CREDIT RATING OF BANKS
Management ideas without any action based on them mean nothing. That is why practical experience is vital for any management studies. Theoretical studies in the class room are not sufficient to understand the functioning climate and the real problems coming in the way of management. So, practical exposures are indispensable to such courses. Thus, practical experience acts as a supplement to the classroom studies. This project deals with role of technical analysis as a tool for trading decisions. I have learnt a lot of new things which could never been learnt from theory classes. It contains research methodology, research objective, scope analysis and interpretation of the data, collected from secondary resources. It also consists limitations of the study. In this study I have collected data from secondary source. Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies.
Objectives: Investor information and protection: Common Scale of Comparisons: Time Efficiency Corporate Image: Lower Cost of Risk Assessment: Reduce Information Asymmetry:
CREDIT RATING OF BANKS
In making decisions about where and when to take a position, strength of trends in financial time series and to identify turning points in these trends. If you can do this with a reasonable degree of accuracy, then you can improve your chances of making a profitability.
CRAs have been in operation since the late 1890s, signifying an existence of over 100 years. Rating standards by Moody‘s and S&P were known to be stringent. From 1970 onwards, financial literature has been commenting on the superior information efficiency of the markets, in comparison to information disseminated by the CRAs. With the advent of securitization and its offshoots, a complex web of contracts are stitched together to service structured obligations. CRAs overestimated the enforceability of the structured obligations and fissures in the structures resulted in the post-Enron, post-World com debacle. Lack of corporate governance standards and vigilance by accountants were identified as the root cause, while the CRAs were accused of abetting the intricate structures with high credit ratings. CRAs (together with accountants) have once again come under sharp criticism after the sub-prime debacle, with the root cause being poor origination standards of banks and excessive, opaque structures designed by aggressive merchant banks. Structured finance, which commenced with class markets, moved into mass markets with the impetus from investment bankers. It is said that CRAs once again overestimated the credibility of the contracting parties to ho nor the structured obligations and were led to base their ratings on complex quantitative ‗black-box‘ models, with data from benign periods. This has led to investors being saddled with poor quality, illiquid paper with systemic implications.
CREDIT RATING OF BANKS
INTRODUCTION TO CREDIT RATING
Credit Rating is an evaluation of a person‘s capacity (or history) of debt repayment. A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower‘s overall credit history. A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender.Credit ratings are calculated from financial history and current assets and liabilities. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor. Thus credit rating is an evaluation of the likelihood of a borrower to default on a loan. It is an expression of creditworthiness based upon present financial condition and past credit history. Borrowers are rated by lenders according to the borrower‘s credit worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as borrower‘s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower‘s credit, and different lenders may assign different grades to the same borrower. Ratings relies on the Issuers, its accountants, counsel, advisors and other experts for the accuracy, completeness and timeliness of the
DEFINITION OF CREDIT RATING:-
CREDIT RATING can be defined as an “Evaluation of the timely repayment ability of an individual. CRISIL. collect. etc.CREDIT RATING OF BANKS
information submitted in connection with the rating and surveillance processes. analyze. expressed in the form of standard symbols or in any other standardized manner. and protection of interest and principal is considered high. firm. Bank of Baroda is assigned AAA ratings and ICICI stands for AA ratings.―Overall credit worthiness of a borrower measured on predefined scale. In other Words. such as the US firm Dun & Bradstreet. to comply with a requirement specified by SEBI regulations. assigned by a credit rating agency and used by the issuer of such securities.
DEFINITION (As Per SEBI):
―Rating‖ means an opinion regarding securities.
1. For example. assessed by an independent agency and informed to lenders is called as Credit Rating‖. store. These ratings are being assigned by the particular agencies like. or debt security (such as a bond)”.
Definition of AAA rating:
Long-term debt rated 'AAA' is of superior credit quality. It is also called debt rating.Credit rating agencies. and sell such information. ICRA. 'AAA' are also considered to be strong credits. The report is being made on the credit worthiness of the banks and as per the report the rate is given to a particular bank. summarize. typically exemplifying above average strength in key areas of consideration and unlikely to be
CREDIT RATING OF BANKS
significantly affected by reasonably foreseeable events.
. etc. Credit rating agencies offer a ready. AA. Common Scale of Comparisons: Credit Rating is done on pre-determined scales such as AAA. Theyare unable to assess the risk profile of the issuer.3
OBJECTIVES OF CREDIT RATINGS:
1. An obligation rated ‗A‘ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions that obligations in higher rated categories. Rating is an indicator of risk. An obligor rated 'AA' has very strong capacity to meet its financial commitments. 'AA' ratings denote expectations of very low credit risk. This capacity is not significantly vulnerable to foreseeable events.
Definition of AA rating:
AA ratings imply very high credit quality. mandatory and regulator (SEBI) approved rating. this enables comparison of two corporate/ two instruments on the same scale. Long-term debt ratings may include a plus (+) or minus (-) to indicate where within the category the issue is placed.
Definition of A rating:
An obligor rated 'A' has a strong capacity to meet its financial commitments.
1. It differs from the highest rated obligors only in small degree. Investment decisions are easy when avenues are comparable. Investor information and protection: Basic objective of credit rating is to protect the interests of retail investors. 2. They indicate very strong capacity for payment of financial commitments. especially default risk.
Reduce Information Asymmetry: CRAs play a key role in financial markets by helping to reduce the informative asymmetry between lenders and investors.CREDIT RATING OF BANKS
3. Since CRAs are independent. whereas credit rating is for fixed fee. 7. he can show the credit rating. 4. Regulation: Ratings compare corporate on common scale and the regulators find it easy to frame their policies with reference to the scale of rating. about the credit worthiness of companies or countries. They charge a specified percentage of loans as fee for appraisal. Time Efficiency: Credit Rating once obtained. regulators can refer to their ratings without hesitation. It is a third party (impartial) proof of credit-worthiness.return trade off. Lower Cost of Risk Assessment: Project appraisal by bank is a costl process.
. 6. 5. on one side. and issuers on the other side. which incorporates the ratings of CRAs into rules for setting weights for credit risk. can be used for 6 months to 1 year for most of the instruments. CRAs role has expanded with financial globalization and has received an additional boost from Basel II. This saves time for the credit processing. Credit Rating is a basic idea of retail investor protection and hence is devised to be at low cost. The main objective is to provide superior and low cost information to investors for taking a decision regarding risk. approved by SEBI. but it also helps to market participants in the following ways. Corporate Image: Continuous high rating is a reflection on ability of management. Hence whenever a borrower approaches a new lender for Commercial Paper or any such instrument. Financial Markets respect highly rated corporate and hence may result in lower cost of capital.
Acts as a marketing tool. easy-to-use measurements of relative credit risk. Lends greater credence to financial and other representations. Credit rating is also used by companies when they take loan from the banks or other financial institutions. based on the credit rating which company has received from credit rating agency. 3. Credit rating is also used by a company.CREDIT RATING OF BANKS
Improves a healthy discipline on borrowers. because a company which has received good credit rating can raise funds easily from either capital markets in the form of issue of equity shares or from debt markets in the form of bonds. 5. investment banks. 2. May reduce interest costs for highly rated companies. 4.
1. this generally increases the efficiency of the market.
. Credit rating has regulatory importance also because if company is going for initial public offering than it is compulsory for it to get credit rating before issuing shares to public. Credit rating is also used to judge about the overall operational efficiency and efficiency of the top management in running the business of a company.4
USES OF CREDIT RATINGS:
Credit ratings are used by investors. For investors. lowering costs for both borrowers and lenders. so that investors know about the company before applying for the initial public offering. credit rating agencies increase the range of investment alternatives and provide independent. and governments. Credit rating is used by the investors for making investment decision about the debt or equity of company. Facilitates formulation of public guidelines on institutional investment. issuers. brokerdealers. Given below are some of the uses of credit rating : 1.
indices. The manual provided information and statistics on stocks
.‖ In 1941 Standard statistics and Poor‘s Publishing Company merged together to form Standard and Poor‘s which is the world‘s foremost provider of independent credit ratings. Poor was a leader in establishing the financial information industry on the principle of ―the investor‘s right to know. Moody’s: John Moody established John Moody &Company in 1900. Mr.CREDIT RATING OF BANKS
HISTORY OF CREDIT RATING
Credit reporting firms were credibility investigators and were established and popularized in US in late 1800s. Rating as a commoditized service mainly started with the establishment of two rating majors. investment research and data. Standard and poor’s: Henry Varnum Poor published his History of Railroads and Canals of the United States in 1860. risk evaluation. It published Moody‘s Manual of Industrial and Miscellaneous Securities in the first year.
He expressed his conclusions using letter rating symbols. John Moody returned to the financial market in 1909 with a new idea. Moody‘s company did not have adequate capital to survive. he now offered investors an analysis of security values. and Moody‘s Manual was known from coast to coast. circulation had exploded. and food companies. utilities. and management of companies.CREDIT RATING OF BANKS
and bonds of financial institutions. manufacturing. mining. and he was forced to sell his manual business. By 1903. When the stock market crashed in 1907. Within two months the publication was sold out. government agencies.
. instead of simply collecting information on the property. capitalization.
All happenings and decisions that affect credit worth or entity obviously change the ratings also. once rated. 2. Following factors emerge from these concerns: a) All the entities (in same category) should be rated on the same scale to enable comparison of risk and return. But these expressions do not give any clear idea of risk comparison. 3. 4.CREDIT RATING OF BANKS
BASICS OF RATING
1. It should consider all the realities which affect credit worthiness of the entity to be rated. it‘s valid for limited time period. c) Ratings are not to create any bias in favour or against. Rating Agency must be an independent entity. b) Scale should be uniform predetermined scale and all the users of the ratings should be appraised of this scale and its implicit meanings. Ratings should be merely indicating risk-return equation. Rating process should be transparent and consultative. Also different agencies may word these expressions clearly.
. Borrower or the entity to be rated should not have any interests in rating agency. Rating is a dynamic process. SCALE: Rating as such can be expressed as ‗Credit worthy‘ or ‗Slightly Risky‘ or ‗Highly Risky‘ or any such expressions. So. These expressions are more ‗emotionally indicative‘ and inherently biased in favour or against the rated entity. Periodical review in rating is necessary. Lenders and investors can choose appropriate mix for them.
