CREDIT RATING

BHARAT SHARMA 2210810

DIVYA C 2210817
R PRANAV 2210842
BHEEM SINGH 2210811
SATTWIK DAS 2210848
SAMEER B K 2210845
RUDRA KHURANA 2210862
CONTENT
1. CONCEPTS

2. OBJECTIVES

3. FEATURES

4. PROCESS

5. BENEFITS

6. DRAWBACKS

7. CREDIT RATING AGENCIES

CREDIT RATING
WHAT IS CREDIT RATING?
In simple terms, a credit rating is a numerical score that reflects
how trustworthy someone is when it comes to borrowing money
or using credit. It helps lenders, like banks or credit card
companies, determine the risk of lending money to an individual
or business. The higher the credit rating, the more likely someone
is to repay their debts on time, making them a more attractive
borrower.

DEFINITION -
A credit rating is an evaluation of the credit risk of a
prospective debtor, predicting their ability to pay back
the debt, and an implicit forecast of the likelihood of
the debtor defaulting.
OBJECTIVES

RISK ASSESSMENT
Credit ratings are primarily used to assess the credit risk
associated with a borrower, whether it's an individual,
corporation, or government entity.Lenders and investors rely
on these ratings to make informed decisions about lending
money or investing in bonds or other financial instruments.

CAPITAL ALLOCATION
Credit ratings are used by investors, including banks and
financial institutions, to allocate their capital effectively. They
can decide how much of their funds to allocate to lower-risk
and higher-risk assets based on credit ratings.
MARKET TRASPARENCY

Credit ratings contribute to market transparency by

providing standardized information about the credit quality
of various entities. This transparency is vital for the
functioning of financial markets.

CREDIT IMPROVEMENT
For borrowers, credit ratings can serve as a benchmark to work
towards improving their creditworthiness. Individuals or
companies can take steps to enhance their credit ratings over
time

RISK MITIGATION
Credit ratings allow lenders to manage their risk exposure by
making more informed lending decisions. By knowing the
creditworthiness of borrowers, they can choose to lend to those
with lower risk ratings, reducing the likelihood of defaults.
FEATURES
STANDARDIZATION
Credit rating agencies use a consistent and widely
recognized rating scale, often using letter grades or
symbols (e.g., AAA, B-, etc.), to communicate credit
risk.

RELATIVE COMPARISION
Credit ratings are relative assessments. They
compare the credit risk of one entity or financial
instrument to others, making it easier for investors
and lenders to gauge risk in a broader context.

FORWORD LOOKING
credit rating agencies also consider forward-looking
factors, such as economic conditions and future
prospects, to assess credit risk. This forward-looking
aspect helps investors and lenders anticipate
potential changes in creditworthiness.
TIMELY UPDATES
Credit rating agencies regularly review and update ratings
to reflect changing circumstances, ensuring that the
ratings remain relevant and up-to-date.

THIRD PARTY VALIDATION

Third-Party Validation: Credit ratings are widely used by
investors, lenders, and regulators to validate the
creditworthiness of entities. This third-party assessment
enhances trust and confidence in the financial system.

IMAPACT ON INTEREST RATES

Credit ratings have a direct impact on the interest rates
entities pay when borrowing money. Higher-rated entities
can secure loans at lower interest rates, reducing
borrowing costs.
PROCESS 50

REQUEST OR APPLICATION 40

The process begins when an entity, such as a corporation or

30
government, approaches a credit rating agency to request a credit
rating. This may be for a specific financial instrument, such as bonds,
or for the entity's overall creditworthiness.
20

GATHERING INFORMATION
10

The credit rating agency collects detailed information from the entity
being rated. This information includes financial statements, business
0
plans, historical financial performance, legal agreements, and other
relevant data.
ANALYSIS
50

Credit analysts at the rating agency thoroughly analyze the collected

data. They assess the entity's financial health, its ability to meet its
debt obligations, and the general economic and industry conditions 40
that may affect its creditworthiness.

30
COMAPARATIVE ANALYSIS
The entity's creditworthiness is compared to similar entities within
20
the same industry or sector. This comparative analysis helps
determine where the entity stands relative to its peers.

