Credit Rating
Credit rating
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 borrowers overall credit history.
Credit ratings are based on financial history and current assets
and liabilities.
Typically, a credit rating tells a lender or investor the
probability of the subject being able to pay back a loan.
Commercial credit risk is the largest and most elementary risk
faced by many banks and it is a major risk for many other
kinds of financial institutions and corporations as well.
There are four Credit Rating agencies in
India
CRISIL(Credit Rating Information Services of India
Ltd)
ICRA(Information and Credit Rating Services ltd)
CARE (Credit Analysis and Research Ltd)
Fitch India
Registration
Credit Rating agencies are regulated by SEBI.
Registration with SEBI is mandatory for carrying out
the rating Business.
A registration fee of Rs. 25000 should be paid to
SEBI
An assessment of the credit worthiness of a
borrower in general terms or with respect to a
particular debt or financial obligation. A credit
rating can be assigned to any entity that seeks to
borrow moneyan individual, corporation, state
or provincial authority, or sovereign government.
Credit assessment and evaluation for companies
and governments is generally done by a credit
rating agencies.. These rating agencies are paid
by the entity that is seeking a credit rating for
itself or for one of its debt issues.
Promoter
A Credit rating agency can be promoted by:
Public Financial Institution
Scheduled Bank
Foreign Bank operating in India with RBI approval
Foreign Credit Rating agency having at least five
years experience in rating securities
Any company having a continuous net worth of
minimum 100 cores for the previous five years.
Eligibility Criteria
Is set up and registered as a company
Has specified rating activity as one of its main objects
in its Memorandum of Association.
Has a minimum Net worth of Rs 5 Crore.
Has adequate Infrastructure
Promoters have professional competence, financial
soundness and a general reputation of fairness and
integrity in Business transactions , to the satisfaction
of SEBI.
Has employed persons with adequate professional
and other relevant experience, as per SEBI directions.
Grant of Certificate of Registration
SEBI will grant to eligible applicants a Certificate of
Registration on the payment of a fee of Rs 5,00,000
subject to certain conditions.
Agreement with the client
The CRA should enter into a written agreement with
each client containing ,
Rights and liabilities of each party w.r.t rating of
securities.
Fee charged
A periodic review of the rating during the tenure
Clients agreement to cooperate and provide true,
adequate and timely information.
Disclosure by CRA to client regarding the rating
assigned.
Clients agreement to disclose the rating assigned in
the offer document for the last 3 years
Monitoring of rating
The CRA should continuously monitor the
rating of securities rated by it during their life
time .
It should disseminate information regarding
newly assigned rating and its changes in the
earlier ratings through press releases, websites
and inform the same to stock exchanges.
CRISIL
The first rating agency Credit Rating Information
Services of India Ltd. , CRISIL, was promoted jointly
in 1987 jointly by the ICICI and the UTI.
It pioneered the concept of credit rating in the country
and since then has introduced new concepts in credit
rating services and has diversified into related areas of
information and advisory activities.
It became public in 1993.
In 1996, it formed a strategic alliance with S&P rating
group.
Services offered by CRISIL
Credit Rating Services
Advisory Services
Credibility first rating and evaluation Services
Training Services
Credit Rating Services(CRS)
Rating of debt obligations:
Debt obligation includes rupee denominated credit instruments
like debentures, preference shares, deposits, CDs commercial
papers and a structured obligations of manufacturing ,finance
companies, banks, financial institutions etc.
It ensures stable and healthy growth of capital market by
offering credit rating which is widely acceptable. It provides
increased disclosures, better accounting standards and
improved financial information to the users.
It reduces cost of issue by direct mobilization of resources.
It protects the interest of investors by constantly monitoring the
results of rated companies.
Rating of structured obligations:
It reflects CRISIL opinion regarding the capacity
and willingness of the company to make timely
payments of financial obligations on rated
instruments.
Rating of real estates developers:
CRISIL has developed framework for rating of real
estate projects. Such rating helps investors to
identify their investment options
The rating is expected to help developers mobilize
funds for their projects.
