SUBMITTED BY: HEENA PARKERIA(30) MAYANK GOYAL (12)

Credit Rating is an opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. companies also publish explanations for their symbols used. It tells a lender or investor the probability of the subject being able to pay back a loan.

Rating

 According

to MoodysRatings are designed exclusively for the purpose of grading bonds according to their investments qualities. to CARECredit ratings is essentially, the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligation as and when they arise.

According

CCredit Worthiness RRisk Analysis EEquity Assessment DDividend and Earning Prospects I Intentions of Promoters TTransparency of Organization RRelative Strength AAuthentic Information TTechnical Analysis I Industrial Climate of Profile NNetwork Assessment GGuidance to Investors, Companies and the Government

 Rating

is based on information Many factors affect rating Rating by more than one agency Monitoring the already rated issues Publication of ratings Right of appeal against assigned rating Rating of rating agencies Rating is for instrument and not for the issuer company Time taken in rating Not applicable to equity shares

 IT Globalisation Increasing

markets Privatisation Security of debt

 Equity

shares Preference shares Bonds/debentures issued by corporate, government etc. Commercial papers issued by manufacturing companies, Fixed deposits raised for medium-term ranking as unsecured borrowings. Borrowers who have borrowed money. Individuals.

The security issuers ability to service its debt. In order, they calculate the past and likely future cash flows and compare with fixed interest obligations of the issuer. The volume and composition of outstanding debt. The stability of the future cash flows and earning capacity of company. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. Ratio of current assets to current liabilities (i.e. current ratio (CR)) is calculated to assess the liquidity position of the issuing firm.

The value of assets pledged as collateral security and the securitys priority of claim against the issuing firms assets. Market position of the company products is judged by the demand for the products, competitors market share, distribution channels etc.
Operational efficiency is judged by capacity utilisation, prospects of expansion, modernization and diversification, availability of raw material etc. Track record of promoters, directors and expertise of staff also affect the rating of a company.

Year
1841

Credit rating Agencies

Mercantile credit agency

1900
1916 1922 1924 1933 1941 1966

Moodys Investors Service

Poor Publishing Company Standard Statistics Company Fitch Publishing Company Dun &Bradstreet Standard & Poor McGraw Hill

1972

Canadian Bond Rating Service

Year 1974 1975 1975 1977 1978 1980 1987 1991 1994 1996

Credit rating Agencies Thomson Bank watch Japanese Bond Rating Institute McCarthy Crisanti & Maffei Dominician Bond Rating Service IBCA Limited Duff and Phelps Credit Rating Co. CRISIL ICRA CARE Duff and Phelps Credit Rating India (P) Limited

 Low

cost information Healthy discipline on corporate borrowers Provides unbiased opinion. Provides quality and dependable information Provide easy to understand information: Provide basis for investment: Formation of public policy.

Receipt of the request

Assignment to analytical team

Obtaining information
Plant visits and meeting with management

Monitoring for possible change

Presentation of findings
Communication of decision
Rating committee meeting

Dissemination to the public

Benefits to Investors

Safety of investments Recognition of risk and returns Freedom of investment decisions Wider choice of investments. Dependable credibility of issuer. Easy understanding of investment proposals Relief from botheration to know company Continuous monitoring

 Benefits

of Rating to the Company

Easy to raise resources. Reduced cost of borrowing. Reduced cost of public issues. Rating builds up image. Recognition to unknown companies.

Benefits to Intermediaries Less efforts for persuading clients to invest save time Save energy costs Less manpower requirement.

 Non-disclosure
Static

of significant information.

study. Rating is no certificate of soundness. Rating may be biased. Rating under unfavorable conditions. Difference In rating grades.

 Traditional

debt rating (TDR) Private placement rating (PPR)

Private placement rating (PPR): Privately rating is newly introduced credit rating system finding in the literature generated by standard & poor on credit rating , private placement rating is not much different to traditional debt rating but it goes one step ahead to traditional debt rating ,ie. Apart from evaluating a risk of default in timely payment it also evaluates the likelihood of loss to an investor in the vent of default according on the investment . Never the less, either or both of the two types of rating can be used for new issues of debt securities or structured obligations.

