Symbiosis Institute of Management

Studies
A Project by- Salil Joshi

Course- PGDFM 2017-18

PRN- 17020464012

Topic- Credit Rating

 Meaning
• An opinion on the future ability and legal obligation of an

issuer to make timely payments if principal and interest on a

specific fixed income security

• Credit Rating Regulations Act 1999, ‘An opinion regarding

securities expressed in the form of standard symbols assigned

by a credit rating agency used by an issuer of such securities’

• A symbolic indicator of the current opinion of the relative

capability of an issuer to service its debt obligations time.

 Types of Credit Rating
• Debenture and bond Rating
• Equity Rating
• Fixed Deposit and Certificate of Deposit Rating
• Commercial paper rating
• LPG/Kerosene dealers/firms rating
• Chit funds rating
• Real estate developers rating
• Banks Rating
• Rating of structured obligations
• Sovereign Rating
• Customers Rating
 Credit Rating Process
▪ Primary Stage
Formal rating request.
• A formal request is made to the rating agency in writing
consisting the terms and conditions of the rating assignment
along with non-refundable fees for rating and surveillance.
• Audited annual accounts of past five years are also
mandatory.
Assigning a rating team
• As per the request the work is assigned to a rating team
consisting of generally two members possessing necessary
expertise and skill.
 Credit Rating Process
▪ Facts finding and analysis stage
Collection of Information
• Primary data- Information provided by the issuer
• Secondary data- Own research, industry experts guidance
Management meetings and plant visits
• Discussion regarding future plans, financial policies and
competitive edge.
• Assessment regarding production process and related aspects
i.e. key factors affecting cost and quality of production as well
as progress of projects under implementation
Preparation of reports.
• Based on the findings the rating agency prepares reports.
 Credit Rating Process
▪ Rating stage.
Preview meeting
• Internal committee analyses the data regarding factors
affecting the financial health of the company and the
performance of the instruments.
Rating committee meeting & Rating
• Final authority to assign ratings
• Analyses the recommendations of the internal committee
• Based on their analysis, rating is assigned to the credit
instrument
 Credit Rating Process
▪ Final stage
Communication of rating and acceptance
• Intimation to the top management carrying the acceptance
and rejection right
• Disclosure among the public regarding the acceptance and
vice-versa
• Rating can be reviewed on issuers request
Surveillance
• Rating is reviewed once a year or a little early under special
circumstances
• Either original rating is retained else upgraded or downgraded
 RATING PROCESS

Primary Fact finding Rating Final stage

stage and analysis stage

•Rating •Data •Preview •Communication

collection meting
request •Meetings & •Acceptance
•Rating
visits
•Rating team committee •surveillance
•Reports
•Rating
 Industry
Analysis

Management Market
Analysis

Rating
Framework

Legal Position Operational

efficiency
Credit Rating Agencies in India
1. CRISIL (Credit Rating Information Services of India Ltd)
• Established in 1987
• Promoted by ICICI UTI, nationalised and foreign banks and
insurance companies
• Rates the company's securities, researches the markets and
provide risk and policy advisory services
2. ICRA (Investment Information and Credit Rating Agency)
• Joint venture between Moody’s investors and Indian Financial
and banking service organisations
• Established in 1991
• Assigns corporate governance ratings, performance ratings,
grading and provides ranking to mutual funds, hospitals and real
estate companies
• Doesn’t cater to the international organisations.
Credit Rating Agencies in India
• CARE (Credit Analysis and Research)
• Established in the year 1992
• Promoted by IDBI, UTI and financial institutions
• Credit rating, Equity research and information services.
• FITCH India
• Only international agency with a presence in India
• Checks credit capacity of global leaders in all Industries
• Operates in more than 30 countries
• Onida Individual Credit Rating Agency (ONICRA)
• Asses the default risk of an Individual
• Home mortgages, bank loans, car loans, employment & any other
credit facility
 Rating Symbols
Rating symbols for long term debt instruments

Sr No CRISIL ICRA CARE Significance

1 AAA LAAA CAREAAA Highest safety
2 AA LAA CAREAA High safety
3 A LA CAREA Adequate safety
4 BBB LBBB CAREBBB Moderate safety
5 BB LBB CAREBB Inadequate safety
6 B LB CAREB Risk Prone
7 C LC CAREC Substantial risk
8 D LD CARED Default

* Long Term Debt Instruments- Debentures, Bonds, Preference Shares

 Rating Symbols
Rating Symbols for medium –term debt instrument

Sr NO CRISIL ICRA CARE Significance

1 FAAA MAAA CAREAAA Highest Safety
2 FAA MAA CAREAA High Safety
3 FA MA CAREA Adequate Safety
4 FB MB CAREBBB Inadequate Safety
5 - - CAREBB Inadequate Safety
6 - - CAREB Inadequate Safety
7 FC MC CAREC Risk Prone
8 FC MD CARED Default

*Medium term instruments refers to fixed deposits only

 Rating Symbols

Rating Symbols for short-term debt instruments

Sr No CRISIL ICRA CARE Significance

1 P1 A1 PR-1 Highest Safety
2 P2 A2 PR-2 High Safety
3 P3 A3 PR-3 Adequate Safety
4 P4 A4 PR-4 Risk prone
5 P5 A5 PR-5 Default

*Short-term debt instruments include commercial papers only

Advantages of Credit Rating
Advantages to Investors
• Assessment of credibility
• Risk Indicator
• Easy to understand
• Enables quick decisions
• Rating Surveillance
• Other services
• Research studies
• Industry reports, Seminars
Advantages of Credit Rating
Advantages to Issuers

• Lowers the cost of borrowing

• Widens investors base

• Fosters a better Image

• Induces Self discipline
• Lowers the cost of Issue
• Motivates Growth
Advantages of Credit Rating
Advantages to Intermediaries

• Enables proper planning , pricing, underwriting and

placement of issues

• Saves time, money and manpower

• Securitization of assets
 Limitations of Credit Rating
• Rating does not recommend buying and selling

• It is issue specific

• Concealment of material information

• Possibility of getting different ratings

• Review lag
 Bibliography & webliography
• Financial Services by Dr Punithavathy Pandian

• www.yourartilcelibrary.com
Thank You!