Credit Rating (CR) as financial service, has come a long way, The main objective is to provide superior and

erior and low cost

since John Moody first introduced the concept 1909. In India it
started in 1988.
Credit rating is has been used to rate debt instrument viz. Fixed
Deposit, Commercial Paper
information to investors for taking a decision regarding risk-return
trade off, but it also helps to market participants in the following
ways;
• Improves a healthy discipline on borrowers,

Credit rating is a technique of credit risk valuation for the • Lends greater credence to financial and other
corporate debt instruments reflecting borrower’s expected representations,
capability and inclination to pay interest and principal in a timely
manner. • Facilitates formulation of public guidelines on institutional
investment,
• In evaluation both qualitative and quantitative criteria are
applied. • Helps merchant bankers, brokers, regulatory authorities,
• It involves past performance as an assessment of its future etc., in discharging their functions related to debt issues,
prospects and entails judgment of the company’s competitive
• Encourages greater information disclosure, better
position, operating efficiency, management evaluation,
accounting standards, and improved financial information
accounting quality, legal position, earnings, cash flow
(helps in investors protection),
adequacy, financial flexibility, the quality of the product etc.
• May reduce interest costs for highly rated companies,
CREDIT RATINGS: -
An assessment of the credit worthiness of individuals and • Acts as a marketing tool
corporations. It is based upon the history of borrowing and
repayment, as well as the availability of assets and extent of FUNCTIONS OF CREDIT RATING AGENCIES
liabilities
• Superior information
• Rating is a symbolic indicator of the current opinion on the • Low cost information
relative capability of timely servicing of the debts and • Basis for proper risk, return & Trade off
obligations. • Healthy discipline on corporate borrowers
• Lower rating does not mean lesser funds available rather it • Formulation of public policy guidelines on Institutional
suggests higher risk level. investment
• Credit rating essentially establishes a link between risk and
return. BENEFITS: -
• A rating is valid for the lifetime of the debt instrument
subject to continuous surveillance and depending upon the 1. Benefits to Investors
performance of the issuer, it may be retained, placed under • Safeguard against bankruptcy
watch, upgraded or downgraded. • Recognition of risk
• Credibility of issuer
NEED FOR CREDIT RATING • Easy understandability of investment proposal
• Saving of resource
– It is necessary in view of the growing number of cases of • Independent of investment decision
defaults in payment of interest and repayment of • Choice of investments
principal sum borrowed by way of fixed deposits, issue • Benefits of rating surveillance
of debentures or preference shares or commercial papers. 1. Benefits of Rating to Company
• Lower cost of borrowing
– Maintenance of investors’ confidence, since defaults • Wider audience for borrowing
shatter the confidence of investors in corporate • Rating as marketing tool
instruments. • Reduction of cost in public issues
• Motivation for growth
– Protect the interest of investors who can not into merits
• Unknown issuer recognition
of the debt instruments of a company.
• Benefits to brokers and financial intermediaries
– Motivate savers to invest in industry and trade. 1. For Brokers and financial intermediaries
• Saves time, money, energy, and manpower in convincing
OBJECTIVES OF CREDIT RATING their clients about investments.
• Less effort in studying company’s credit position to convince
their clients.
• Easy to select profitable investment security
• Helps to improve business
Advantages: -
• Rating system works in the interest of the issuing company as
well as the investors.
• Rating directly influence the cost and availability of funds to
the issuers (upward rating = funds at lower cost).
• Ratings help channel funds according to the inherent worth of
the projects rather than according to mere names.
Disadvantages of CR
• Biased rating and misrepresentations
• Static study
• Concealment of material information
• Rating is no guarantee for soundness of company
• Human bias
• Reflection of temporary adverse condition
• Down grade
• Difference in rating of two agencies
Types of Rating
• Bond / Debenture Rating
• Equity Rating
• Preference share rating
• Commercial Paper rating
• Fixed deposit rating
• Borrower rating – Rating of borrower
• Individuals Rating – Individuals credit rating
• Structured Obligation – Asset backed security
• Sovereign Rating – Rating of a country
EMERGING AREAS OF CREDIT RATING
• Equity Research
• Banking Sector
• Insurance Sector
• New Instruments viz. Floating Rate Notes (FRN)
• Intermediary in Financial Sector
• Indian Corporate raising funds overseas
CREDIT RATING AGENCIES IN INDIA
• Credit Rating Information Services Limited (CRISIL)