10
RATING COMMITTEE
Many rating agencies have a ratings committee that reviews and
discusses the analysis to arrive at a consensus rating. The committee's 0
members may be senior analysts and experts in the relevant field.
 BENEFITS
CREDIT ENHANCEMENT
Credit ratings can enhance
the creditworthiness of an
entity or financial
instrument. By achieving a
higher rating, an entity may
attract more investors and
lenders, which can lead to
improved access to capital at
favorable terms.
DIVERSIFICATION LOWER
OF PORTFOLIOS BORROWING COST
Investors can diversify Higher-rated borrowers
their portfolios by can secure loans at
including assets with lower interest rates,
different credit ratings. reducing their overall
This diversification can cost of borrowing. This
help spread risk and can have a positive
potentially improve impact on an entity's
overall portfolio profitability and
performance. financial health.
 BENEFITS
ECONOMIC STABILITY
Credit ratings contribute to
economic stability by helping
prevent excessive lending to
high-risk entities. This, in
turn, reduces the likelihood
of financial crises and
market disruptions.
IMPROVED LIQUIDITY PUBLIC DISCLOSURE
Higher-rated securities Credit rating agencies
are often more liquid, often publish detailed
meaning they can be reports on the entities
bought and sold more they rate. This
easily in the secondary disclosure provides
market. This liquidity valuable information to
can be advantageous for the public and
investors looking for contributes to market
flexibility. transparency.
 ISSUER-PAYS MODEL
One significant drawback is
the issuer-pays model,
where the entity seeking the
rating pays the credit rating
agency for its services. This
model can create potential
conflicts of interest, as
rating agencies may feel
pressure to provide
favorable ratings to retain
business.
PRO-CYCLICAL NATURE RATING INACCURACY
Credit ratings can be pro-
Credit ratings are not
cyclical, meaning they tend to
infallible. There have been
exacerbate economic cycles.
instances where highly
During economic downturns,
rated entities or securities
credit ratings may be
subsequently experienced
downgraded, making it more
financial distress. This can
challenging for entities to
lead to a loss of
access credit precisely when
confidence in the accuracy
they need it most. This can
of credit ratings.
contribute to a self-reinforcing
cycle of economic instability.
 LIMITED COVERAGE LACK OF TRANSPARENCY RATING LAG
Credit rating agencies may The methodologies and
Credit ratings are based on
not cover all entities, criteria used by credit rating
historical data and may not
especially smaller or less agencies are often considered
always reflect rapidly
well-known ones. This can proprietary and not fully
changing economic or
limit access to credit for transparent. This can make it
financial conditions. They
these entities and create challenging for market
may not provide timely
information asymmetry in participants to fully
warnings of impending
the market. understand how ratings are
financial crises or
determined.
systemic risks.
CREDIT RATING AGENCIES

CRISIL
CRISIL, which stands for Credit Rating Information
Services of India Limited, is a leading and globally
recognized credit rating and research company
based in India. Established in 1987, CRISIL is a
subsidiary of Standard & Poor's (S&P), one of the
world's prominent credit rating agencies.
CRISIL's primary focus is on providing credit ratings,
research, and analysis services to a wide range of
financial market participants, including corporations,
banks, financial institutions, investors, and
government entities.
CREDIT RATING AGENCIES

ICRA
ICRA Limited, formerly known as Investment
Information and Credit Rating Agency of India
Limited, is a credit rating and research company
headquartered in Gurgaon, India. ICRA was
established in 1991 and is one of the leading credit
rating agencies in India.
ICRA provides credit ratings for a wide range of
entities, including corporations, banks, financial
institutions, small and medium-sized enterprises
(SMEs), and debt instruments.
CREDIT RATING AGENCIES

CARE
Credit Analysis and Research Limited (CARE) is a
leading credit rating agency based in Mumbai, India.
Established in 1993, CARE is one of the prominent
credit rating agencies in India. The company provides
a wide range of services related to credit assessment,
research, and risk analysis for various entities and
financial instruments.
CARE assigns credit ratings to entities such as
corporations, banks, financial institutions, and
government entities. These credit ratings help
investors, lenders, and other market participants
assess the creditworthiness and risk associated with
these entities.