3. With some benchmarking. Scaled ratings need manual review. C. Indexes are self-changing and hence dynamic in nature.
. All the ratings are in the form of position on this rating scale. we can determine whether factors are favourable or not. Index is a predetermined weighted average of financial variables of the entity. index value will move. Such scales are A. B. E or 1. In some cases instead of scale an index is devised. 2. 5.CREDIT RATING OF BANKS
Rating Agencies device is a common scale for rating. or other such combinations. D. As these variables move. 4.
Interest. Current Credit Ratings: 1. Agency Moody's Fitch Standard and Poor's DBRS Long Term Aa3 AAA+ AA (low) Short Term P-1 F1+ A-1 R-1 (middle) Long Term Aa3 AAA+ AA (low) Short Term P-1 F1+ A-1 R-1 (middle)
. Debt. along with his credit report. affects his or her ability to borrow money through financial institutions such as banks. Bank of Scotland plc. Spending patterns.The factors that may influence a person's credit rating are: Ability to pay a loan.CREDIT RATING OF BANKS
TYPES OF CREDIT RATINGS
4. Lloyds TSB Bank plc. Saving patterns.1 PERSONAL CREDIT RATINGS:
An individual's credit score. Agency Moody's Fitch Standard and Poor's DBRS 2. Amount of credit used.
depending on the tenor of the financial obligation. Credit rating is usually of a financial instrument such as bonds. Issue-Specific Credit Ratings: these are an opinion of an entity's ability and willingness to honour its financial obligations with respect to a specific bond or other debt instrument or Sukuk. A short-term rating is assigned to debt instruments with an original maturity of up to one year. Dun & Bradstreet. Moody's or Fitch Ratings and have letter designations such as A. Best.3
Issuer Credit Ratings these summarise an entity's overall creditworthiness and its ability and willingness to meet its financial obligations as they come due. Local currency ratings for financial institutions and corporates are assigned on a selective basis where appropriate.
4. and unlike
. C. These are assigned by credit rating agencies such as A. rather than the whole corporation.
National Ratings measure the creditworthiness of issuers or issues relative to all other issuers or issues within the same country.2
CORPORATE CREDIT RATINGS:
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Standard & Poor's. Sectors and the types of ratings that may be assigned are given below. B. Ratings assigned to an entity are comparable across international borders.CREDIT RATING OF BANKS
4. The ratings assigned to the debt issues of financial institutions and corporates can be either short term or long term.
Local currency ratings for non-sovereign issuers are an opinion of an entity's ability and willingness to meet all of its financial obligations on a timely basis. as well as the likelihood that an entity would receive external support in the event of financial difficulties. Foreign Currency and Local Currency Ratings: Foreign currency ratings refer to an entity's ability and willingness to meet its foreign currency denominated financial obligations as they come due.
. National Ratings enable the ratings of obligors in a given country to be distributed across a full rating scale (from 'AAA' to 'D') thereby allowing greater credit differentiation than may be possible under internationally comparable rating scales. foreign currency ratings take into account the likelihood of a government imposing restrictions on the conversion of local currency to foreign currency or on the transfer of foreign currency to residents and non-residents. National Ratings are used in countries whose sovereign credit ratings are some way below 'AAA' on CI's international ratings scales and where there is sufficient demand from capital market participants for such ratings. For banks and corporates.CREDIT RATING OF BANKS
Corporate Individual's (CI) other ratings are not intended to be comparable across countries. Both foreign currency and local currency ratings are internationally comparable assessments. Foreign and local currency ratings take into account the economic. regardless of the currency in which those obligations are denominated and absent transfer and convertibility restrictions. financial and country risks that may affect creditworthiness.
CREDIT RATING OF BANKS
NEED AND IMPORTANCE
5. Maintenance of investors‘ confidence. based on high standards of analytical rigour. and consequently broaden the range of financial resources available to SMEs. as the banking sector increasingly focuses on lending and providing other financial services to the small and medium enterprises (SME) sector. Motivate savers to invest in industry and trade. 5. since defaults shatter the confidence of investors in corporate instruments. Independent agency ratings for SMEs.
IMPORTANCE OF CREDIT RATING OF BANKS:
The credit rating of banks has a great importance. Protect the interest of investors who cannot into merits of the debt instruments of a company.1 NEED FOR CREDT RATING OF BANKS:
It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits. the Indian financial system has come to regard credit ratings as an integral part of the framework for credit and investment decisions relating to larger enterprises. Today. ratings can play the same pivotal role as they do for larger enterprises. Ratings can make SMEs‘ access to financial services more efficient by providing benchmarks and improving transparency. Some of its important factors are as follows: Credit ratings will benefit the SME sector: Over the years. can provide greater confidence to lenders. issue of debentures or preference shares or commercial papers.
Benefits for the sector as a whole: For the SME sector as a whole. In the SME sector too. and customers. As the number of rated players in the SME sector increases.a viable proposition: There are certain misconceptions about SME credit ratings. Surveys among larger enterprises clearly show that managements feel ratings have provided value that goes well beyond the rating symbol. SME ratings -. Ratings can also facilitate faster processing of credit facilities. The Indian rating industry has established its credibility in providing in-depth and unbiased analysis. from rating experts who have in-depth sector knowledge and understanding of risk. Firstly. SMEs can leverage their ratings for negotiating better borrowing rates and strengthening their relationships with bankers. as more and more information is demanded and made available. An interactive rating process helps managements gain unique perspectives on business and financial issues and on best practices. ratings can be an important feedback tool for managements. such as technology providers. we recently had an opportunity to
. ratings are therefore highly respected by lenders. ratings can provide an important impetus in raising standards through better financial discipline. A credit rating takes a significant chunk of the perceived uncertainty out of their lending decisions. lenders and investors often assume that SMEs will only get low ratings because of their smaller size. and reduces time and transaction costs in the system. At CRISIL. there will be greater transparency.CREDIT RATING OF BANKS
Benefits for lenders and SMEs: The rapid growth of the SME sector creates exciting lending opportunities for banks and financial institutions. enhance their credibility with other counterparties too. suppliers. disclosure and governance practices.
and there is no reason why this should not be so for the SME sector as well as the National Small Industries. you are borrowing money that you promise to pay back within a specified period of time. The combination of business and management strength indicates that there will be several players in the sector with strong credit profiles. Satyam Computer Services. Our analysis shows that there were a healthy number of companies with considerable business strengths underpinned by the leadership of first generation entrepreneurs who had built strong brands and demonstrated the ability to withstand competition. The third misconception is that SMEs will find fees of rating agencies unaffordable. Some may take into consideration only the information contained in your credit report. In fact the rating fee is by far the lowest element of the cost of raising funds. Rating agencies are forward-looking in their analysis. Marico Industries and Maharashtra Seamless are some examples. The credit bureaus that issue these scores have different evaluation systems. Moser Baer India. including from large global players. Clearly. Sun Pharma Industries. were SMEs only a decade ago. Several large and highly successful companies today. But rating agencies must recognise the special initiatives they will need to take in this regard. the ratings industry in India has never allowed fees to be a constraint. In its efforts to develop the credit markets. The primary factors used to calculate an individual's credit score
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analyse over 5000 SMEs. each based on different factors. and expectations are built into ratings. ratings have the potential to transform the way SMEs are integrated into the financial system. Credit Rating When you use credit. A credit score is a statistical method to determine the likelihood of an individual paying back the money he or she has borrowed. which we look at below.
credit type mix and frequency of applications for new credit. each number is preceded by one of two letters: "I" signifies installment credit (like home or auto financing). even though the scores are based on the same credit report information. you may have an R1 rating with Visa (the highest level of credit rating). TransUnion. Each creditor will issue its own rating for individuals. Although the "R" and "I" systems are still in use. the three major credit bureaus in the U. Because the scoring systems are based on different criteria which are weighted differently. Scores range between 350 (extremely high risk) and 850 (extremely low risk). Here is a breakdown of the distribution of scores for the American population in 2003:
What about a Credit Rating? In addition to using credit (FICO) scores. and "R" stands for revolving credit (such as a credit card). and Canada) use a scale of 0-9 to rate your personal credit.CREDIT RATING OF BANKS
are his or her credit payment history. and Experian) may issue differing scores for an individual. the prevailing trend is to move away from this
. On this scale. most countries (including the U. For example. (Equifax. but you might simultaneously have an R5 from MasterCard if you've neglected to pay your MasterCard bill for many months. time length of credit history. current debts.S.S.
. here is how the scale breaks down: Rating Description You are new to the credit world. your lender sends information to a credit bureau which details. Your debt payments are made under consolidation. You officially have bad debt (default). but you are not a "9" yet. You pay your credit back in 1 month.
R0 or I0
R1 or I1 R2 or I2 R3 or I3 R4 or I4 R5 or I5 R7 or I7 R8 or I8 R9 or I9
What Makes up Your Credit Score? When you borrow money.CREDIT RATING OF BANKS
multiple rating scale toward the single digit FICO score. Nevertheless. Debt was cleared by selling the item (repossession). You pay your credit back in 4 months. how well you handled your debt. in the form of a credit report. You pay your credit back in 3 months. You have not repaid in four months. and you have an insufficient credit history for making an accurate judgment of your future risk. which usually means it is uncollectible. You pay your credit back in 2 months.
3) Time credit has been in use. Here is how the weighting breaks down:
As you can see by the pie graph. The factor that can boost your credit rating the most is having a past that shows you pay off your debts fairly quickly. the bureau determines a credit score based on five major factors: 1) Previous credit performance. and 5) Pursuit of new credit. and refraining from constantly applying for additional credit will all help your credit score. 2) Current level of indebtedness.CREDIT RATING OF BANKS
From the information in the credit report. Additionally. Although all these factors are included in credit score calculations.
. maintaining low levels of indebtedness (or not keeping huge balances on your credit cards or other lines of credit). they are not given equal weighting. having a long credit history. your credit rating is most affected by your historical propensity for paying off your debt. 4)Types of credit available.
