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CREDIT RATING

SUBMITTED BY, SNATA MOHAPATRA MBA 2ND YEAR SESSION-(2011-13) REGD. NO.1106247201

CONTENT
INTRODUCTION DEFINATION ORIGIN CREDIT RATING AGENCY IN INDIA RATING PROCESS

IMPORTANCE OF CREDIT RATING


ADVANTAGES OF CREDIT RATING RATING SYMBOLS FOR LONG TERM

INSTRUMENTS PRACTICAL PROBLEMS CONCLUSION

CREDIT RATINGINTRODUCTION
A credit rating assesses the credit

worthiness of an individual, corporation, or even a country.


Credit ratings are calculated from

financial history and current assets and liabilities.


A credit rating tells a lender or

investor the probability of the subject being able to pay back a loan.
A poor credit rating indicates a high

risk of defaulting on a loan, and thus leads to high interest rates.

DEFINATION
Moody's: Ratings are designed exclusively for

the purpose of grading bonds according to their investments qualities. Australian Ratings: A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely repayment of interest and principal on a particular type of debt can be noted. CRISIL: Credit rating is an unbiased (neutral) and independent opinion as to issuers capacity to meet its financial obligations. It doesnt constitute a recommendation to buy/sell or hold a particular

ORIGIN
The credit rating concept originated in the USA in

1860 by Henry Vannum Poor.


In 1906, Moodys Investor Agencies started rating

Railroad giving more thrust to the concept.


In India the CR was introduced by CRISIL in

1987, followed by ICRA & CARE in1991 & 1993.

CREDIT RATING AGENCY IN INDIA


Credit Rating Information Services

Limited (CRISIL)
Investment Information and Credit

Rating Agency of India (ICRA)


Credit Analysis and research

(CARE)
Duff Phelps Credit Rating Pvt. Ltd.

(DCR India)
Onida Individual Credit Rating

Agency of India(ONICRA)

RATING PROCESS
Primary Stage Rating Request Assigning Rating team Fact Finding and Analysis Stage Collection of information Meetings and plant visits Preparation of Reports Rating Stage Preview Meeting Rating committee Meeting and Rating Final Stage Communication and acceptance Surveillance (continuous observation)

IMPORTANCE OF CREDIT RATING


Credit rating is an indicator that reflects how well or badly

you manage your financial matters. By having a look at your credit rating, one can get much information regarding your business organization and particularly the payments made by your organization. It's very important to know your credit score and understand it completely, as it helps you to get loans, mortgage and even a job. In the competitive market, rating gives an edge to the company when they place their bond/debenture or other debt instruments in the market for subscription. The investor relies on the independent rating agency since he does not have the time, expertise, analytical skills and the past data on the companys performance available with

ADVANTAGES OF CREDIT RATING


Advantages to Investor Saves the time and energy in studying companys financial matter. Strong indicator of companys financial capacity. Ratings represent the informed opinion of a neutral third party. Identification of the risk involved in the debt instrument. Guidance in making an investment decision by being presented with a wide variety of safe choices. Constant monitoring and surveillance by the agency on the debt instrument leading to effective risk management strategies. Periodical evaluation of companys financial capacity by rating agency helps the investor to exit the investment, in case rating is downgraded subsequently.

Advantages to Rated Companies

Sources of additional certification Increase the investor population Encourages financial Discipline Foreign collaborations made easy Benefits the industry as a whole Low cost of borrowing Rating as a marketing tool Lowers the cost of borrowings Fosters a better image

RATING SYMBOLS FOR LONGTERM INSTRUMENTS


S.L NO.CRISIL ICRA CARE SIGNIFICANC E

1 2 3 4 5 6 7 8

AAA

LAAA LAA LA LBBB LBB LB LC LD

CARE AAA CARE AA CARE A CARE BBB CARE BB CARE B CARE C CARE D

Highest safe High safe Adequate safe Mod safe Inadq safe Risk prone Sub risk Default

AA A BBB BB B C D

PRACTICAL PROBLEMS
The widespread of branch network of the rating

agency may limit skills in rating. Inexperienced, unskilled or overloaded staff may not do justice to their job & the resulting ratings may not be perfect. The rating is not permanent but subject to changes & moreover the agencies can not give any guarantee for the investors. The time factor greatly affects rating & gives misleading conclusions. A company which adverse conditions temporarily will be given a low rating judged on the basis of temporary phenomenon.

CONCLUSION
Credit rating agencies use their judgment and

experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects. More importantly, a credit crisis has transformed into a much wider and deeper crisis of confidence in the global markets. Credit rating agencies have an opportunity to help restore confidence in markets by restoring confidence in our industry.