CREDIT RATING

AGENCIES
INTRODUCTION

According to SEBI Regulations, 1999 of the SEBI Act, 1992, Securities and Exchange
Board of India (SEBI) reserves the right to authorize and regulate credit rating agencies
across the country. CRA uses the debtor’s income and credit lines to analyze if there is any
credit risk associated or the debtor’s ability to repay the debt. In a broader sense, these
agencies evaluate and assess an individual’s or a company’s creditworthiness.
DEFINITION – CREDIT RATING

A credit rating is a quantified assessment of the creditworthiness 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 money—an individual, a corporation, a state or
provincial authority, or a sovereign government.
 WHAT ARE THESE
RATINGS?

The ratings given to such securities are mostly represented

as AAA, AAB, Ba3, CCC etc. It is very similar to a marking
system wherein the highest rating AAA is given to a
borrower who has the highest probability of paying back. In
that way, AAA is considered to be one of the safest debt
securities to buy.
 CHARACTERISTICS OF CREDIT RATING

Assessment of issuer’s capacity to repay

Based on data

Expressed in symbols

Done by expert

Guidance about investment – not recommendation

 Economic analysis

RATING Business analysis

METHODOLOGY
Financial analysis
 In India the process of obtaining a
rating is quite lengthy and time Management analysis
consuming.

 The analytical frame work for Fundamental Analysis

rating consists of the following

broad areas.
 TYPES OF CREDIT RATING

Bond or debenture Rating

Equity Rating
Preference share Rating
Commercial paper Rating
Fixed deposits Rating
Borrowers Rating
Individuals Rating
Structured Obligation
Sovereign Rating
 DIFFERENCE BETWEEN ;

CREDIT RATING CREDIT SCORE

A credit rating is given to a company, a credit score is given to an individual after

organisation or a government body by taking a look at his credit history and

calculating its ability to repay the debt and repayment behavior.

to predict the likelihood of default.

 MEANING – CREDIT RATING AGENCY

A credit agency is a for-profit company that collects information about individuals' and businesses'
debts and assigns a numerical value called a credit score that indicates the borrower's
creditworthiness.

A credit rating agency does assessment of the financial strength of companies and other government
entities. They help investors identify the companies ability to pay debts and their level of risk.
 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.

 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 5 years experience in rating securities.

 Any company having a continuous net worth of minimum 100 crores for the previous 5
years.
 ELIGIBILITY CRITERIA

• Is set up and registered as company.

• Has specified rating activity as one of its main objectives in its MOA.

• Has min Net worth of Rs.5 Cr.

• Has adequate Infrastructure.

• Promoters have professional competence, financial soundness and a general reputations, 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 Fee of Rs. 5,00,000 subject to certain conditions.
 FUNCTIONS OF CREDIT RATING AGENCIES

• Business analysis
• Evaluation of industrial risks
• Market position of the company within the industry
• Operating efficiency
• Legal position in terms of prospectus
• Financial analysis based on accounting quality
• Statement of profits
• Earnings protection
 FUNCTIONS OF CREDIT RATING AGENCIES

• Adequacy of cash flow

• Financial flexibility
• Management evaluation
• Capacity to overcome adverse situations (catastrophe management)
• Goals philosophy and strategy
• Labour turnover
• Regulatory and competitive environment
• Asset quality
• Financial position – interest/ tax sensitivity
 ROLE IN CAPITAL MARKETS

• Credit rating agencies assess the relative credit risk of specific debt securities or
structured finance instruments and borrowing entities (issuers of debt), and in some cases
the creditworthiness of governments and their securities. By serving as information
intermediaries, CRAs theoretically reduce information costs, increase the pool of
potential borrowers, and promote liquid markets. These functions may increase the
supply of available risk capital in the market and promote economic growth.
 WHO ARE THESE CREDIT RATING AGENCIES ?