With a high credit score. Description: Your credit score is based on the contents of your credit history. The main factors making up FICO and other credit scores are whether you pay bills on time.1 Good Credit Scores: According to the Credit Scoring website. Although there is more than one credit scoring system. They want to know how likely you are to repay the money you want to borrow. car loan or credit account. A FICO score ranges from 300 to 850.
6. you can obtain the credit you need almost all the time. is a summary of your credit history. the amount of debt you carry and the length of your credit history.
. and a score of 770 or above is considered excellent. the average American's credit score is around 720. a good credit history results in a high credit score. Other factors include the frequency with which you open or close credit accounts and the types of credit you have. Consequently. as do banks when you want to open an account. or credit report. Potential employers may also check your credit. The best interest rates go to people with credit scores in the high 700s. or rating. the Fair Isaac Corporation (FICO) score is most widely used.CREDIT RATING OF BANKS
LEVELS OF CREDIT RATING
Your credit is checked anytime you apply for a mortgage. at favourable interest rates. A good score is anything over 700. Your credit score. Lenders rely on credit scores to assess risk.
These reports are available from the Federal Trade Commission's authorized provider.2 Poor Credit Scores: Once your credit score falls below 690 to 700. you should monitor your credit history carefully. contact the credit bureau and have the mistake corrected.
. 6. Equifax and TransUnion). Errors on your credit report can lower your credit score. A score below 620 is called "subprime" and is considered poor. although you may pay a higher interest rate. Annual Credit Reports. Those who do extend you credit will charge you significantly higher interest. If you discover an error. You can get a free credit report once every year from each major credit reporting agency (Experian.CREDIT RATING OF BANKS
6. However. If your credit score is subprime. With a credit score in the middle 600s you can usually finance a car and get a mortgage or credit card. many lenders will not extend credit and you may find it difficult to finance a home.3 Guarding Your Credit: Paying bills on time and otherwise using credit in a responsible manner are the best ways to raise your credit score. lenders have concerns about your ability to repay a loan.
At such banks. senior managers indicated that the internal rating system is at least partly designed to promote and maintain the overall credit culture. If not properly handled by senior management and the loan review unit. especially at very large banks serving many customers over a wide area. Tensions can arise when rating systems both maintain culture and support sophisticated modeling and analysis. and the frequency of legitimate disagreements about ratings is likely to be higher when systems have a large number of Pass grades.CREDIT RATING OF BANKS
RATING SYSTEMS AND CREDIT CULTURE
‗‗Credit culture‘‘ refers to an implicit understanding among bank personnel that certain standards of underwriting and loan management must be maintained. relationship managers are held accountable for credit quality partly by having them rate all credits. substantial authority must be delegated to mid-level and junior personnel. the latter applications introduce pressures for architectures involving fine distinctions of risk. Maintenance of a credit culture can be difficult. including large exposures that might be more efficiently rated by the credit staff. Of necessity. At some of the banks we interviewed. and undue relaxation of standards may not appear in the form of loan losses for some time. Strong review processes aim to identify and discipline relationship managers who produce inaccurate ratings. Such a setup provides strong incentives for the individual most responsible for negotiating with the borrower to assess risk properly and to think hard about credit issues at each stage ofa credit relationship rather than relying entirely onthe credit staff.
. An emphasis on culture as a criticalconsideration in designing the rating system wasmost common among institutions that had sufferedserious problems with asset quality in the past ten orfifteen years. even in the face of constant pressures to increase revenues and bring in new business. a rating system redesign that increases the number of grades may make cultural norms fuzzier and the rating system less useful in maintaining the credit culture. As noted.
The top retail banks.to four-star range. and ratings may fluctuate on a quarterly basis. the least desirable is one. Performing institutions will generally receive a rating of three or more stars with the majority of financial institutions falling into the three.
.CREDIT RATING OF BANKS
Presented below is an explanation of Bankrate's Safe & Sound rating : Star rating Definition Superior Sound Performing Below peer group Lowest rated Not Rated "NR" Complete data not available Closed Institution is closed G Designates high growth
Safe & Sound Ratings:
Bank rate's Safe & Sound ratings are comparisons to both industry peer norms and standards. thrifts and best credit unions will have a star rating of three or higher. The most desirable Safe & Sound rating is five stars. operating strategies that differ from industry norms may lead to ratings that are not truly reflective of an institutions' financial condition. Quarterly updates of Safe & Sound ratings allow us to monitor changes that may occur. A Safe & Sound rating of one or two stars does not suggest that we believe direct regulatory action is imminent or even likely but rather only indicates that certain belowaverage performance factors have been found during the applicable rating cycle. In a very small number of instances.
The process of rating starts with a rating request from the issuer. decision-making process in assigning a rating. CRISIL has sometimes arrived at rating decisions in shorter timeframes. However. and the signing of a rating agreement. A detailed flow chart of CRISIL's rating process of CRISIL is as follows:
. the rating process normally takes three to four weeks.CREDIT RATING OF BANKS
PROCESS OF CREDIT RATING
CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigour. CRISIL employs a multi-layered. From the initial meeting with the management to the assignment of the rating. to meet urgent requirements.
copy of all the agreements and contracts of relevance. 2) MANAGEMENT MEETING: Agency would collate and analyze all the information provided and prepare its preliminary findings report. business forecasts and proposed policy changes are also tobe briefed to the agency. proposed security.
. This should mainly contain financial reports. if required. information and documents. Client takes this opportunity to justify his unsubstantiated information. the process of rating the banks starts with the bank which requests for the rating of their bank. The team then recommends the rating.CREDIT RATING OF BANKS
As shown above in the chart of CRISIL‘s Rating process flow chart. More than one meetings are possible if CRA is convinced that such further meetings are necessary and whould provide better insight. 4) ADVICE TO THE CLIENT: The client is informed about the rating proposed by the rating agency. It should disclose all the ownership documents of proposed collateral or security. 3) ASSIGNMENT OF RATING: Rating team of the agency determine all the data. At this stage there is a meeting of rating agency executives with the key personnel of the client. audited balance sheets. It would demand any further information or documents from the client. It also considers all the points presented by the client. Proposed plans for next five years. And the process contines as follows: 1) COLLECTION OF INFORMATION: The client should provide all the necessary information to yhe agency. It may also make a presentation of its strengths ane weaknesses to the agency. It should also brief the agency about the purpose of the instrument.
it can appeal so to the agency. 6) PUBLICATION: On finalization of rating. sovereign) is disaggregated into a number of analytical categories in order to build an issuer's risk profile and facilitate meaningful comparisons between issuers. it is formally communicated to the client. a country visit. Analysis of each general type of issuer (bank. The rating process. involves preparatory work on the issuer (including an analysis of financial information and the calculation of standardised performance ratios).CREDIT RATING OF BANKS
5) APPEAL: If the client feels that the rating can be improved and has adequate reason for it. Such appeal should be substantiated with proper reasoning and justification. Ratings are only assigned when there is sufficient information available to form a credible opinion and are usually undertaken with the co-operation of the entity that is to be rated. which is summarised in the diagram below. 7) SURVEILLANCE AND REVIEW: Rating is a dynamic activity. So rating has to be monitored continuously. On appeal the agency may or may not revise the rating. corporate. and the drafting of a credit report and its deliberation by a rating committee. to regulator and after their acceptance it is released for general public.
. Also it is mandatory.
The Rating Process CI Ratings:
CI's approach to assigning credit ratings involves a thorough evaluation of the quantitative and qualitative factors that may affect repayment capacity and is underpinned by transparent procedures and detailed methodologies.
Non-financial categories include operations. as well as the quality and credibility of management together with an assessment of the reliability of the financial and any other information received. capital adequacy. In addition.CREDIT RATING OF BANKS
For banks. leverage. liquidity and profitability. quantitative categories include asset quality. strategies and prospects including an examination of the market or operating environment. Financial aspects include cash flow. In the case of corporates. the cumulative experience of the institution in its present structure is reviewed. and earnings.
Qualitative categories considered include the impact of market conditions and the quality of regulation and supervision. Performance ratios relating to the breakdown of the balance sheet and profit and loss account and their rates of growth are analysed. management. Calculations are complemented by peer group and trend analysis. debt profile.
. analytical categories aim to capture key financial and business risks.
with unanticipated and important changes in the issuer's circumstances or the provision of previously undisclosed information typically required to trigger the representation of the report and rating to the rating committee. CI analysts recommend specific ratings for credits in their portfolios only after such evaluations have been made. An issuer has the right to appeal the committee's rating decision. the sustainability of fiscal and monetary policies. CI analysts also meet with other key market participants and observers such as central banking authorities and external auditors. However. and the burden of public sector domestic and external debt. the committee chairperson has the casting vote. the right of appeal is limited both in time and to the submission of new information. the strength of the country's external finances. economic growth prospects. The draft report is made available to the issuer for comments and to correct any factual errors and to ensure that commercially sensitive or confidential information has been removed. the analytical categories used to assess sovereign creditworthiness include political stability. Following the finalization of the report.
.CREDIT RATING OF BANKS
Finally. Insight is gained through lengthy face-to-face meetings with an organisation's senior management. Following the completion of the discussion. which decides the ratings assigned to each issuer (or issue). composed of several CI analysts. the report and ratings are communicated and dispatched to CI subscribers and often to the wider financial community through press releases. It is a democratic process and the majority vote rules. In the event of a tie. In order to supplement their understanding of the local operating environment. The analyst responsible for a particular credit distributes a draft report to committee members in advance of a meeting. While CI analysts recommend specific ratings for the institutions they monitor. the committee either votes on the rating recommendation or asks for further data to support a resubmission. An oral presentation is subsequently made to the rating committee and the analyst's recommendations are discussed. it is a rating committee.
exposing the bank to possibly substantial risks in the interim. As part of their judgmental evaluation. in practice the rating process at almost all banks relies heavily on judgment. in the long run.CREDIT RATING OF BANKS
Surveillance is an important part of CI‘s work and rated entities are continuously monitored. do so
. operating costs will be reduced in that less labour will be required to produce ratings. and probably more. (2) Data to support estimation of such models is currently rarely available. most of the banks we interviewed either use statistical models of borrower default probability as an input (about three fourths do so) or take into consideration any available agency rating of the borrower (at least half. Those few banks moving toward heavy reliance on models appear to feel that models produce more consistent ratings and that. and (3) The reliability of such models would become apparent only over time. Rating reviews are conducted at least annually but more frequently if the credit profile has altered.