The methodology assesses a project in terms of
project risk factors and developers risk factors.
Bank loan rating:
The creditworthiness of banks borrower is assessed
offering comments on the likelihood of repayment of loans.
The methodology considers the borrowers underlying
assets liquidity and risk management initiative and for
NBFC quality of assets , loans and investment.
CRISIL Advisory Services (CAS)
The CAS offers consulting services that aim at identifying and
mitigating risk. The main focus of these services is transaction
and policy level assignments in the area of energy, transport,
banking and finance disinvestment, privatization and
valuation.
Energy group services: it offers advisory services to
companies engaged in energy sector like power, coal, oil
and gas. The policy level assignments Include aspects like
sector reforms and structuring, regulatory framework
privatization, corporate plan fuel related services.
Banking and finance group:
CRISIL offers a wide range of services covering restructuring
and business reengineering, credit management, investment
management and portfolio insurance, equity valuation,
resource mobilization studies and financial feasibility studies
Capital Market Group:
This group provides customized research and advisory
assistance to meet specific transactional and strategic
requirements of clients
ICRA Ltd
Information and Credit Rating Services (ICRA) has been promoted
by IFCI Ltd as the main promoter and started operations in 1991.
It provides Rating, Information and Advisory services ranging from
strategic consulting to risk management and regulatory practice.
The main objectives of ICRA are to assist investors both individual
and institutional in making well informed decisions
To assist issuers in raising funds from a wider investor base.
To enable banks, investment bankers, Brokers in placing debt with
investors.
To provide regulators with market driven systems to encourage the
healthy growth of capital markets.
It provides rating services, information services and advisory
services.
Rating services
ICRA rates debt instruments issued by manufacturing
companies, commercial banks, NBFCs, financial institutions,
PSUs and municipalities.
The instruments rated by it include bonds/ debentures, fixed
deposits commercial papers and certificate of deposit. It also
rates structured obligations in accordance with the terms of
the structure based on risk assessment of the instrument . It
rates sector specific debt obligations issued by power, telecom
and infrastructure companies.
Information services
The information services division of ICRA focuses on
providing authentic data and value added products
used by intermediaries, financial institutions, banks,
asset managers, institutions and investors.
Other services include corporate reports, equity
assessment, mandate based studies (customized
research) and sector/industry specific publication.
Advisory services
The advisory services division of ICRA offers wide ranging
management advisory services. Under advisory services ICRA
provides its understanding on the business processes and
relevant organizational issues to different players of financial
markets such as investors, issuers, regulators, intermediaries
and media.
The advisory services include 1.strategic consulting/ strategic
practice 2. risk management (credit risk, market risk and
operations risk) 3. regulatory practice 4 transaction practice 5.
information( content services).
It focuses on sectors like banking and financial services,
infrastructure sector, manufacturing and
service sector,
government and regulatory authorities.
CARE Ltd.
Credit Analysis and Research Ltd or CARE is promoted by
IDBI jointly with Financial Institutions, Public/Private Sector
Banks and Private Finance Companies.
It commenced its credit rating operations in October, 1993 and
offers a wide range of products and Services in the field of
Credit Information and Equity Research.
It also provides advisory services in the areas of securitisation
of transactions and structuring Financial Instruments.
It offers services like 1. Credit rating of debt instruments
2. Advisory services like securitization transactions,
structuring financial instruments, financing infrastructure
projects and municipal finances 3. Information services like
providing information to companies, industry and businesses.
4. Equity research
Fitch Ratings India Ltd.
It is the latest entrant in the credit rating Business in
the country as a joint venture between the
international credit Rating agency Duff and Phelps
and JM Financial and Alliance Group.
In addition to debt instruments, it also rates
companies and countries on request.
Rating Process
The process begins with issue of rating request letter
by the issuer of the instrument and signing of the
rating agreement.
CRA assigns an analytical team consisting of two or
more analysts one of whom would be the lead
analyst and serve as the primary contact.
