PRESENTED BY:

Debarati Guha (FMR 2005)

Anita Kumari (FMR 2002)
SEC: R; 14TH Batch,
Ishan Institute of Management &Technology
Objective of Study
Since 1840 Credit Rating system operates in
different countries. In this years of service it
become more & more popular. Now a days credit
rating is must for a company to establish
themselves in the competitive market. As the
importance of credit rating increases day by day it
is become necessary for any finance student for
knowing the basic things regarding credit rating.
In this project we are trying to do so.
WHAT IS CREDIT RATING?
In simple words we can say , “a credit rating is an
opinion on the creditworthiness of a debt issue or
issuer.”
In general, credit rating, is a evaluation of the credit
worthiness of an individual or of a business concern or
of an instrument of a business.
It also establish a link between risk and return. An
investor or any other person use rating to assess the
risk level & compare the offered rate of return with the
retune that he expected.
Types of Credit Rating:
Bond Rating
Equity Rating
Short-term Rating
Long-term Rating
Sovereign Rating
Benefits of Credit Rating:
Investors
1) It gives an idea to the investors regarding risk
associate with a specific investment.
2)It helps investors to take their own decisions without
taking help form Brokers.
3) Its helps to define the credit risk policy.
4)It also increase the knowledge of investors regarding
current market situations also.
Benefits of Credit Rating (Contd.)
Issuers
1) It helps the issuer to fixing up best pricing policy.
2)It also provide financial flexibility.
3)Create better image in market.
4)It also encourage the companies to disclose all
financial matters, so it helps to increase the
transparency of management activities.
Benefits of Credit Rating (Contd.)
Intermediaries
1) For financial intermediaries like, banks, merchant
bankers, investment advisor fund etc. rating is very
useful for decision making purpose.
2)For merchant bankers rating is useful for planning,
pricing, underwriting & placement of the issues.
3) For brokers and dealers rating is a tool for monitoring
risk exposure.
Benefits of Credit Rating (Contd.)
Regulators
1) Regulator authorities in different countries like, US,
Australia, Japan have specified rules that, only those
instruments with a particular grade can enter into
the market.
2)This increases transparency of the financial system
leading to a healthy development of the market.
Rating symbols:
Rating symbols are used in terms of alphabets.eg: for
preference share symbols is “P”, for fixed deposit symbol is
“F”.
In rating instruments are categorized in :
 Highly safety (AAA): It means accurate timely payment
of interest and principal at any circumstances.
 High safety (AA): Its also means timely payment of
interest & principal in all time. It has a minor variation
from AAA.
 Adequate safety (A): It means the company pay interest
& principal in time but some time it may be fail to pay
interest at time.
 Moderate safety (BBB): It means less secure than (A).
 High risk (B): That means payment of interest &
principal is not certain, so investment in such rated
instruments is risky.
 Substantial risk ( C): That means extremely high
possibility to become default.
 Default (D): Payment of interest & maturity amount are
extremely speculative & return from them can be
realized only at the time of liquidation.
It is also noted that different credit rating agency
use different rating symbols. The following table
shows different rating symbols used by various
rating agencies:
Different symbols used by various rating agencies:
Rating related products and activities
CRAs in India rate a large number of financial products:
1. Bonds/ debentures- [the main product]
2. Commercial paper
4. Bank loans
5. Fixed deposits and bank certificate of deposits
6. Mutual fund debt schemes
7. Initial Public Offers (IPOs)
8. Preference Shares
9. Insurance
WHAT IS A CREDIT RATING AGENCY?
A credit rating agency (CRA) is a commercial concern
engaged in the business of credit rating of any debt
obligation or of any project or program requiring
finance in the form of debt or otherwise.
If a company wants to rates its debt instruments, it
has to pay some fees to the credit rating agency. It is
not necessary for any company to rate there debt
instruments. But it helps company in many ways,
such as, generally investors are interested to invest
there money in those instruments which rank high in
credit worthiness.
Name of some National & International credit
rating agency:
Standard & Poor’s (1860)
Moody’s Rating (1900)
Fitch Rating (1924)
CRISIL (1987)
ICRA (1991)
CARE (1993)
EMERGENCE OF CREDIT RATING:

