Definition and Concept: The act of assigning values to credit instruments by assessing the ability of the borrower to repay debt and indicating the values through pre-determined symbols is called Credit Rating. Credit rating may also be defined as grading bonds with accordance with their investment quality. It is the current assessment of credit worthiness of the issuer of the credit instrument with respect to its obligation to repay debt. It is a means which provides the lenders or investors with a simple gradation system to judge the relative abilities or capacities of the companies to make timely repayment of interest and principal on a particular kind of debt. It is to be noted that credit rating is not a recommendation to the lenders or investors to purchase or sell or hold the securities. Again, it is not general purpose evaluation of the company’s liability. In fact, Credit rating is a specific or special purpose on-going evaluation of risk that remains valid for the life span of the security. Credit Rating can be done by Credit Rating Agency (CRA). The SEBI has defined Credit Rating Agency as a body of corporate registered under the Securities and Exchange Board of India (credit rating agencies) Regulations, 1999. When a credit rating Agency makes a credit rating of a company, it doesn’t create any fiduciary relationship between the credit rating agency and the rating users.
Functions of Credit Rating:
Indication of risk: Through the study of credit rating, the investors can assess the degree of default risk involvement in the financial instrument issued by the company. Gradation : Credit rating is designed for the purpose of grading the bonds in accordance with their investment quality.
Liquidity position of the organization. The factors which are taken into consideration by the credit rating instrument are : i) ii) iii) iv) v) vi) vii) Industry risk in which the organization or issuing company belongs.
6. B+. Planning and controlling systems which are in the issuing company.3.
7. the credit rating agency rates the different factors which have influence or impact upon the instrument. A+. These symbols indicate the ability of the company or borrower to repay its debt. BB. Assessment of credit worthiness: The creditworthiness and reliability of the obligator are made available to the investors or lenders by credit rating. BBB. such as. AA. Financial soundness and accounting quality maintained. D. Factorial Assessment: In the function of assigning ratings.
Country Rating: The credit rating extends to the country rating which is also known as ‘Sovereign rating’.
4. A. Symbolization: The companies or borrowers whose credit are rated by the credit rating agencies are expressed through certain predefined symbols. Track record.
viii) Profitability of the issuing company. Here the whole country or nation is rated to assess its solvency or credit worthiness. AAA. C.
Assessment of solvency: Credit rating estimates or assesses the vales of credit instruments by applying specialized and expert knowledge to assess the solvency position of the borrower or issuer of the credit instrument. Operating efficiency of the issuing company. Market position of the organization.
It began in India in 1988 and its progress was slow at its inception but In recent times. credit rating has gained importance in India.)
v) DCR (Duff and Phelps Credit rating Agency Of India Ltd.) CARE (Credit Analysis and Research in Equities Ltd.) ICRA (Investment Information and credit rating Agency of India Ltd.)
Credit Rating : by CRISIL
In case of debenture /long term investment rating Highest safety High safety Adequate Safety Moderate Safety Inadequate Safety High risk Subtantial Risk Default AAA AA A BBB BB B C D
ONICRA (ONIDA Individual Credit Rating Agency of India Ltd. The different credit rating agencies working at present in India are:
i) ii) iii)
CRISIL (Credit rating information services of India Ltd.There was belated beginning of credit rating in India.