CREDIT RATING

Definition
 What Does Credit Rating Mean?

An assessment of the credit worthiness of

individuals and corporations. It is based upon
the history of borrowing and repayment, as
well as the availability of assets and extent of
liabilities.
 Features
 Specificity
 Relativity
 Guidance
 Not a Recommendation
 Broad Parameters
 No Guarantee
 Quantitative and Qualitative
CREDIT RATING
AGENCIES
 International CRA
 1. Standard & Poor,

 2. Moody‘s Investor Services and

 3. Fitch Ratings.
 The Standard & Poor's rating scale is as
follows: AAA, AA, A, BBB, BB, B, CCC, CC, C,
D. Anything lower than a BBB rating is
considered a speculative or junk bond.
 The Moody's rating system is similar in concept
but the verb age is a little different. It is as
follows: AAA, Aa1, Aa2, Aa3, A1, A2, A3,
Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3,
Caa1, Caa2, Caa3, Ca, C.
 Major CRA in INDIA
 CRISIL, Credit Rating Information services of India LTD. From a
pioneering step taken in 1987, to playing an integral role in India's
development milestones, CRISIL has emerged as India's leading Ratings,
Research, Risk and Policy Advisory company.

 CARE Credit Analysis & Research Ltd. (CARE), incorporated in April

1993, is a credit rating, information and advisory services company
promoted by Industrial Development Bank of India (IDBI), Canara Bank,
Unit Trust of India (UTI) and other leading banks and financial services
companies. In all CARE has 14 shareholders

 ICRA , Investment Credit Rating Agency of India Ltd (an Associate of

Moody's Investors Service) was incorporated in 1991 as an independent
and professional company. ICRA is a leading provider of investment
information and credit rating services in India. ICRA’s major
shareholders include Moody's Investors Service and leading Indian
financial institutions and banks.
 Onicra – SSI and SME rating – approved by the Govt of
India and Indian banks association. NSCI is its nodal
agency
 Rating 1A, 1B, 1C – 5A, 5B ,5C( high to Poor)
 SME rating agency of India (SMERA) (1995)
is a joint initiative by SIDBI, Dun & Bradstreet
Information Services India Private Limited (D&B), and
several leading banks in the country.
-- Objective is to enhance credit flow to credit-constrained
SME sector. It was first of its kind in the world.
--The agency would rate any individual or company
engaged in any field like manufacturing, trading,
business and commerce but not the non banking
finance corporations (NBFCs), chit funds and ‘nidhis’.
 CRISIL’s association with Standard & Poor’s, a
division of The McGraw-Hill Companies, dates
back to 1996 when both companies started
working together on rating methodologies and
joint projects. S&P is the world's foremost
provider of independent credit ratings, indices,
risk evaluation, investment research, data and
valuations. This partnership has now
culminated in Standard & Poor’s acquiring a
majority shareholding in CRISIL.
 Ratings and Risk Assessment

 CRISIL Ratings is the only ratings agency in India to operate on

the basis of sectoral specialization. It reflects sharpness of analysis,
the responsiveness of the process and the large-scale
dissemination of opinion.
CRISIL Ratings plays a leading role in the development of the
debt markets in India.
The Rating Criteria & Product Development Centre, responsible
for policy research, new product development and ratings' quality
assurance, has developed new ratings methodologies for debt
instruments and innovative structures across sectors.

Standard & Poor's, the financial services business of The McGraw-

Hill Companies, the world's foremost provider of independent
credit ratings, indices, risk evaluation, investment research, data
and valuations, enables Crisil to anticipate new market challenges
and introduce value-added ratings methodologies.
Crisil has partnered with Standard & Poor on several projects in
the US and East Asia and jointly promote business and services in
India.
 CARE has been granted registration by SEBI
under the Securities & Exchange Board of India
(Credit Rating Agencies) Regulations,1999.
 The rating coverage has extended beyond
industrial companies, to include public utilities,
financial institutions, infrastructure projects,
special purpose vehicles, state governments
and municipal bodies. CARE's clients include
some of the largest private sector
manufacturing and financial services
companies as well financial institutions of
India. CARE is well equipped to rate all types
of debt
 Importance

 To increase investor confidence and guide

them
 Facilitate decision making
 Measures probability of default to meet
obligations
 Strengths and weaknesses of the company
 Rated instrument enjoys higher confidence
 Provide information and guidance to
institutional and individual investors/creditors.
 Assist the regulators in promoting transparency
in the financial markets.
 Provide intermediaries with a tool to improve
efficiency in the funds raising process.
 Issues
 CRA are not auditors

 Credit rating changes with time

 Judgment in India is a mix of quantitative and

qualitative factors

 Is it necessary to regulate CRA

 Solicited or Unsolicited ratings

 Regulating the Raters

 Factors contributing to success of rating
system
 Credibility arises from objectivity of resource
allocation
 Rating agencies are not and should not assume
the role of regulators
 Continued growth and evolution of the credit
rating business would depend on the size and
the growth of the debt market.
Are Indian Credit Ratings Credible
 CR involves subjective judgment with objective
analysis
 Rating shopping is a cause of concern
 Lack of transparency on the part of CRA
 In most country’s CRA are not regulated
 Credibility arises from objectivity of resource
allocation
 Difference in Rating
 Fuzziness of data
 Readiness/ Reluctance of the company in
disclosing information
 Proper control systems are not in place
 Credibility of the agencies carrying out the
rating
 Industry is still young
 Conclusions
 Still Young
 Foreign CRA entering India, quality will
improve
 No credit rating association
 Discussion Questions

 Do rating agencies conduct a primary audit?

 Is it mandatory for the rating agencies to follow

international norms?

 Can the rating agencies demand information as

a matter of right?