PRESENTED BY: GROUP 3

Credit rating is essentially giving an expert opinion by a rating agency on the relative willingness and ability of the issuer of a debt instrument to meet the servicing obligation in time and in full. Credit Rating performs the function credit risk evaluation reflecting the borrowers expected capacity to pay the debt as per terms of issue. 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.

For Investors

For Rated Companies

Safeguards against bankruptcy Recognition of risk Credibility of the issuer Easy understand ability (ratings) of the investment proposal Savings of resources (time and money) Independence of investment and quick investment decision Choice of investments

Low cost of borrowing Wider audience for borrowing (Increase the investor population) Rating as a marketing tool Reduction of cost in public issues(attract investors with least efforts) Foreign collaborations made easy

PromotersCommercial Banks, Public FIs, Foreign Banks Operating in India, Foreign Credit Rating agency & Companies with minimum net worth 100cr as per its audited annual balance sheet for the previous 5 years. redit Rating AgencyIt is a set up and registered as a company. Has a minimum net worth of Rs 5 cr. Mandatory for credit rating agency to have registration with SEBI. The certificate of registration is valid for 3 years.

Credit Rating Information Services Limited (CRISIL) Investment Information and Credit Rating Agency of India (ICRA) Onicra Credit Rating Agency of India Limited Credit Analysis and Research (CARE)

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Following Major factors are assessed in the credit rating process.

 

BUSINESS ANALYSIS. FINANCIAL ANALYSIS

 Actual & estimated Demand/Supply No. of firms and potential entrance in the industry Govt. Policy Performance of industry & future Prospects

Market share of the firm Strength & weaknesses Product & Customers

Industry Risk

Market Position in the Industry

Operating Efficiency
Company structure Locational advantage Labour relationship Input availability & Prices

Legal Position
Accuracy of Information Regulatory authority

 Inventory valuation Depreciation Policy Off- balance Liability

Profitability Ratio Earning growth

Accounting Quality

Earning Protection

Working Capital Need Future budgeting

Adequacy of CashFlow

Financial Flexibility
Alternative Plan in development Feasibility of such plan

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Biased rating and misrepresentation, 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.

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Methodology ICRA considers all relevant factors that have a bearing on the future cash generation of theissuer. These factors include: industry characteristics, competitive position of the issuer,operational efficiency, management quality, commitment to new projects and other associatecompanies, and funding policies of the issuer. A detailed analysis of the past financial statementsis made to assess performance under "real world" business dynamics. Estimates of futureearnings under various sensitivity scenarios are drawn up and evaluated against the claims andobligations that require servicing over the tenure of the instrument being Rated. P rimarily, it isthe relative comfort level on the issuers' cash flows to service obligations that determines theRating