8 MODELS AND JUDGEMENT
Although in principle the analysis of risk factors may be done by a mechanical model. We suspect most banks are hesitant to make models the center piece of their rating systems for three reasons: (1) Different models would be required for each asset class and perhaps for different geographic regions.
CREDIT RATING OF BANKS
CREDIT RATING OF BANKS
RATINGS FOR NEW ISSUE
Independence of investment and quick investment decision. Wider audience for borrowing (Increase the investor population). Benefits of rating surveillance. Rating as a marketing tool.CREDIT RATING OF BANKS
ADVANTAGES AND DISADVANTAGES
BENEFITS OF CREDIT RATING
For Investors: Safeguards against bankruptcy. Low cost information
For Rated Companies: Low cost of borrowing. Easy understandability (ratings) of the investment proposal. Choice of investments. Self discipline by companies (Encourages financial Discipline). Forewarns (caution) risk. Savings of resources (time and money). Recognition of risk. Motivation for growth. Sources of additional certification. Good bye to thumb rules. Credibility of the issuer.
. Reduction of cost in public issues(attract investors with least efforts).
Credit Rating Agencies have failed to predict Asian Crises 1997. Differences in rating of two agencies. Following points need attention while CRAs assign their ratings in future: 1) RATINGS ARE STICKY: CRAs apply quantitative methods and qualitative judgements to assign ratings. No guarantee for soundness of the company. Also ideally such change should be step by step. It is very difficult for them to precisely see a day when they would downgrade or upgrade the rating once assigned. They find it logically difficult to change the rating
. money. energy. Less effort in studying company‘s credit position to convince their clients. Easy to select profitable investment security. Helps to improve business. 2007 and many corporate failures. Reflection of temporary and adverse conditions. Static study. Human bias. Concealment of material information. Global Crises. Foreign collaborations made easy For Brokers and financial intermediaries: Saves time.
DISADVANTAGES OF CREDIT RATING
Biased rating and misrepresentation.CREDIT RATING OF BANKS
Merchant bankers job made easy. Present rating may change (down grade). and manpower in convincing their clients about investments.
evaluate the reasonableness of the issue price. the rating which was ‗AA‘ till yesterday. rating is a human perception.CRAs downgrade the rating so as to save their credibility. which influence an investment decision. lag behind the real market happenings. cannot be downgraded to ‗C‘ today all of a sudden unless there is a precise reason. They do not. All said and done. AGGRAVATE CRISES: Overreaction of CRAs in downgrading the rating results in further loss of investor confidence. RATINGS LAG MARKETS: Ratings are based on historical events and past financial and economic data. contributing to financial instability and crosscountry contagion. EXCLUDES IMPORTANT ASPECTS: They do not take into account many aspects. Ratings also do not take into account the risk of pre-payment by the issuer. This prohibits them for any gradual downgrading also. CRAs overreaction may have aggravated financial crises in recent past. because failures most of the time are ‗collapses‘ and do not provide any meaningful time for systematic step-by-step change in rating. Ratings thus. It is not shelled from opinions. For instance. for example. Hence. possibilities for capital gains or take into account the liquidity in the secondary market. Most of the times. It is evident that.CREDIT RATING OF BANKS
suddenly and substantially. This aggravates the crises CRAs are seen as impartial judges of the situation. when crises occurs . first a negative incidence has to occur for any CRA to downgrade the rating. such downgrading is in excess than required. OVERREACTION: Ratings over react when they do change.
. but they panic when the market panics and they are overzealous when markets are booming.
Although the FDIC does not release ratings to the public. it is wise to do a little research. For a clue to how sound the bank is. Open your web browser and go to the Bank rate Safe & Sound Ratings website." View the Bankrate. 2. state.
10. The CAEL ratings are the opposite with a CAEL rating: one is the highest and five is the lowest. When that same consumer decides to open a savings account with a substantial balance. you should look at another rating system.
. Click "Next" after selecting your search option. Click the "Next" button to continue. he doesn't always think to look into the bank's history. check its credit rating. and go up to five stars. which is a superior rating. Choose your bank from the list of financial institutions provided in the drop-down menu and click on "Next. 4. ZIP code. This is useful whether you do not have a specific bank in mind or you want to check the status of your current bank. which is the lowest rating. Choose to review any reports of financial summaries that Bank rate has from your financial institution. including the bank's asset quality. 3.com Star Rating and the Safe & Sound CAEL Rating. asset size or rating.1 INSTRUCTIONS:
1. Enter the search options to locate your financial institution. it recommends several sites where consumers can check a bank's credit rating. You can search by the bank's name.CREDIT RATING OF BANKS
CHECKING FOR A BANK’S CREDIT RATINGS
When a consumer looks to open a checking account. Bank rate looks at a variety of statistics for each financial institution. profitability and liquidity. Star ratings start at one star. Select whether the financial institution you are researching is a credit union or a bank/thrift. Now that you have looked at how Bank rate scores your bank.
10. 5. 7. If they are similar (they don't need to be identical) then you can be reasonably assured that the bank's credit rating is indeed a positive one. The overall creditworthiness of an institution and default risk is captured by CI's foreign currency ratings. Review the Star Rating that Bauer Financial has assigned to your bank. Support ratings complement CI's financial strength ratings which. you can do so from this screen. You will need to choose whether you are looking for information on a bank or credit union. Neither financial strength ratings nor support ratings take account of transfer and convertibility risks associated with sovereign events. 6. Click on "Search" for your results. Bauer Financial recommends all four. Compare the ratings from Bankrate and Bauer Financial.CREDIT RATING OF BANKS
It is a good idea to use two different models to ensure that there isn't a large discrepancy between the two. If you are interested in purchasing a more in-depth report on your bank's credit rating. Find your bank on the results page and click on the "Tell Me More" button.2 SUPPORT RATING FOR BANKS:
CI's support ratings assess the likelihood that. Foreign currency ratings take into
.and five-star banks to its readers. in the event of difficulties. 8. a bank would receive sufficient financial assistance from the government or private owners to enable it to continue meeting its financial obligations in a timely manner. in effect. indicate the likelihood that a bank will fail due to inherent financial weaknesses and/or an unstable operating environment and therefore may require external support to avoid defaulting on its obligations. Open the Bauer Financial Banks and Credit Unions rating page. Select the state where the financial institution is located and the name of the financial institution.
as well as the country's regulatory and supervisory framework and the credit standing of potential supporters. 4. 2. There is considerable uncertainty about the ability and willingness of potential supporters to provide sufficient and timely assistance. market position and importance within the sector and economy. The likelihood of support is high. The likelihood of support is very high. The likelihood of a bank receiving support in the event of difficulties is extremely high.
. The following rating scale applies to support ratings: 1. The ability and willingness of potential supporters to provide sufficient and timely support is strong. The likelihood of support is moderate. the operating environment. The bank may also be of such importance to the national economy that state intervention is virtually assured. 3. external support. support ratings are based on a thorough assessment of a bank's ownership. The characteristics of a bank with this support rating may include strong government ownership and/or clear legal guarantees on the part of the state. 5. The ability and willingness of potential supporters to provide sufficient and timely support is very strong. There is some uncertainty about the ability and willingness of potential supporters to provide sufficient and timely assistance. The likelihood of support is low. and sovereign-related risks. Although subjective.CREDIT RATING OF BANKS
account all factors affecting the likelihood of repayment including inherent financial strength. The ability and willingness of potential supporters to provide sufficient and timely support is extremely strong.
in general. and the firm‘s access to sources of finance other than the bank. For example. as are those in highly competitive industries. whereas firms with diversified lines of business are viewed as less risky. and leverage are typically analyzed. The larger the cushion.CREDIT RATING OF BANKS
10. across borrowers or loan types. The focus of analysis is on the borrower‘s debt service capacity. taking account of its free cash flow.3 FACTORS CONSIDERED
Bank personnel base their decisions to assign a particular rating on the criteria that define each grade. projected) earnings. and miscellaneous other factors. the liquidity of its balance sheet.22 Firms in declining industries are considered more risky. operating cash flow. the financial analysis often includes a formal comparison of the borrower‘s financial ratios to prevailing industry norms. and position within the industry. Indeed. A related factor. industry. and trends in cash flow and profitability). Risk factors include the borrower‘s financial condition. size. the reliability of the borrower‘s financial statements and the quality of its management. the more favourable is the rating. interest coverage. which are articulated as standards for a number of specific risk factors. collateral). elements of transaction structure (for example. in some cases. general volatility. Financial statement analysis is central to appraising the likely adequacy of future cash flow and thus the ability of the borrower to service its debt. Historical (and to a lesser extent. the characteristics of the borrower‘s industry are often considered (such as cyclicality. with exact definitions of financial ratios used in the analysis varying across banks and. As a context for financial statement analysis. is also an important factor in
. The risk factors are generally the same as those considered in deciding whether to extend a loan and are similar to the factors considered by rating agencies. The analysis yields an assessment of the difference between current or projected performance and liquidity on the one hand and projected debt service obligations on the other. the borrower‘s position in its industry. a criterion for assignment of a grade ‗‗3‘‘ might be that the borrower‘s leverage ratio must be smaller than some value.
financial analysis may produce a distorted view of the borrower‘s condition. Subjective factors play at most a minimal role. statistical models of default probability tend to analyze fixed sets of financial ratios and to apply fixed weights to each ratio in arriving at a default probability. banks assign ratings on the basis of the borrower‘s current condition and most likely outlook. When statement quality is poor or uncertain. In contrast. This relative inflexibility of models leads most banks to regard their results only as generally suggestive of an appropriate rating.CREDIT RATING OF BANKS
determining ratings. Interviewees noted that small firms— including many that would be considered middle market—usually have limited access to external finance and often have few or no assets that can be sold in an emergency without disrupting operations. One of the most important reasons that rating is usually a judgmental process is that the details of financial statement analysis vary with the borrower‘s other characteristics. Raters also appraise the quality of financial information provided by the borrower.
