CREDIT RATING

A credit rating assesses the credit worthiness of an individual,

corporation, or even a country. It tells a lender or investor the
probability of the subject being able to pay back a loan.

It is an symbolic indicator of the current opinion of the rating

agency regarding relative ability and willingness of the issuer of
the financial (debt) instruments to meet the (debt) Service
obligations as and when they arise
It provides a relative ranking of the credit quality of
debt/financial instruments or their grading according to
investment quality.
It provides a simple system of gradation by which the re;ative
capacities of companies (borrower) to make timely repayment of
interest and principle on a particular type of debt/financial
instrument can be noted.
Credit ratings are calculated from financial history and current
assets and liabilities. The ratings are expressed in code numbers
which can be easily comprehended by the lay investors.

A poor credit rating indicates a high risk of defaulting on a

loan, and thus leads to high interest rates.

Credit rating, as exists in India, is done for a specific security

and not for a company as a whole.
A debt rating is not one time evaluation of credit risk, which
can be regarded as valid for the entire life of the security.

NEED FOR CREDIT RATING

- It is necessary in view of the growing number of cases of

defaults in payment of interest and repayment of principal sum
borrowed by way of fixed deposits, issue of debentures or
preference shares or commercial papers.
- Maintenance of investors’ confidence, since defaults shatter
the confidence of investors in corporate instruments.
- Protect the interest of investors who can not into merits of the
debt.

OBJECTIVES OF CREDIT RATING

The main objective is to provide superior and low cost

information to investors for taking a decision regarding risk
return trade off, but it also helps to market participants in the
following ways;
• Improves a healthy discipline on borrowers,
• Lends greater credence to financial and other representations,
• Facilitates formulation of public guidelines on institutional
investment,
• Helps merchant bankers, brokers, regulatory authorities, etc.,
in discharging their functions related to debt issues,
• Encourages greater information disclosure, better accounting
standards, and improved financial information (helps in
investors protection),
• May reduce interest costs for highly rated companies,
• Acts as a marketing tool

BENEFITS OF CREDIT RATING

For Investors

– Safeguards against bankruptcy

– Recognition of risk
– Credibility of the issuer
– Easy understandability (ratings) of the investment proposal
– Savings of resources (time and money)
– Independence of investment and quick investment decision
– Choice of investments
– Good bye to thumb rules
– Benefits of rating surveillance
– Low cost information instruments of a company.

For Rated Companies

– Low cost of borrowing

– Wider audience for borrowing (Increase the investor
population)
– Rating as a marketing tool
– Self discipline by companies (Encourages financial Discipline)
– Reduction of cost in public issues (attract investors with least
efforts)
– Motivation for growth
– Sources of additional certification
– Forewarns (caution) risk
– Merchant bankers job made easy
– Foreign collaborations made easy

For Brokers and financial intermediaries

– Saves time, money, energy, and manpower in convincing
their clients about investments.
– Less effort in studying company’s credit position to convince
their clients.
– Easy to select profitable investment security
– Helps to improve business

DISADVANTAGES OF CREDIT RATING

• Biased rating and misrepresentation,

• Static study,
• Concealment of material information,
• No guarantee for soundness of the company,
• Human bias,
• Reflection of temporary and adverse conditions,
• Present rating may change (down grade),
• Differences in rating of two agencies.
CREDIT RATING AGENCIES IN INDIA

1. Credit Rating Information Services Limited (CRISIL)

2. Investment Information and Credit Rating Agency of
India (ICRA)
3. Credit Analysis and research (CARE)
4. Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and
5. Onicra Credit Rating Agency of India Limited: Is an
established player in the individual credit assessment
and scoring services space in the Indian market.
CRISIL ‘S FLOWCHART

Debenture Rating Symbols

High Investment Grades:
AAA (triple A): Highest Safety
AA (double A): High Safety
Investment Grades:
A: Adequate Safety
BBB (triple B): Moderate Safety
Speculative Grades:
BB: Inadequate Safety
B: High Risk
C: Substantial Risk
D: Default
Fixed Deposit Rating Symbols
– FAAA (triple A): Highest Safety
– FAA (double A): High Safety
– FA: Adequate Safety
– FB: Inadequate Safety
– FC: High Risk
– FD: Default

Ratings for short-term instruments

– P-1: Timely payment very strong
– P-2: Strong
– P-3: Adequate Safety
– P-4: Minimal
– P-5: Expected to be in default on maturity or is in default

RATING METHODOLOGY OF CRISIL

Key factors considered for rating are:
1. Business Analysis,
2. Financial Analysis,
3. Management evaluation,
4. Regulatory and competitive environment, and
5. Fundamental analysis.
Factors listed above at serial numbers 1, 2, and 3 are evaluated
for manufacturing companies, while 4 and 5 factors are used
to evaluate finance companies apart from the 1, 2 and 3 factors.
1. Business Analysis – Industry risk, market position and
operating efficiency of the company, legal position.

2. Financial Analysis – Accounting quality, earnings

position, adequacy of cash flows, and financial flexibility.

3. Management Evaluation – Goals, philosophy, strategies,

ability to overcome adverse situations, managerial talents
and succession plans, commitment, consistency and
credibility.

4. Regulatory and Competitive Environment

5. Fundamental Analysis – Liquidity management, assets

quality, profitability and financial position, interest and tax
sensitivity.

Types of Rating
 1. Bond/Debenture rating
2. Equity Rating
3. Preference share Rating
4. Commercial Rating
5. Fixed deposit Rating
6. Borrower Rating – Rating of borrower
7. Individual rating- individuals credit rating
8. Structured obligation – assest backed security
9. Sovereign Rating – Rating of a country

Emergence areas of CREDIT RATING

 Equity Research
 Banking Sector
 Insurance Sector
 New Instruments viz. Floating Rates Notes
 Intermediary in financial Sector
 Indian Corporates raising Funds Overseas.