leverage) and Net debt/Equity (Gearing)
 Profitability Analysis – Analysis of
EBITDA/Operating income and Return on equity/
Return on capital employed
 Credit rating agencies
 Credit scores for individuals are assigned by
credit bureaus . Credit ratings for corporations
and sovereign debt are assigned by
credit rating agencies.
 In India, the main credit bureaus are CRISIL,
ICRA and Credit Registration Office (CRO).
 The credit rating agency for individuals in
India is CIBIL(Credit Information Bureau (India)
Limited).
 The largest credit rating agencies are Moody's,
Standard and Poor's and Fitch Ratings.
THANK YOU