. perhaps with some variation in weights by industry. Those borrowers with substantial market power or that are perceived to be ‗‗market leaders‘‘ in other respects are considered less risky because they are thought to be less vulnerable to competitive pressure. most banks formally consider both firm size (sales revenue or total assets) and the book or market dollar value of a firm‘s equity in assigning ratings. As noted previously. For example. adding substantially to risk. A primary difference between banks and public rating agencies is whether the financial analysis is keyed to a downside (or ‗‗stress‘‘) scenario or to a ‗‗base‘‘ (or ‗‗most likely‘‘) case. In another departure from practice at the rating agencies. raters have much more confidence in financial statements that are audited by a major accounting firm than in those that are compiled or unconsolidated or that are audited but accompanied by important qualifications. whereas the rating agencies assign grades on the basis of a downside scenario.
CREDIT RATING OF BANKS
In contrast, larger firms were characterized as having more ready access to alternative financing, more saleable assets, and a more firmly established market presence. For these reasons, many banks require that small borrowers be assigned relatively risky grades even if their financial characteristics might suggest a more favorable rating. Almost all internal rating systems cite the borrower‘s management as an important consideration in assigning the risk grade. Such assessments are necessarily subjective and may reveal weaknesses in a number of areas related to competence, experience, integrity, or succession plans. Vulnerability of management to the retirement or departure of key individuals is usually considered. Some institutions (similar to the rating agencies) appear to give considerable weight to the rater‘s appraisal of management‘s ability and willingness to manage the firm to achieve a high level of financial performance throughout the business cycle and to its attitude toward protecting the interests of lenders. We reviewed the written criteria for those banks among the fifty largest that we did not interview. Our experience with interviewed banks indicates that conclusions should be drawn with care from written documents alone. However, the description of risk factors herein is probably representative of the factors used by almost all large banks. Staff at the banks interviewed appeared to be well aware of the potential pitfalls of such comparisons. For example, a borrower with a fiveyear history of stable cash flow might still be considered rather risky if the particular five-year period contained no recession and the borrower‘s industry is highly cyclical.
CREDIT RATING OF BANKS
CODE OF CONDUCT
CRISIL Ratings‘ mission is to provide high-quality, objective, independent, and rigorous analytical information to the marketplace. In order to achieve its mission, CRISIL Ratings strives for analytic excellence at all times, evaluates its rating criteria, methodologies and procedures on a regular basis, and modifies or enhances them as necessary to respond to the needs of the Indian capital markets. CRISIL Ratings endeavours to conduct the rating and surveillance processes in a manner that is transparent and credible and that also ensures that the integrity and independence of such processes are not compromised by conflicts of interest, abuse of confidential information or other undue influences. This Code of Conduct (the ―Code‖)replaces the CRISIL Ratings Code of Conduct dated December 2006. CRISIL Ratings has updated this Code and amended it in order to align its policies and procedures with the amendments in Code of Conduct Fundamentals for Credit Rating Agencies published in December 2004, as amended in May 2008n(the ―IOSCO Code‖), by the International Organization of Securities Commissions (IOSCO). As requested by the IOSCO Code, exceptions to IOSCO Code are set forth in Section 7 of this Code. However, by making this Code available to the public, CRISIL Ratings does not assume any responsibility or liability to any third party arising out of or relating to this Code. This Code shall not form any contract with any third party and no third party shall have any right (contractual or otherwise) to enforce any of this Code‘s provisions, either directly or indirectly. CRISIL Ratings in its sole discretion may revise this Code to
CREDIT RATING OF BANKS
reflect changes in market, legal and regulatory circumstances and changes to CRISIL Ratings‘ controls, policies and procedures. CRISIL Ratings expects all employees to comply with this Code and the related policies, procedures, and guidelines. Any exceptions to this Code or the related policies, procedures, and guidelines should be approved in writing by the Senior Director in charge of CRISIL Ratings or her/his designee who shall be responsible for the interpretation of this Code and the related policies, procedures, and guidelines. Each year all CRISIL Ratings employees shall be required to read the Code and affirm their compliance with the Code and all related CRISIL Ratings policies and guidelines by signing an Affirmation Statement. Failure to comply with this Code and the related policies, procedures and guidelines could be sufficient reason for disciplinary action, including discharge and possible legal sanctions. Capitalized terms used herein are defined in Section 5 of this Code.
11.1 Quality of the Rating Process
I. Each rating shall be based on a thorough analysis of all information known to CRISIL Ratings and believed by CRISIL Ratings to be relevant to its analysis according to CRISIL Ratings‘ established criteria and methodology. CRISIL Ratings shall use rating criteria and methodologies that take into consideration CRISIL Ratings‘ goal of maintaining rigorous analysis and systematic processes, and, where possible result in ratings that can be subjected to some form of objective validation based on historical experience.
to the rating committee. CRISIL Ratings shall ensure that it has and devotes sufficient resources to perform credible credit assessments for all issuers and issues it rates. including when the credit assessment involves a type of financial
. have the appropriate knowledge and experience in developing a rating opinion for the type of credit being applied. in each case. Analysts involved in the preparation or review of any Rating Action shall use criteria and methodologies established by CRISIL Ratings. CRISIL Ratings and its Analysts shall take steps to avoid publishing any credit analysis or reports that contain misrepresentations or are otherwise misleading as to the general creditworthiness of an issuer or issue. CRISIL Ratings shall use Analysts who. as determined by CRISIL Ratings. consistent with CRISIL Ratings‘ established criteria and methodologies.
V. CRISIL Ratings shall maintain internal records to support its credit opinions for a reasonable period of time or in accordance with applicable law. and believed to be relevant. Credit Ratings shall be assigned by a vote of a rating committee comprising competent and experienced professionals and not by any individual analyst. The composition of the Rating Committee shall be appropriate to meaningfully assess the risks that underlie the Rating.
VII. Analysts shall consistently apply the then existing rating criteria and methodologies in the analytical process for any Rating Action.
In assessing the credit worthiness of an issuer or issue.CREDIT RATING OF BANKS
III. When deciding whether to rate or continue rating an issuer or issue. and whether its Analysts likely will have access to sufficient information needed in order to make such an assessment.
VI. Ratings shall reflect all information known. individually or collectively. CRISIL Ratings shall assess whether it is able to devote sufficient Analysts with sufficient skill sets to make a credible assessment.
3 Code of Conduct contained in SEBI Regulations
CRISIL Ratings abides by the Code of Conduct contained in the Third Schedule of the Securities and Exchange Board of Indian(Credit Rating Agencies) Regulations. In accordance with CRISIL Ratings‘ established policies.2 Monitoring and Updating
product presenting limited historical data.
11. Although CRISIL Ratings undertakes no duty to audit or otherwise verify information it uses in assigning a rating is of sufficient quality to support a credible rating. and guidelines for surveillance. CRISIL Ratings shall endeavor to structure its rating terms of Analysts in a manner that promotes continuity and the high quality and integrity of the rating process. as amended (―SEBI Code‖). CRISIL Ratings supports and actively works towards fulfilment of the objectives of the SEBI Code. which is to promote investor protection by safeguarding the integrity
. once a rating is accepted by the issuer CRISIL Ratings shall monitor on an ongoing basis and update the rating. procedures.
IOSCO Code of Conduct Fundamentals for Credit Rating Agencies
CRISIL Ratings fully supports the essential purpose of the IOSCO Code. CRISIL Ratings shall allocate adequate personnel and financial resources to monitoring and updating its ratings.CREDIT RATING OF BANKS
and disclosure by issuers. integrity. CRISIL Ratings has implemented a firewall policy to ensure that the rating and surveillance processes are not compromised by conflicts of interest. Notwithstanding these differences.CREDIT RATING OF BANKS
of the rating process. information technology. CRISIL Ratings believes that the Code is consistent with the IOSCO Code and appropriately implements IOSCO‘s Statement of Principles Regarding the Activities of Credit Rating Agencies published in September 2003. abuse of confidential information or any other improper influence.
11.3 Operational and Legal Separation
CRISIL Ratings operates in multiple locations as a division of CRISIL Ltd. There is one area in which the provisions of the Code differ from the provision of the IOSCO Code: CRISIL Ratings operation and legal separation. CRISIL Ratings believes that the independence. Provides shared services to all of its segments. units or divisions. including legal. human resources and finance functions. credibility and objectivity of the rating and surveillance processes is not affected and therefore the IOSCO Code‘s essential purpose will be achieved.
The objective of Basel II is to bring about international convergence of capital measurement and standards in the banking system. issued by the Basel Committee on Banking Supervision in June 2004. as they are called. Basel II is a recommendatory framework for banking supervision. CRISIL commenced rating bank loans post the Reserve Bank of India's guidelines on capital adequacy for banks. It has been applicable to all other commercial banks (except local area banks and regional rural banks) from March 31. require banks to provide capital on the credit exposure as per credit ratings assigned by approved external credit assessment institutions (ECAIs). It has. The break-up of ratings according to size of bank facilities is given below:
. representing over 50 per cent of all the companies which have their bank loans rated in India. 2009. CRISIL has rated bank facilities of all types: term loans. the facility includes principal and interest.645 entities as on March 31. project loans. assigned ratings to the bank facilities of more than 5.50 million to Rs. in 2007. corporate loans. if any. working capital demand loans. so far. CRISIL bank loan ratings cover companies of all sizes with bank facilities ranging from Rs. The revised framework for capital adequacy has been effective from March 31. CRISIL rates the maximum number of companies for their bank loans in India.500 billion. general purpose loans. such as CRISIL.CREDIT RATING OF BANKS
BANK LOAN RATINGS (BASEL-II)
A bank loan rating indicates the degree of risk regarding timely payment of the bank facility being rated. such as letters of credit and bank guarantees. The Basel II guidelines. 2011. and nonfund-based facilities. 2008. cash credit facilities. on the principal. for all Indian banks with an operational presence outside India (12 public sector banks and five private sector banks) and for all foreign banks operating in India.
The largest and most experienced team of rating analysts. and decision makers.