Meeting with Management- The analytical team
obtains and analyses information relating to its
financial statements, cash flow projections and other
relevant information.
Discussion with management on management
philosophy, competitive position, financial policies
and future plans.
Rating Process cont
Discussions on financial projections based on
objectives and growth plan , risks and opportunities.
Rating committee- after meeting with the
management the analysts present their report to a
rating committee which then decides on the rating.
After the committee has assigned the rating, the
rating decision is communicated to the issuer, with
reasons or rationale supporting the rating.
Dissemination to the Public: Once the issuer accepts
the rating, the CRAs disseminate it, along with the
rationale, to the print media.
Rating Review for a possible change
The rated company is on the surveillance system of
the CRA, and from time to time, the earlier rating is
reviewed. The CRA constantly monitors all rating
with respect to new political ,economic, financial
development and industry trends.
Analysts review new information or data available on
the company. On preliminary analysis of the new
information if the analyst feel that there is a
possibility for change in the rating then they meet
with the management and proceed with
comprehensive rating analysis.
Credit Rating Watch
During the review monitoring or surveillance
exercise, rating analysts might become aware of
imminent events like mergers and so on, which effect
the rating and warrants a rating change.
In such a possibility, the issuers rating is put on
credit watch indicating the direction of a possible
change and supporting reasons for review.
Once a decision to either change or present the rating
had been made, the issue will be removed from credit
watch.
Rating Methodology
The rating methodology involves an analysis
of industry risk, issuers business and financial
risk. A rating is assigned after assessing all
factors that could affect the credit worthiness
of the entity. The industry analysis is done first
followed by the company analysis.
Credit rating for manufacturing
companies
The main elements of rating methodology are as
below
Business risk Analysis : It begins with an assessment
of the companys environment focusing on the
strength of the industry prospects, business cycle as
well as competitive factors affecting the industry. The
vulnerability of the industry to political factors is also
assessed. If a company is involved in more than one
business, each segment is analyzed separately. The
main factors include Industry Risk, Market position,
operating efficiency and legal position.
Financial risk analysis: Financial risk is analyzed
mainly through financial ratios. Emphasis is placed on the
ability of the company to maintain /improve its future
financial performance.
The profitability of a company is an important
determinant of its ability to withstand business adversity.
The main measures of profitability include operating and
net margins and returns on capital. The absolute levels of
these ratios, trends and comparison of these ratios with
other competitors is analyzed. Emphasis is also laid on
cash flow patterns.
The area analyzed are accounting quality, earnings
prospects, adequacy of cash flows financial flexibility and
interest and tax sensitivity.
Management Risk: A proper assessment od
debt protection levels requires an evaluation of
management philosophies and its strategies.
The analyst compares the companys business
strategies and financial plans to provide
insights into a managements ability to forecast
and implement plans. The areas analyzed
include track record of the management,
planning and control systems, evaluation of
capacity to overcome adverse situations, goals,
philosophy and strategies.
Speculative grades
BB(Double B)- Inadequate safety- These
instruments carry inadequate safety of timely
payment of interest and principal.
B (High risk)- Instruments rated B have
greater risk of default.
C (Substantial risk)- Risk of default.
Repayment can only be expected in favorable
conditions.
D (Default) Such instruments are extremely
speculative and default risk is highest.
Rating symbols for Fixed deposits.
FAAA( F triple A)- Highest safety
FAA( F- double A)- High safety
FA- Adequate safety
FB- Inadequate safety
FC- High Risk
FD- Default
Rating symbols for Short term
instruments
P-1 (highest safety)
P-2 (High Safety)
P-3( Adequate safety)
P-4(Inadequate safety)
P_5 (default)
Rating for credit assessment
It indicates the capability of entity to repay the
interest and principal as per the terms of the
contract. The rating symbols are as below 1-Very strong capability
2,3,4- Strong capability
5,6,7- Adequate capability
8,9,10- Inadequate capability
11,12,13 Poor capability
14- Default