• Investment Information and Credit Rating Agency of India
(ICRA)
• Credit Analysis and research (CARE)
• Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and
• Onicra Credit Rating Agency of India Limited: Is an
established player in the individual credit assessment and
scoring services space in the Indian market.
Credit Rating Information Services Limited (CRISIL)
• The first credit agency floated on January 1, 1988, jointly
started by ICICI and UTI with an equity capital of Rs. 4
crores, as public Ltd company.
• CRISIL is India's leading rating agency, and is the fourth
largest in the world.
• With over a 60% share of the Indian Ratings market, CRISIL
Ratings is the agency of choice for issuers and investors.
• CRISIL Ratings is a full service rating agency that offers a
comprehensive range of rating services. CRISIL Ratings
provides the most reliable opinions on risk by combining its
understanding of risk and the science of building risk
frameworks, with a contextual understanding of business.
OBJECTIVE OF CRISIL –
The principal objective of CRISIL is to rate the debt obligations
of Indian companies. Its rating guides the investors about the risk
of timely payment of interest and principal on a particular debt
instrument.
• Credit Rating Committee - CRISIL's rating process and rating
committee are designed to ensure that all assigned ratings are
based on the highest standards of independence and analytical
rigor.
• The rating committee comprises members who have the
professional competence to meaningfully assess the credit
analysis that underlies the rating, and have no interest in the
entity being rated. A team of analysts carries out the credit
analysis.
RATING METHODOLOGY OF CRISIL
• Business Analysis – Industry risk, market position and
operating efficiency of the company, legal position.
• Financial Analysis – Accounting quality, earnings position,
adequacy of cash flows, and financial flexibility.
• Management Evaluation – Goals, philosophy, strategies,
ability to overcome adverse situations, managerial talents and
succession plans, commitment, consistency and credibility.
• Regulatory and Competitive Environment -
• Fundamental Analysis – Liquidity management, assets
quality, profitability and financial position, interest and tax
sensitivity.
Investment Information and Credit Rating Agency of India
(ICRA)
• ICRA was set up by IFCI on 16th January 1991.
 • ICRA Limited is an Associate of Moody's Investors Service Investment Information and Credit Rating Agency of India
and an independent and professional company. (ICRA)
• It is a public limited company with an authorized share
capital of Rs.10 crores, Rs. 5 crores is paid up.
• ICRA’s major shareholders IFCI (26%), and the balance by • Medium term including Fixed deposits Rating Symbols
UTI, LIC, GIC, PNB, Central Bank of India, Bank of • MAAA: Highest Safety MAA: High Safety
Baroda, UCO Bank and banks (SBI) • MA : Adequate Safety MB : Inadequate Safety
• MC : Risk prone MD : Default
OBJECTIVES OF ICRA • Short-term including CPs
• A-1: Highest Safety A-2: High Safety
To access the credit instrument and award it a grade consonant to • A-3: Adequate Safety A-4: Risk prone
the risk associated with such instrument. • A-5: Default
• To assist investors in making well informed investment Long term Debentures, Bonds and Preference shares-Rating
decision Symbols
• To assist issuers in raising funds from a wider investors base
• To enable banks, investment bankers and brokers in placing • LAAA : Highest Safety
debt with investors by providing them with a marketing tool • LAA : High Safety
• To provide regulators with a market driven system to • LA : Adequate Safety
encourage the healthy growth of the capital markets in a • LBBB : Moderate Safety
disciplined manner without costing an additional burden on • LBB : Inadequate Safety
the Government for this purpose. • LB : Risk prone
• LC : Substantial Risk
STRATEGIES OF ICRA • LD : Default, Extremely speculative
– Create awareness of the rating concept and benefits among
issuers, investors, regulators, and financial institutions.

• Win the credibility, confidence and trust of the constituents

by demonstrating that its methodology is transparent and its
ratings are independent and consistent.
• Aggressively focus on business development whitish would
result in a significant increase in the volume of rating
assignments and spur the Govt. into introducing an
exclusively market-driven interest rate structure.

RATING METHODOLOGY OF ICRA

The rating methodology comprises the study of industry as well as

the company’s SWOT analysis.

• Marketing strategies,
• Competitive edge,
• Level of technological development,
• Operational efficiency,
• Competence and effectiveness of management,
• HRD policies and practices,
• Hedging of risks,
• Cash flow trends and potential,
• Liquidity,
• Financial flexibility,
• Asset quality and past record of servicing debts and
obligations, and
• Government policies and status affecting the industry.