.CREDIT RATING OF BANKS
CRISIL's bank loan coverage is pan-Indian. regulators. Regular presentations and interaction with industry associations. A qualified team of industry analysts and economists that contributes to a large knowledge base. State-of-the-art automated workflow with dedicated support-services teams. are as follows:
A direct presence in 65 major industrial centres across India to handhold first-time rating clients. underlining its superior capabilities as a rating agency of choice. as can be seen below:
Some of the highlights of CRISIL's bank loan rating operations.
The banks could save capital. depending on the credit profile of their corporate exposures. it is desirable that all the loan accounts are rated by an external credit rating agency.CREDIT RATING OF BANKS
FAQ’S BY BANKS:
1. if the majority of its assets are in the 'AAA' and 'AA' categories) it will save capital because of low credit risk. it is in the interest of banks to have ratings on their corporate exposures from an external credit rating agency. does the borrower need to take a separate rating for each facility with each banker? Yes. In case of consortium lending. 2. the borrower will need separate ratings for each facility with each banker. such as CRISIL. What could be the extent of saving on capital that a bank would get if its assets were rated? If a bank has high-quality assets (for example. Is credit rating of loans mandatory under RBI guidelines? Credit rating is not mandatory. 3. However. Should a bank get all its loans rated by a bank loan rating agency? Yes. 4. the difference is apparent in the illustration below:
Short-term facilities (with original contracted maturities of one year or less) are rated on CRISIL's short-term rating scale.1000 Million Rating Basel I Basel II Risk Capital Risk Capital Capital 1 weight required weight required saved (Rs. irrespective of the currency of exposure. bank facilities extended to non-resident corporate entities are rated by global rating agencies. mn) (Rs. mn) AAA 100% 90 20% 18 72 AA 100% 90 30% 27 63 A 100% 90 50% 45 45 BBB 100% 90 100% 90 0 BB and 100% 90 150% 135 (45) Below Capital required is computed as loan amount x risk weight x 9 per cent. such as Standard & Poor's. On the other hand. 5. are rated by domestic rating agencies. Who rates foreign currency facilities extended by domestic banks? Bank facilities extended to resident corporate entities.
. such as CRISIL. Does CRISIL rate working capital facilities extended by the bank on its short-term scale or on its long-term scale? Long-term loans or facilities (with original contracted maturities of one year or more) and cash credit facilities are rated on CRISIL's long-term rating scale.CREDIT RATING OF BANKS
Illustration of capital-saving potential by banks on a loan of Rs. 6.
8. banks can only use ratings from external credit rating agencies to calculate the capital required against credit risk. the risk weight to be used for the unrated claim will be one category higher than the risk weight for the rated claim. Does CRISIL map the internal ratings of the bank with CRISIL's ratings? As per the guidelines. the specific rated debt in all respects. A qualified team of industry analysts and economists that contributes to a large knowledge base (expert team of 100 plus industry analysts).CREDIT RATING OF BANKS
7. CRISIL is fully equipped to handle large volumes of ratings. CRISIL has: A direct presence in 65 major industrial centres across India to handhold first-time rating clients. The bank's claim has a maturity that is not later than the maturity of the rated claim. In case of short-term exposures. Hence. Presently. If a company's non-convertible debentures are rated.
. Is CRISIL capable of handling rating requests from many corporate entities at the same time? Yes. 9. or is senior to. The largest and most experienced team of rating analysts (175 analysts and 75 data specialists). mapping of ratings will not be really helpful to banks under the standardized approach. can the same rating be used by banks for all exposures to the company? The rating applicable to the existing debt instrument of a borrower may be applied to the bank's unrated claims for capital relief only in case of the following cases: The bank's claim ranks pari passu with.
10.Who pays for the ratings? Rating fees are usually paid by the borrower. CRISIL can enter into specific arrangements for obtaining its fee from banks. CRISIL requires the borrower to sign a rating mandate. The rating will remain in the public domain until the rated loans or facilities are repaid in full or extinguished. since the request for a rating is made by the borrower. along with all information required for the analysis. with dedicated supportservices teams .CREDIT RATING OF BANKS
A state-of-the-art automated workflow. All accepted ratings are made public by CRISIL through rating rationales. 11. and make the payment towards the applicable rating fee. Increased frequency of rating committee meetings to handle increased volume of rating assignments.Will the bank loan rating be released to the public? Yes. the rating will be made public once the borrower accepts the rating in writing. In all cases.
. CRISIL takes three to four weeks to complete the exercise of assigning a bank loan rating. which are uploaded onto CRISIL's website. 12. and monthly bulletins.How long does it take to complete a loan rating assignment? From the day it receives a written request for a bank loan rating. the mandate for carrying out the rating exercise has to be signed by the borrower before the rating exercise can be initiated. However.
Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. In 2003 the U. state and local governments. and affects the interest rate applied to the particular security being issued.
.e.S. Credit ratings for corporations and sovereign debt are assigned by credit rating agencies. the issuers of securities are companies.1 CREDIT RATING AGENCIES:
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. non-profit organizations. or national governments issuing debt-like securities (i. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i. UK: credit reference agencies). A company that issues credit scores for individual credit-worthiness is generally called a credit bureau (US) or consumer credit reporting agency (UK). its ability to pay back a loan). The value of such security ratings has been widely questioned after the 2007/2009 financial crisis. In some cases. bonds) that can be traded on a secondary market.
Bureaus and credit rating agencies:
Credit scores for individuals are assigned by credit bureaus (US. the servicers of the underlying debt are also given ratings.CREDIT RATING OF BANKS
CREDIT RATING AGENCIES (CRA)
12... special purpose entities. In most cases.e.
List of credit rating agencies:
Agencies that assign credit ratings for corporations include: M. The credit bureaus for individuals in India are Credit Information Bureau (India) Limited (CIBIL) and Credit Registration Office (CRO). and TransUnion. The largest commercial credit rating agencies (which tend to operate worldwide) are Dun & Bradstreet.S. bank ratings on banks in China.The firm offers sovereign ratings on major economies. In India. Equifax. bonds ratings on 1000+ bonds in China. CIS and Eastern-European importing companies in the course of their foreign economic activity and trade financing.)
. Taiwan and Hong Kong and product risk ratings on 1000+ investment products. commercial credit rating agencies include CRISIL. In Hong Kong. Information and Rating Agency Credo Line is the only Rating Agency in Ukraine which assigns short-term and long-term credit ratings to Ukrainian. obligor ratings on 4000 listed companies in Greater China. the main credit bureaus are Experian. Best (U. Standard and Poor's and Fitch Ratings. the locally-based credit rating agency is CTRISKS.) Baycorp Advantage (Australia) Credo line (UA) Dagong Global (People's Republic of China) Dominion Bond Rating Service (Canada) Egan-Jones Rating Company (U. Moody's.S. CARE. ICRA and Brickwork Ratings. Taiwan. in particular. Hong Kong and Macau.CREDIT RATING OF BANKS
In the United States. A relatively new credit bureau in the US is Innovis.
In a way. Low cost information.CREDIT RATING OF BANKS
Fitch Ratings (Dual-headquartered U. Credit Ratings determine the eligibility of debt and other financial instruments for the portfolios of certain institutional investors due to national regulations that restricts investment in speculative-grade bonds.
ii.) Muros Ratings(Russia alternative rating agency) Standard & Poor's (U. Basis for proper risk. about the creditworthiness of companies or countries. Healthy discipline on corporate borrowers. Superior information./UK) Japan Credit Rating Agency. (Japan) Moody's Investors Service (U. on one side. return & Trade off.
Functions of credit rating agencies:
i. CRAs reduce the informative asymmetry between lenders and investors. CRAs assess creditworthiness of the issuer of bonds and certain other financial instruments. and issuers on the other side.
iv.S.S. regulators have outsourced to CRAs much of the responsibility for assessing debt risk. CRAs role has expanded with financial globalization and has received an additional boost from Basel II.
iii. which incorporates the ratings of CRAs into the rules for setting weights for credit risk.
. Formulation of public policy guidelines on Institutional investment.
5. For this. Onicra Credit Rating Agency of India Limited: Is an established player in the individual credit assessment and scoring services space in the Indian market. Credit Analysis and research (CARE) 4. risk management. which comprises of operation upgradation. The Credit Rating Agencies in India offer varied services like mutual consulting services. CRAs carryout research and development work of the industries. (DCR India) and 5. They examine the risk involved in a new project. 2. They provide training to the employees and executives of the companies for better management. CRAs have started offering services to the mutual fund sector through the application of fund utilization services.CREDIT RATING OF BANKS
Supplementary functions of CRAs: In addition to the main task of Rating.
Credit Rating Agencies in India: 1.
. 3. Ltd. chalk out plans to fight with the problem successfully and thus ameliorate the percentage of risk largely. they carry on thorough research into the respective industry. 4. Investment Information and Credit Rating Agency of India (ICRA) 3. 6. CRAs carryout some supplementary functions to assist the corporate: 1. Credit Rating Information Services Limited (CRISIL) 2. Duff Phelps Credit Rating Pvt.
4 crores. Credit Rating Committee CRISIL's rating process and ratingcommittee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor. as public Ltd Company. and have no interest in the entity being rated. Its rating guides the investors about the risk of timely payment of interest and principal on a particular debt instrument. The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis thatunderlies the rating. CRISIL Ratings is the agency of choice for issuers and investors. 1988. CRISIL is India's leading rating agency. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks. and is the fourth largest in the world. with a contextual understanding of business. A team of analysts carries out the credit analysis. With over a 60% share of the Indian Ratings market. CRISIL Rating symbols: Debenture Rating Symbols High Investment Grades: AAA (triple A): Highest Safety AA (double A): High Safety
. jointly started by ICICI and UTI with an equity capital of Rs. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services.CREDIT RATING OF BANKS
Credit Rating Information Services Limited (CRISIL) The first credit agency floated on January 1. The principal objective of CRISIL is to rate the debt obligations of Indian companies.
legal position. market position and operating efficiency of the company. performance
. the rating agency considers industry‘s characteristics. To ascertain business risk.CREDIT RATING OF BANKS
Investment Grades: A: Adequate Safety BBB (triple B): Moderate Safety Speculative Grades: BB: Inadequate Safety B: High Risk C: Substantial Risk D: Default Fixed Deposit Rating Symbols –FAAA (triple A): Highest Safety –FAA (double A): High Safety –FA: Adequate Safety –FB: Inadequate Safety –FC: High Risk –FD: Default Ratings for short-term instruments –P-1: Timely payment very strong –P-2: Strong –P-3: Adequate Safety –P-4: Minimal –P-5: Expected to be in default on maturity or is in default Rating Methodology of CRISIL: Key factors considered for rating are: 1. Business Analysis – Industry risk.
the rating agency takes into account various aspects of its Financial Management (e. operating position (capacity.g. while 4 and 5 factors are used to evaluate finance companies apart from the 1. adequacy of cash flows. capital structure. national economic outlook. organizational structure.). profitability. size and capital intensity. To assess financial risk. assets quality. interest coverage). Financial Analysis– Accounting quality.
