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Credit rating are not based on mathematical formulas. Instead, credit rating agencies
use their judgment and experience in determining what public and private information
should be considered in giving a rating to a particular company or government.
Later on, it was taken over by Robert Dun. This agency published its first
rating guide in 1859.
Origin in India
India’s first credit rating agency CRISIL was set up in 29 January 1987.
It is incorporated, promoted by the erstwhile ICICI Ltd along with UTI and
other financial institutions.
Credit Rating Agencies
In India:
Credit Rating and Information Services of India Ltd. (CRISIL)
Investment information and Credit Rating Agency Ltd. (ICRA)
Credit Analysis and Research Ltd. (CARE)
SME Rating Agency of India Ltd. (SMERA)
Onida Individual Credit Rating Agency of India (ONICRA)
Fitch Rating India Limited
Brickwork Ratings
Globally
Moody’s
Fitch Ratings
Need
Maintenance of investor’s confidence, since default shatter the
confidence of investors in corporate instruments.
Protect the interest of investors who can not investigate much into
the merits of the debt instruments of a company.
Choice of instruments
b) Financial Analysis.
c) Management Evaluation.
d) Geographical Analysis.
f) Fundamental Analysis
a) Business Analysis
a) Industry Risk
b) Market Position
c) Operating efficiency
d) Legal position
e) Size of business
b) Financial Analysis:
a) Accounting quality
b) Earning profitability
d) Financial Flexibility
c) Management Evaluation
The effects on company’s performance by-
a) Management goals
c) Regional subsidies.
e) Regulatory and Competitive Environment
a) Structure of the Financial System
b) Asset quality
Scheduled Bank
Foreign Credit Rating agency having at least five years experience in rating
securities
Any company having a continuous net worth of minimum 100 cores for the
previous five years.
Eligibility Criteria
Is set up and registered as a company
Has specified rating activity as one of its main objects in its Memorandum of
Association.
Has employed persons with adequate professional and other relevant experience, as
per SEBI directions.
Grant of Certificate of Registration
SEBI will grant to eligible applicants a Certificate of Registration
on the payment of a fee of Rs 5,00,000 subject to certain
conditions.
Rating Process
The process begins with issue of rating request letter by the issuer of the instrument
and signing of the rating agreement.
CRA assigns an analytical team consisting of two or more analysts one of whom would
be the lead analyst and serve as the primary contact.
Meeting with Management- The analytical team obtains and analyses information
relating to its financial statements, cash flow projections and other relevant
information.
They should also state that the ratings do not constitute recommendation to buy, sell
or hold any securities.
It should provide the public the rational of its rating which covers analysis of various
factors justifying the assessment as well as the risk factors.
Sovereign Credit Rating
At the request of the country, a credit rating agency will evaluate its
economic and political environment to assign it a rating. Obtaining a good
sovereign credit rating is usually essential for developing countries that
want access to funding in international bond markets.
CRISIL
The first rating agency (CRISIL) ‘Credit Rating Information Services of India Ltd. was
promoted jointly in 1987 jointly by the ICICI and the UTI. Other shareholders included
ADB, LIC, HDFC Ltd, General Insurance Corporation of India and several other foreign and
Indian Banks.
It pioneered the concept of credit rating in the country and since then has introduced
new concepts in credit rating services and has diversified into related areas of
information and advisory activities.
It became public in 1993.
In 1996, it formed a strategic alliance with S&P rating group.
Services offered by CRISIL
Credit Rating Services
Advisory Services
Training Services
ICRA Ltd
Information and Credit Rating Services (ICRA) has been promoted by IFCI Ltd as the
main promoter and started operations in 1991.
Other shareholders are UTI, Banks, LIC, GIC, Exim Bank, HDFC and ILFS.
It provides Rating, Information and Advisory services ranging from strategic consulting
to risk management and regulatory practice.
The main objectives of ICRA are to assist investors both individual and institutional in
making well informed decisions
Rating symbols are a symbolic expression of the opinion/assessment of the credit rating
agency regarding the investment, credit quality, grade of the debt, obligation instrument.
CRISIL rating symbols: The rating symbols of CRISIL with respect debentures, fixed deposits,
short term instruments(CPs), credit assessment, structured obligations, bond funds, bank
loans, collective investment schemes, Indian states, real estate developers are as follows.
Rating symbols for Debentures
High Investment Grade:
AAA-(Triple A ) Highest security- Offer the highest safety against payment of interest
and principal.
AA(Double A) High Safety - Offer high safety against payment of interest and principal.
A- Adequate safety- Offer adequate safety against payment of interest and principal. In
adverse conditions might affect such issues.
BBB(Triple B)- Moderate safety- Offer sufficient safety against payment of interest and
principal. Circumstances may lead to weakened capacity to pay interest and principal.
Speculative grades
BB(Double B)- Inadequate safety- These instruments carry inadequate safety of timely
payment of interest and principal.
D (Default) -Such instruments are extremely speculative and default risk is highest.
Rating symbols for Fixed deposits.
FAAA( F triple A)- Highest safety
FD- Default
Rating symbols for Short term instruments
P-1 (highest safety)
P-5 (default)
Rating for credit assessment
It indicates the capability of entity to repay the interest and principal as per the terms of
the contract. The rating symbols are as below-
14- Default
Ratings for bond funds
AAAf – Very Strong Protection against losses
loan.
loan.