The first credit rating agency was established in New York

in 1841 & the name of that credit rating was “Mercantile
Credit Agency”.
First rating guide was published in 1859 by Robert Dun.
John Moody founded Moody’s in 1900.
In India credit rating was started in 1987. The first credit
rating agency in India is CRISIL (1987).
EMERGENCE OF CREDIT RATING (Contd.)
In earlier stage rating was done only for some specific
debt instruments, like Bond, Debenture, etc.

As the time passes, other instruments like, certificate

of deposit, Commercial paper, preference share etc
are also rated.

As the SEBI become autonomous body in 1992 credit

rating comes under the control of SEBI.
 THE PROCESS
Rating process refers to the practice & procedures
which a rating agency follows to gather information
for evaluation of credit risk of specific instruments. It
is a multilayer process.
THE PROCESS (Contd.)
Tools & Techniques used by credit rating
agencies:
There are some common aspects that follows by all
rating agencies, like:

1. Operational Characteristics

2. Financial Characteristics
Operational Characteristics:
 Assessment of management capability
 Market share
 Distribution channel
 Market knowledge & market network
 Industry's characteristics
 Risks pertaining to the issuer
 Risks pertaining to the competitors
 Risk in industry in which it operates
 Technological aspects
 Business cycle
 Financial Characteristics:
 Capital structure
 Liquidity position
 Profitability
 Leverage
 Accounting policies and practices
 Income recognition
 Inventory valuation
 Amortization of intangible assets
 Foreign currency transactions,
Loan rating
The loan market is much larger than the bond market
& it is the main source of income for any bank or
financial institutions.
Loan rating generally comes under the rating of
individual & corporate.
In India the first Loan rating was started by CRISIL in
2007.
Loan Rating identify the risk associated with timely
payment of interest and repayment of principal on a
specified loan.
EQUITY RATING:
At the start of a business owners put some funding into
the business to finance. That will create liability to the
business to repay the interest on those fund which is
invested in the business. These known as equity.
These equity can be generated from various sources,
like internal sources & external sources.
In equity rating company rates the following types of
equity like, preference shares, bonds, debenture etc.
Bond Rating
 In investment, the bond credit rating assesses the credit
worthiness of a corporation's debt issues.
 In the process of bond rating the rating agencies first
segregate the bond into two category:
1. Govt. bond or high yield bond
2. Investment- grade bond
 The risk is higher in investment grade bond in compare
with Govt. bond
 The difference between risk rates for first-class
government bonds and investment-grade bonds is called
investment-grade spread. It is an indicator for the
market's belief in the stability of the economy. The higher
these investment-grade spreads (or risk premiums) are,
the weaker the economy is considered.
Debenture rating
Debentures are unsecured loans that are offered by a
company. Corporations that issue debt that are not
backed by specific assets are known as debentures.
These instruments are backed by good faith and
credit of the company.

Debentures are more secure than stock but less

secure than bond, because at the time of liquidation
debenture holders payment made after the payment
of bondholders.
Preference share rating
 Preference shares are those which provides a specific
dividend that is paid before any dividends are paid to
common stock holders, and which takes privilege
over common stock at the time of liquidation.
Similar to bonds, preferred stocks are rated by the
major credit rating companies. The rating for
preference is generally lower since preferred
dividends do not carry the same guarantees as
interest payments from bonds and they are junior to
all creditors.
INSURANE RATING
The first credit rating company which starts rating of
insurance company is Standard & Poor in USA.
Today, credit rating agencies offer different types of
insurance products and services including life
insurance, property and casualty insurance, health
insurance, reinsurance, mortgage and bond insurance.
The concept of insurance rating is new in India.
Moody’s has assigned by Insurance Financial Strength
(IFS) to rate 238 life insurance companies all over the
world.