Globally :
• Standard & Poor’s
• Moody’s
• Fitch Group

Indian :
• ACUITE RATINGS & RESEARCH LIMITED
• BRICKWORK RATINGS INDIA PRIVATE LIMITED
• CARE RATINGS LIMITED
• CRISIL RATINGS LIMITED
• ICRA LIMITED
• INDIA RATINGS AND RESEARCH PVT. LTD. (FORMERLY FITCH RATINGS INDIA PVT. LTD.)
• INFOMERICS VALUATION AND RATING PVT. LTD.
 OVERVIEW OF INDIAN AGENCIES

CRISIL CARE ICRA

• CARE
• CRISIL (“Credit Rating
Information Services of India
Limited”) is the largest rating
agency in India with over 65% of
Indian market share. Established
in 1987, it has been offering its
services in manufacturing, service,
financial and SME sectors.
Standard & Poor’s now holds the
majority stake in CRISIL.
(“Credit Analysis and
• ICRA, backed by Moody’s
Research Limited”), established in
1993 is a credit rating agency
is a leading agency that
promoted and backed by IDBI, UTI, focuses on rating corporate
Canara Bank, and other financial
governance, Mutual funds,
institutions and NBFCs. Ratings
provided by CARE include financial
hospitals, infrastructure
organizations, state governments and development and
municipal entities, public utilities and
construction and real estate
special purpose vehicles.
companies.
 FUNCTIONS OF CRISIL

CRISIL rates organizations like public limited companies, banks and financial
organizations, and not individuals.

The agency establishes the creditworthiness of companies based on the market share,
reputa-tion, business strengths and more such factors.

CRISIL also collaborates with various policy-makers in India and other developing
nations to improve the infrastructure and meet the demands of the region.

It also provides advisory services and training services.

 FUNCTIONS OF CARE

 By providing the entire spectrum of credit rating, CARE helps the corporates to raise capital for

their various requirements.

 It also assists the investors in formulating an informed investment decision based on the credit risk

and their own risk-return expectations.

 CARE has emerged as the leading agency in covering many segments including manufacturing,

infrastructure, non-financial services, financial sector including banks, among others.

 CARE Ratings have made a reputation for itself in the Indian capital market which revolves hugely

around investor confidence.

 FUNCTIONS OF ICRA

• Provide informative consultation to institutional and individual investors/creditors,

regarding risks

• Promoting transparency in the financial markets, by assisting the regulators

• Aid the intermediaries in improving efficiency in the funds raising process by providing
them with appropriate tools

• Enhance the ability of borrowers/issuers to access the money market

 FUNCTIONS OF ICRA

• ICRA assigns corporate performance ratings, governance rating, gradings and provides
rank-ing to mutual funds, hospitals, construction and real estate companies.

• For companies that are lesser known and not very prominent, ICRA devises strategies for
them to access the capital markets.

• It provides advisory and credit rating services.

• After conducting extensive research in the fiscal, monetary, and industrial sector, ICRA
offers the best solutions and strategies.
 OVERVIEW OF INDIAN AGENCIES
SMERA
SMERA, a joint venture by several learning
banks of the country primarily focuses on
rating the Indian MSME segment.
ONICRA
ONICRA is a private rating established my Mr.
Sonu Mirchandani which analyzes data and
provides rating solutions for Individuals and
Small and Medium Enterprises (SMEs). It has
credible experience in operating across sectors
like Finance, Accounting, Back-end Management,
Application Processing, Analytics, and Customer
Relations.
 FUNCTIONS OF SAMERA

• It is also known as an external credit assessment institution (ECAI).

• SMERA rates bank loans under Base II guidelines.

• One of its major jobs include grading of various instruments like IPO, bonds, NCDs,
fixed de-posits, security receipts, commercial papers, etc.

• These grading's are used by all banks for capital adequacy requirements calculation as
author-ised by the RBI.
 CONCLUSION

Therefore, Credit Rating Agencies are required to work with fairness and transparency
during their dealings, as their analysis provides the lender or investor with an insight into
the workings of the business. This helps further research and risk evaluation. Investment
decisions are made easier through the ratings of these agencies.
THANK YOU