. etc. amortization of intangible assets. technological aspects. philosophy. pending litigation. managerial talents and succession plans. accounting policies and practices with particular reference to practices of providing depreciation. etc. personnel policies. strategies. 2 and 3 factors. consistency and credibility. profitability and financial position. ability to overcome adverse situations. financial flexibility and cash flow adequacy. corporate strategy and philosophy. commitment. 2. interest and tax sensitivity. Fundamental Analysis– Liquidity management. 2. 4. Management evaluation includes consideration of the background and history of the issuer. distribution system. business cycles. income recognition. Factors listed above at serial numbers 1. leverage. market share. earnings position. and 3 are evaluated for manufacturing companies. and financial flexibility. quality of management and management capabilities under stress.CREDIT RATING OF BANKS
and outlook. marketing network. foreign currency transactions. etc. Management Evaluation – Goals. off-balance sheet claims and liabilities. tax status. 3. liquidity position. possibility of default risk under a variety of scenarios. areas of special significance to the company. inventory valuation. Regulatory and Competitive Environment –This includes regulatory environment. 5. projections with particular emphasis on the components of cash flow and claims thereon. operating environment.
First Leasing Company of India. GIC. Sundaram Finance Ltd. PNB.CREDIT RATING OF BANKS
Investment Information and Credit Rating Agency of India (ICRA): ICRA was set up by IFCI. ONICRA In India there has been an absence of rating agency for individuals. information and advisory services company promoted. ONICRA has filled this gap
Credit Analysis and Research Limited (CARE): Incorporated in April 1993. Unit Trust of India(UTI) and other leading banks and financial services companies. In all CARE has 14 shareholders. Credit Capital Venture Fund Ltd.10 crores. and the balance byUTI. is a credit rating. Canara Bank. Kotak Mahindra Finance Ltd. ICRA Limited is an Associate of Moody's Investors Service and an independent and professional company. IFB Leasing and Finance Ltd. It is a public limited company with an authorized sharecapital of Rs. UCO Bank and banks like SBI. The Federal Bank Ltd. Kalimati Investment Company Ltd. by Industrial Development Bank of India (IDBI). ITC Classic Finance Ltd. 5 crores is paid up. The Vysya Bank. and 20the Century Finance Corporation Ltd. UTI. Central Bank of India. Varuna Investments Ltd. ICRA‘s major shareholders IFCI (26%). The Investment Corporation of India Ltd. Bank of Baroda. Canara Bank. Rs.
This has led to suggestions that. Benefit of Rating: It is beneficial to lenders because it saves time. Large corporate rating agencies have been criticized for having too familiar a relationship with company management. In the process customer is required to fill the form given by ONICRA. implying that the market often leads a downgrade and questioning the informational value of credit ratings. broker-dealers and insurance firms to use credit spreads when calculating the risk in their portfolio. possibly opening themselves to undue influence or the vulnerability of being misled. despite fact that credit rating agencies had been aware of the company's problems for months. Some empirical studies have documented that yield spreads of corporate bonds start to expand as credit quality deteriorates but before a rating downgrade. for the use of lending institutions. financial regulators should instead require banks. Rating of Individuals: ONICRA credit rating systems is based on the sophisticated software developed in collaboration with James Martin & Co. It brings to India the internationally established concept of providing credit rating of individuals.2 CRITICISM AGAINST CRAs:
Credit rating agencies have been subject to the following criticisms: Credit rating agencies do not downgrade companies promptly enough. Enron's rating remained at investment grade four days before the company went bankrupt. and helps in concentrating on core area of interest.CREDIT RATING OF BANKS
and it is the India‘s first individual credit rating system.
12. ONICRA takes up credit rating for individual‘s customer at the request of a lending firm/institution. For example.
. that has provided to ONICRA the most comprehensive methodology that addresses the needs of a mega credit rating system. rather than rely on CRA ratings in financial regulation.
Moody's published an "unsolicited" rating of Hannover Re. or long-term research and development. more generally.CREDIT RATING OF BANKS
These agencies meet frequently in person with the management of many companies. and lowering ratings for those firms. At the same time. In some cases.. the larger CRAs charge debt issuers. When Hannover management refused. as not only interest rates for that company would go up. which were downgraded over successive years. CRAs have also been accused of engaging in heavy-handed "blackmail" tactics in order to solicit business from new clients. etc. rather than investors. but other contracts with financial institutions may be affected adversely. and even though the insurer's other rating agencies gave it strong marks. with a subsequent letter to the insurance firm indicating that "it looked forward to the day Hannover would be willing to pay". The lowering of a credit score by a CRA can create a vicious cycle. Moody continued to give Hannover Re a rating. shareholders were shocked by the downgrade and Hannover lost $175 million USD in market capitalization. large loans to companies contain a clause that makes the loan due in full if the companies' credit rating is lowered beyond a certain point (usually a "speculative" or "junk bond" rating). causing an increase in expenses and ensuring decrease in credit worthiness. While often accused of being too close to company management of their existing clients. Furthermore. for their ratings. and advise on actions the company should take to maintain a certain rating. The purpose of these "ratings triggers" is to ensure that the bank is able to lay claim to a weak company's assets before the
. email. because information about ratings changes from the larger CRAs can spread so quickly by word of mouth. the environment. the largest agencies (Moody's and Standard & Poor's) are often seen as promoting a narrow-minded focus on credit ratings. possibly at the expense of employees. In 2004. all while making payment requests that the insurer rebuffed. For instance. Moody's cut Hannover's debt to junk status. This has led to accusations that these CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings.
can be devastating: under a worst-case scenario. Of the large agencies. which in a large number of cases has subsequently been downgraded or defaulted. however. Credit Rating Agencies have made errors of judgment in rating structured products. the company's loans become due in full. in particular Fitch. Ratings agencies. only Moody's is a separate. As a result. If default models are biased to include arbitrary default data and "Ratings Factors are biased low compared to the true level of expected defaults. Conflicts of interest often arise because the rating agencies are paid by the companies issuing the securities — an arrangement that has come under fire as a disincentive for the
. because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). particularly in assigning AAA ratings to structured debt. the perceived default probability of rated tranches from a high yield CDO will be incorrectly biased downward. Moody's and Standard and Poor‘s have been implicitly allowed by governments to fill a quasiregulatory role. and its high profit margins (which at times have been greater than 50 percent of gross margin) can be construed as consistent with the type of returns one might expect in an industry which has high barriers to entry. providing a false sense of confidence to rating agencies and investors. publicly held corporation that discloses its financial results without dilution by non-ratings businesses. The effect of such ratings triggers. The actual method by which Moody's rates CDOs has also come under scrutiny. but because they are for-profit entities their incentives may be misaligned. the Moody‘s [method] will not generate an appropriate level of average defaults in its default distribution process. once the company's debt is downgraded by a CRA.CREDIT RATING OF BANKS
company declares bankruptcy and a receiver is appointed to divide up the claims against the company. Agencies are sometimes accused of being oligopolists.
is designed to address the types of conflicts of interest that CRAs face. even before the economic crisis of 2007-8. the International Organization of Securities Commissions (IOSCO) published a Code of Conduct for CRAs that. All of the major CRAs have agreed to sign on to this Code of Conduct and it has been praised by regulators ranging from the European Commission to the U. preferring instead to use credit spreads to benchmarks like Treasuries or an index. Securities and Exchange Commission. In December 2004. including voting details and notes of dissent. It has been made mandatory for CRAs to publish information about the historical default rates of their rating categories and whether the default rates
. CRAs should maintain records of the rating committee.S. for a period of five years. The major measures taken in this regard are summarized below: 1. 2.3 SEBI guidelines for credit rating agencies
SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3. 2010 has provided for certain transparency and disclosure norms for the Credit Rating Agencies (―CRAs‖). It has also been suggested that the credit agencies are conflicted in assigning sovereign credit ratings since they have a political incentive to show they do not need stricter regulation by being overly critical in their assessment of governments they regulate. they have a continued obligation. Many market participants no longer rely on the credit agencies ratings systems. among other things.CREDIT RATING OF BANKS
agencies to be vigilant on behalf of investors. since the Federal Reserve requires that structured financial entities be rated by at least two of the three credit agencies.
(iii) the general nature of its compensation arrangements with the issuers and (iii) the details of any relationship it has with the issuer whose securities are being rated and any of its associate of such issuer and the CRAs or its subsidiaries. CRAs should ensure that its analysts do not participate in any kind of marketing and business development. SEBI commented that the recent events in global financial system have underlined the pivotal role that credit ratings play. 5. 3. Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the CRAs. In case of unsolicited credit ratings (the credit ratings not arising out of the agreement between the CRAs and the issuer).
. methodology and procedures in detail followed by them regarding solicited and unsolicited credit ratings. 4. While publishing the ratings of structured finance products and their movements.CREDIT RATING OF BANKS
of these categories have changed over time. CRAs while rating structured finance products. This prohibition would apply to the subsidiaries of CRAs too. including negotiations of fees with the issuer whose securities are being rated. credit rating symbol should be accompanied by the word ―UNSOLICITED‖ in the same font size. CRAs apart from following all the applicable requirements in case of non-structured ratings should also disclose the track record of the originator and details of nature of underlying assets while assigning the credit rating. the employees involved in the credit rating process and their dependants cannot own shares of the issuer. CRAs should also disclose (i) the policies. 6. (ii) the history of credit rating of all outstanding securities. Also. are barred from providing consultancy or advisory services regarding the design of the structured finance instrument.
