Long-term/Medium-term debt obligations such as debentures, bonds,preference shares or project finance debts are considered long-term anddebts ranging from 1 to 3 years like fixed deposits are consideredmedium-term;1.Short-term debt obligations - the period involved is one year or less andcover money market instruments such as commercial paper, credit notes,cash certificates etc.;2.Equity Grading and Assessment, structured obligations, municipal bonds,mutual fund schemes, plantation schemes, real estate projects,infrastructure related debts, ADR, GDR issues, bank securities etc.3.Credit rating does not bound the investor to decide whether to hold or sell aninstrument as it does not take into consideration factors such as marketprices, personal risk preferences and other consideration which mayinfluence an investment decision. It does not create any fiduciary relationshipbetween the rating agency and the user of the rating. A credit rating agencydoes not perform an audit but relies on information provided by the issuerand collected by the analysts from different sources hence it does notguarantee the completeness or accuracy of the information on which therating is based.In determining a rating, both qualitative and quantitative analysis areemployed. The judgement is qualitative in nature and the role of thequantitative analysis is to help make the best possible overall qualitativeudgement or opinion. The reliability of the rating depends on the validity ofthe criteria and the quality of analysis.The quality of credit rating mainly depends upon and quality of the ratingagency, rating elements also. The agency should have good reputation,personal competence, independence, qualified and experienced staff.
Uses of Credit Rating
Credit rating is useful to investors, issuers, intermediaries and regulators.
The main purpose of credit rating is to communicate to theinvestors the relative ranking of the default loss probability for a given fixedincome investment, in comparison with other rated instruments. In a way it isessentially an information service. In the absence of professional creditrating, the investor has to largely depend on his familiarity with the names ofpromoters or collaborators of a company issuing debt instruments. This isnot a reliable method. Credit rating by skilled, competent and credibleprofessionals eliminates or at least minimizes the role of name recognitionand replaces it with a well researched and properly analysed opinions. Thismethod provides a low cost supplement to investors. Large investors useinformation provided by rating agencies such as upgrades and downgradesand alter their portfolio mix by operating in the secondary market. Investorsalso use the industry reports, corporate reports, seminars and open accessprovided by the credit rating agencies.
The market places immense faith in opinion of credit ratingagencies, hence the issuers also depend on their critical analysis. Thisenables the issuers of highly rated instruments to access the market evenduring adverse market conditions. Credit rating provides a basis for
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