CREDIT RATING & CREDIT RATING AGENCIES

PRESENTED BY: Priyanka Gautam Shradha Biyani Lokesh Yadav

Credit Rating
y A credit rating assesses the credit worthiness of an

individual, corporation, or even a country. y Credit ratings are calculated from financial history and current assets and liabilities. y A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. y A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

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y Credit is important since individuals and corporations

with poor credit will have difficulty finding financing, and will more likely have to pay more due to risk of default. y The ratings are expressed in code numbers which can be easily comprehended by lay investors. y Credit rating, as exists in India, is done for a specific security and for the company as a whole. y A credit rating does not create fiduciary relationship between the agency & the users.

History of cr
1937 in newyork.

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y First emerged in 1940s following the financial crisis of

y The standards & poor was formed in 1941. y In 1970s a number of credit rating companies started

operational over the world.

CREDIT RATING IN INDIA

y the concept came in india in 1987 with the setting up of crisil. y as the scope of credit rating widened icra & care was set up in 1991 & 1993 respectively. y the first private sector credit rating institution was duffs & phelps credit rating india pvt.ltd formed in 1995

Need for credit r ti

The increasing role of money & capital market consequent to disintermediation. 2. Increased securitization of borrowing and lending consequent to disintermediation. 3. Globalization of credit market. 4. Withdrawal of government safety nets & the trend towards privatization. 5. Growth of confidence in the efficiency of open market mechanism.
1.

Types of credit r ti
y Sovereign Ratings-: Assess the country Credit risk and

isused as a point of
reference for country borrowings from WB ,IMF , ADB ,IDBetc
y Entity Ratings-:Risk ratings of Corporate entities.
y Instrument Ratings-:Ratings of the Bonds issued by

different corporations and municipalities.

Functions
y Superior information y Low cost information y Basis for proper risk, return y Healthy discipline on corporate borrowers y Formulation of public policy guidelines on Institutional investment

Credit Rating Agency

 Company that assigns credit ratings for issuers of certain

types of debt obligations as well as the debt instruments themselves. instruments.

 Also its an agency that performs the rating of debt  CRA s scope at present is not only limited to the rating of

debts but they are also undertaking financial analysis & assessment of financial products , individuals , Institutions & governments.

Credit Rating Agency

 CRA play a key role in the infrastructure of the modern financial system.  For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers & lenders.  This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, start up companies, hospitals, and universities.

Indian Credit Rating Agencies

y CRISIL : Credit rating information services of India y y y y

limited. ICRE : Investment Information & credit rating agency of India limited. CARE : Credit analysis & research limited. Fitch ratings India private limited.(earlier-Duff & Phelps credit rating ) Fitch is the only international agency with a presence on the ground in INDIA.

Crisil
y The first credit agency setup on January 1, 1988, jointly started by ICICI and UTI y y y

with an equity capital of Rs. 4 crores, as public Ltd company. CRISIL is India's leading rating agency, and is the fourth largest in the world. With over a 60% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business. It offers a comprehensive range of integrated product & service offerings-real time news, analysed data , incisive insights & opinions &expert advice-to enable investors , issuers , policy makers de-risk their business & financial decision making , take informed investment decisions& develop workable solutions.

ICRA
y ICRA was set up by IFCI on 16th January 1991. y It is a public limited company with an authorized share capital of Rs.10

crores, Rs. 5 crores is paid up.

y ICRAs major shareholders IFCI (26%), and the balance by UTI, LIC, GIC,

PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI) .
y OBJECTIVE - to provide information & guidance to investors for

determining the credit risk associated with a debt instrument.

CARE
y It was setup by IDBI in collaboration with some banks & financial service companies in NOV 1993. y It offers services such as credit rating of debentures/ preference shares / F.D / CP / information services & equity research extensive study of the shares listed on major stock exchanges through EIL (economy,industry,company) analysis.

RATING METHODOLOGY
Consists of four areas : -

y Business analysis - covers an analysis of industry risk, market position in the country, operating efficiency of the company & legal position. y Financial analysis analysis of accounting quality, earnings
protection, cash flow adequacy & financial flexibility.

y Management evaluation study of track record of the

managements capacity to overcome adverse situations, goals, philosophy & strategies.

y Fundamental analysis analysis of liquidity management, asset

quality, profitability & interest & tax sensitivity.

Rating Symbols
High investment grades:
y AAA & AA Highest safety y A Adequate safety y BBB moderate safety

Speculative grades :y BB - inadequate safety y B high risk y C substantial risk y D - default

Limitations
y Institutions whose instruments were given highest rating didnt perform y y y y

well. Frequent revision of grading creates confusion questioning credibility of the expertise of rating agencies. No audit, only rely on information provided by the issuer which may be inaccurate & incomplete. Biasing investors lose their investments. Rating agencies often fail to correctly predict a borrowers financial health in the short term.

Sectors where credit rating plays a vital role

y Commercial bank y Mutual funds y Investment banks y Leasing companies y Insurance companies y Bonds & securitization

factors considered
y

THANKYOU..