The CRAs were asked to take necessary steps to implement this circular immediately and ensure its full compliance at the latest by June 30. Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the credit rating agencies (CRAs). ―Recent events in the global financial system have underlined the pivotal role that credit ratings play.‖ A CRA would be formulating policies and internal codes for dealing with the conflict of interests: A CRA shall ensure: that its analysts do not participate in any kind of marketing and business development including negotiations of fees with the issuer whose securities are being rated. However for 2009-10 only. The CRAs were asked to communicate to SEBI the status of the implementation of the provisions of this circular by July 15.4 New rules to be implemented latest by June 30
The Securities and Exchange Board of India (SEBI) has issued transparency and disclosure norms for credit rating agencies (CRAs) order to impart higher credibility to the processes and procedures associated with credit rating. SEBI stated that a CRA can make additional disclosures other than those stipulated with the prior approval of its board. stipulated by the regulator. ―They shall also place the compliance status of this circular before their boards. The CRA shall disclose its shareholding pattern as prescribed by stock exchanges for a listed company under clause 35 of the Listing Agreement.CREDIT RATING OF BANKS
12. The yearly disclosures stipulated would be made by the CRAs within 30 days from the end of the financial year. the half yearly and yearly disclosures stipulated would be made by the CRAs by June 30.‖ SEBI stated in a circular to all credit rating agencies on Monday. would be made by the CRAs within days from the end of the half-year (March/September). The half-yearly disclosures. that the
―If a quantitative model is a substantial component of the credit rating process. auditors and bankers which have a bearing on the credit rating.‖ it stated
WHAT RATINGS DO NOT MEASURE
It is important to emphasise the limitations of credit ratings. They do not. They are not recommendations to invest. They do not take into account many aspects which influence an investment decision. summary of discussions with the issuer. by any member of the rating committee. decisions of the rating committee(s). Although these are often related to the credit risk. Ratings also do not take into account the risk of prepayment by issuer. if any. evaluate the reasonableness of the issue price.
. its management. the rationale for any material difference between the credit rating implied by the model and the credit rating actually assigned. These records should be maintained till five years after maturity of instruments and be made available to auditors and regulatory bodies when sought by them. for example.CREDIT RATING OF BANKS
employees' involved in the credit rating process and their dependants do not have ownership of the shares of the issuer. The CRAs were asked to keep all records in support of each credit rating and review/surveillance thereof: The important factors underlying the credit rating and sensitivity of such credit rating to changes in these factors. including voting details and notes of dissent. possibilities for capital gains or take into account the liquidity in the secondary market. prompt review of the credit ratings of the securities as and when any of its employees joins the respective issuer. the rating essentially is an opinion on the relative quality of the credit risk.
According to you.e. Which Credit Rating Agency (CRA) provides you the Credit Rating to your bank? =>HDFC Bank has its deposit programmes rated by two rating agencies Credit Analysis & Research Limited. 2. professional integrity. Product Leadership and People. (CARE) and Fitch Ratings India Private Limited. Which rating is assigned to your bank? =>The rating assigned to our bank i. HDFC Bank is ‗AAA‘ 3. 4.
. Customer Focus. HDFC Bank's business philosophy is based on four core values: Operational Excellence. What are the basic criteria required to maintain for a good credit rating? =>Maintaining the highest level of ethical standards.CREDIT RATING OF BANKS
RESEARCH AND FIELD STUDY
QUESTIONNAIRE:1. what is the importance of Credit Rating to your bank? => The rating is of very much importance for our bank as it helps us to motivate savers to keep more money with their confidence. corporate governance and regulatory compliance.
publication and review. appeal. Can you please describe the rating procedure? =>The process of Rating starts with the Rating Request and continues with Collection of information. How long the procedure is carried out by CRAs to provide rating to your bank? => From the day it receives a written request for a bank loan rating. Over the last 13 years. CRISIL takes three to four weeks to complete the exercise of assigning a bank loan rating.yearly basis. 6. 8.CREDIT RATING OF BANKS
5. While rating. 9. On what basis (time period).What measures your bank is taking in order to achieve the target? =>Our bank strives hard in order to achieve the target by the use of technology and the ability to deliver world-class service with rapid response time. What is the target rating that you desire for your bank? =>Target is to maintain consistency of ‗AAA‘ Rating. assignment of rating. assets quality. are considered while rating. 7. interest and tax sensitivity etc. advice to the client. the rating is assigned to your bank? a) Yearly b) Half-yearly c) Quarterly d) Others (please specify) =>On Half. along with all information required for the analysis. profitability and financial position. the bank has successfully
. what are the things that are considered by CRA? =>Liquidity management. management meetings. 10.
What recent developments have been made in your bank? =>HDFC Bank plans to introduce a mobile-bank-cum. 11.
. Each mobile bank is expected to cost the Bank Rs. savings.ATM in Coimbatore to benefit its microfinance clients. the bank will offer a suite of banking products such as credit. insurance and remittances.000) and Rs.1 lakh (USD 2.500) monthly. at the customers doorstep. Through this medium.CREDIT RATING OF BANKS
gained market share in its target customer franchises while maintaining healthy profitability and asset quality.40 lakhs (USD 100.
Thus. a bank‘s decisions about its internal rating system can have a material effect on its ability to manage credit risk.CREDIT RATING OF BANKS
Hence. For example. statistical models of default probability. we can conclude that. The rapid pace of change in risk management practice and the trend toward risk-sensitive profitability analysis has recently increased the stresses on credit cultures in general and internal rating systems in particular. a system that has separate grades for default probability and loss in event of default can
. Second. First. assigning or reviewing ratings with the aid of agency ratings. a bank with appropriate data describing its historical loss experience by internal. But development of internal rating system architectures and operating designs that are appropriate to the uses made of the ratings is an especially complex task. It is also evident that certain practices can improve the quality of any internal rating system and are especially helpful to rating systems that support analytical functions such as profitability analysis and portfolio management. By their nature. internal ratings grounded in clear loss concepts are helpful in grade assignment and review because rating criteria can be clearly linked to different aspects of risk. grade and by different risk factors is better able to assess the predictive power of its ratings criteria and to estimate values of parameters needed for its analysis. Finally. care must be used in mapping internal grades to external grades or other indicators to ensure that the desired results are achieved. careful design of controls and internal review procedures is a crucial consideration in aligning form with function. However. or other objective criteria helps limit the magnitude of rating biases. The central role of human judgment in the rating process and the variety of possible uses for ratings mean that internal incentives can influence rating decisions. banks‘ credit cultures typically adapt slowly to changes in conditions. from the whole project.
.CREDIT RATING OF BANKS
incorporate different effects for a wide variety of types of collateral. All three of these practices are likely to be helpful in refining the subjective judgments that are central to almost all rating systems.
CBL's ratings are expected to be upgraded to that of HBL and then withdrawn as part of the amalgamation. Individual and Support ratings have been placed on Rating Watch Positive. Fitch expects HBL to maintain its post-merger financials and competitiveness amongst the best banks in India. The merger benefits HBL through the addition of CBP's branch network. CBP's Longterm. Support at '3'. which would add momentum to its increasing market share (currently seventh-largest bank in India in terms of assets).
. the merger would increase the latter's branch network by 50%. National Short-term at 'F1+(ind)'. HBL should however be able to gradually leverage on the increased branch network with its superior franchise and stronger product delivery capabilities to improve its existing liability profile and business volumes of CBP and thereby its profitability. HBL should also be able to absorb CBP's unprovided NPLs (INR2. The merger is subject to shareholder and regulatory approvals.CREDIT RATING OF BANKS
Fitch Ratings on HDFC Bank affirmed with a Stable Outlook Fitch Ratings on 26th February 2008 has affirmed HDFC Bank Ltd (HBL) following its announcement to pursue a merger with Centurion Bank of Punjab Ltd (CBP) through a share swap. While CBP's assets are about a fifth that of HBL's. At the same time. CBP's profitability is weaker than that of HBL and would slightly dilute the merged entity's figures. INR24 billion lower tier 2 subordinated debt at 'AAA(ind)'. fixed deposit programme at 'AAA(ind)' and INR50bn certificates of deposit programme at 'F1+(ind)'. Individual at 'C'. Similarly. equivalent to 17% of HBL's annualised net income in 9MFY08). The following ratings of HBL have been affirmed with a Stable Outlook: National Long-term at 'AAA(ind)'.5bn.
Regular equity infusions have helped maintain the Tier 1 ratio above 8% (end-December 2007: 10. Strong operations in both retail and corporate banking businesses together with multiple delivery channels across India have supported HBL's loan growth and its superior earnings profile. unsecured personal and SME loans. HBL is the second-largest private bank in India with a nationwide presence. HBL would however continue to have a relatively higher proportion of unsecured consumer loans. The gross NPL ratio has remained better than that of most Indian banks and reflects the bank's strong risk management system. CBP incorporates three private banks that merged in 2006 and 2007 the erstwhile Centurion Bank which turned around following the induction of new shareholders and management in 2003. commercial vehicles.
.CREDIT RATING OF BANKS
Post-merger. HBL's risk management has so far enabled it to maintain credit losses in line with expectations at the point of origination. The asset quality in these segments came under some pressure for the banking system in 2007 when increasing interest rates undermined the borrower's repayment capacity.5%) through periods of rapid growth. residential mortgage. the erstwhile Bank of Punjab that added a strong retail liability franchise in Punjab and the erstwhile Lord Krishna Bank that helped add the branch network in Kerala. CBP's loan portfolio consists mainly of two-wheeler. while its two wheeler loan portfolio would slightly increase.
com www.managementparadise.hdfc.com www.yahoo.com www.care.com www.wikipedia.invesmentword.com www.com www.com www.com
.com www.knowledge.crisil.sharegyan.CREDIT RATING OF BANKS
www.com www.investopedia.com www.google.
2. Ratings. Levich.By Richard M.Ong
.CREDIT RATING OF BANKS
1.By Michael K. The rating agencies and their credit ratings
. Credit ratings . Patricia T.By Herwig M. Giovanni Majnoni Carmen M. Langohr. rating agencies and the global financial system
CREDIT RATING OF BANKS