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Credit Rating

Chandra Prakash Upadhyay(3013


Kalandi pradhan (3079)
Definition
Moodys:- rating is designed exclusively for
the purpose of grading bonds according to
their investment qualities.
According to ICRA, “Credit ratings are
opinions on the relative capability of timely
servicing of corporate debt and obligations.
These are not recommendations to buy or
sell…….neither the accuracy nor the
completeness of the information is
guaranteed.
-:Function of credit rating:-
1. Superior Information
2. Low cost information
3. Basis for proper risk- return trade off
4. Healthy discipline on corporate borrowers
5. Formulation of public policy guidelines on
institutional investment
Origin
vOriginated in USA
vIn 1860, Henry Vannum started publishing
for railroad companies.
vIn 1990, moody’s investment agency started
vIn 1993, US gov. make rule
Credit Rating in India

Credit Rating Information Service of India


was set up in 1987.
Investment Information and Credit Rating
Agency of India was promoted in 1991.
Credit Analysis and Research Limited was
floated in in 1993.
Benefits of Credit Rating
Ø Low Cost Information
Ø Quick Investment Decision
Ø Independent Investment Decision
Ø Investment Protection
Benefits to Rated Companies
I. Sources of additional certification
II. Increase the investor population
III. Forewarns risk
IV. Encourage financial discipline
V. Merchant bankers job made easy
VI. Foreign collaboration made easy
VII. Low cost of borrowing
VIII.Rating as a marketing tool
CREDIT RATING
INFORMATIONSERVICE LTD.(CRISIL)
CRISIL, the first credit agency was floated on jan-1-
1998.It was started jointly by ICICI & UTI with an
equity capital of Rs-4 cr. Each of them holds 18%
of the capital. The promoters are
ADB(15%),LIC(5%), SBI(5%),HDFC(6.2%), nine
public sector banks(19.25%)& 10 foreign
banks(7.55%).
OBJECTIVE’S:
To assist both individual & institutional investors in
making investment decisions in fixed income
securities.
To enable corporate to raise large amounts at fair
cost from a wide spectrum of investors.
To enable intermediaries in placing their debt
instruments with investors by providing them with
CREDIT RATING AGENCIES IN
INDIA
Credit rating information service ltd.(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(ONICRA)
RATING METHODOLOGY
The first analysis relates to the past performance
of the company. The past performance of the
company & assessment of its prospects. The
industry is studied by analysingdemand & supply
growth, nature & basis of competition, govt.
policy for the company & the effect of change in
govt. policy on the future of the company. The
position of the company within the industry is
studied to understand how the company would
fare in the future.
In evaluating the ratings, crisil employs both
qualitative & quantitative criteria.
CREDIT RATING SYMBOLS:
Investment info. And credit rating
agency of India(IICRA)
The iicra was set up by industrial finance corporation
of india on 16th jan 1991.it is a public ltd company
with an authorised share capital of Rs 101 cr. The
initial paid up capital of rs 3.50 cr. Is subscribed by
IFC, UTI,LIC,GIC,SBI & 17 other bank. IICRA started
its operation from 15thmar. 1991.during 94-95 IICRA
rated 212 debt instruments covering a debt volume
of Rs. 5343 crores. Cumulative number of
instruments covering a debt volume of Rs 17,638
crores.
IICRA RATING SCALE:
CREDIT ANALYSIS & RESEARCH
Ltd.(CARE)
 The CARE was promoted in1993 jointly with
investment companies, banks & finance
companies. Services offered by CARE are –
(1).credit rating (ii) information service(iii)Equity
research (iv)rating & paralled market of LPG &
kerosene. Since its inception till the end of march
1995, CARE has rated 249 debt instruments
covering a total debt volume of Rs 9729 crores.
CARE Rating Services:
CARE provides rating services to the following debt
instruments.
Debentures
Certificate of deposits
Commercial paper
Fixed deposits.
SEBI GUIDELINES(1999)
No credit rating agencies shall rate a security
issued by its promoters.
Dual rating is compulsory for public & rights issue
of debt instrument of Rs 100 crore or more.
The networth of rating agencies has been fixed at
Rs 5cr.
Rating agencies can choose theire methodology of
operation but self regulatory mechanism will give a
better maturity status for agencies.
Period of validity of registration shall be 3 years.
Sebihas decided to incorporate a clause in the
listing agreement of stock exchanges requiring
companies to corporate with agencies by providing
correct information. Refusal to do so many lead to
breach of contract between rating agency & client.
It is also suggested that a penal clause be
PRACTICAL PROBLEMS
The widespread of branch net work 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.
Since the rating agencies receive a sizable fee from
the companies for awarding ratings, a tendency to
inflate the ratings may develop.
Investment which have the same rating may not
Future of credit rating in india
At present, commercial paper, k bonds and
debentures with maturities exceeding 18 months &
fixed deposits of large non-banking companies
registered with RBI are required to be compulsorily
rated. these are moves to make rating compulsorily
for other types of borrowings such as fixed deposit
programme of manufacturing companies. In
addition,therating agencies are expected to be
called upon to enlarge volumes of securitization of
debt & structuring of customised instruments to
meet the needs of issuers or different class of
investors. there are number of areas where rating
agencies will have to cover new grounds in the
coming years. The rating of municipal bonds,state
govt. borrowings ,commercial banks & public sector