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Credit Rating

*It is an symbolic indicator of the current opinion of the rating


agency regarding relative ability and willingness of the issuer of a
financial (debt) instrument to meet the (debt) service obligations
as and when they arise.

*It provides a relative ranking of the credit quality of


debt/financial instrument or their grading according to investment
quality.

*It provides a simple system of gradation by which the relative


capacities of companies(borrowers)to make timely repayment of
interest and principle on a particular type of debt/financial
instrument can be noted.
Features of credit rating

*It is with respect to particular instrument issued by company.


*It is not recommended for buying, selling or holding security.
*It uses various of information.
*It does not create any legal relationship between the rating
agency and the investor.
*It should be reviewed and upgraded .
Is it obligatory?

*Not obligatory for equity shares


*It is obligatory for following debt instruments-
-convertible/nonconvertible debentures/bonds irrespective
of period of maturity or redemption
-fixed deposits issued by NBFC
-commercial paper

New SEBI guidelines-


-if size of issue is more than 100 crores, the issue i.e
required to be rated by at least two rating agencies
Who can do?
*credit rating and information service on India
Ltd(CRISIL))
*investment information and credit rating agency(ICRA)
*Credit analysis and Research Ltd (CARE)
*FITCH Rating India Private Ltd
Advantages
*provides the investor with the reliable and superior
information from an independent and professional
source about the company.
*it is easy for co to market the instrument at less cost.
*motivation to the co to improve their performance.
*the investible funds of the investors are directed
towards more productive investment portfolios.
Rating Process
Steps followed
*new issue instruments-rating agreement, meeting with
management ,rating committee, communication
*review of rating-possible change, new data, credit rating
watch
*flow chart of rating-new issue rating/review of existing
rating
Methodology…..

Crisil considers following aspects


(a)Business Analysis consists of-
*industry risk
*market position
*operating efficiency
*legal position
(b).Financial analysis
*accounting quality
*earnings prospects
*adequacy of cash flows
*financial flexibility
*interest & tax sensitivity
(c ) Management evaluation
*track record of management
*evaluation of capacity to overcome adverse situation
*goals, philosophy & strategies

(d) Fundamental analysis


*capital adequacy
*resources
*asset quality
*liquidity management
*profitability & financial position
*interest & tax sensitivity
Limitations of Credit Rating
*subjective valuation
*guidelines do not require the co to publish these
ratings
*promoted by government organization having own
consequences
*primarily based upon past performance
*multiplicity of rating agencies
*up- gradation of rating within in a short period of
time