Traditional debt ratings (TDR): Traditional debt ratings are a symbolic prediction about the debt security probability resulting in a default in timely payment of interest and principal. In other words, traditional debt rating reflects the current opinion of a credit rating agency of the relative capability and willingness of an issuer of a debt instrument to service the debt obligation as per the term of contract .Traditional debt rating is specific to specific to to a debt instrument in term of credit risk associated with such instrument .Traditional debt rating enable an investor to establish a link between risk and return and provide a symbolic yardstick to identify the risk level associated with the instrument and the return it offers to match with his preferences with expectations

International Ratings Issuer Credit Ratings (for governments, financial institutions and corporates): these summarise an entity's overall creditworthiness and its ability and willingness to meet its financial obligations as they come due. Ratings assigned to an entity are comparable across international borders. Sectors and the types of ratings that may be assigned are given below. Sovereigns and Local Government Long- and short-term local currency ratings Long- and short-term foreign currency ratings Banks and other Financial Institutions Long- and short-term local currency ratings Long- and short-term foreign currency ratings Financial strength ratings (an opinion of stand-alone financial health) Support ratings (an assessment of the likelihood that a bank would receive external support in case of financial difficulties)

Corporates Long- and short-term local currency ratings Long- and short-term foreign currency ratings Issue Credit Ratings (for bonds, Sukuk and other financial obligations): these are an opinion of an entity's ability and willingness to honour its financial obligations with respect to a specific bond or other debt instrument. The ratings assigned to the debt issues of financial institutions and corporates can be either short-term or long-term, depending on the tenor of the financial obligation. A short-term rating is assigned to debt instruments with an original maturity of up to one year. National Ratings National Ratings measure the creditworthiness of issuers or issues relative to all other issuers or issues within the same country, and unlike CI's other ratings are not intended to be comparable across countries. National Ratings are used in countries whose sovereign credit ratings are some way below 'AAA' on CI's international ratings scales, and where there is sufficient demand from capital market participants for such ratings. National Ratings enable the ratings of obligors in a given country to be distributed across a full rating scale (from 'AAA' to 'D'), thereby allowing greater credit differentiation than may be possible under internationally comparable rating scales.

 Credit

Rating and Information Services of India Limited (CRISIL). Investment Information and Credit Rating Agency of India Limited (ICRA). Credit Analysis and Research Limited (CARE).

First Credit Rating agency in India. Incorporated in 1987. Promoted by ICICI along with UTI and other financial institution with an equity capital of Rs. 4 crores. Headquarter in Mumbai. Has rated over 800 Debt instruments.

To assist both individual and institutional investors in making investment decisions in fixed interest securities.
To guide the investors as to the risk of timely payment of interest and principal on a particular debt instrument; To help the companies to raise funds from a large number of investors in larger amounts at a lesser cost; To create awareness of the concept of credit ratings amongst corporations, merchant bankers, brokers, regulatory authorities and help in creating environment that facilitates the debt rating; To provide regulators with a market-driven system in order to ensure discipline and a healthy growth of capital markets.

Credit Rating Services Advisory Services Research and Information Services

CRISIL Rates Debentures Fixed Deposits Commercial Papers Credit Assessment Structured Obligations Bonds Bank Loans etc.

For Debenture: For High Investment Grades: AAA (Triple Safety) Highest Safety. AA (Double Safety) - High Safety. For Investment Grades: A Adequate Safety BBB (Triple B) Moderate Safety For Speculated Grade: BB - Inadequate Safety B - High Risk C - Substantial Risk D - Default

Set up in 1991. Established by Industrial Finance Corporation Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA).

ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA)
It is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. Has a tie-up with Moody Investor Service in the area of technical service which benefit in-house research capabilities.

To provide information and guidance to institutional and individual investors and creditors. To enhance the ability of the borrower/issuers to access the money market and the capital market for tapping a larger volume of resource from a wider range of investing public; To assist the regulators in promoting the transparency in the financial markets; To enable the banks, investment bankers, brokers in placing debt with investors by providing them with a marketing tool.

 Rating

Services

Credit Assessment General Assessment Bank lines of Credit Rating

Information Advisory

Services

Services

ICRA rates Long term instruments Medium term instruments Short term instruments Equity Bank line of credit Insurance Companies

For EquityExcellent Earnings Prospects:

ERIA Low Risk ERIB Moderate Risk ERIC High Risk

Very Good Earning Prospects:

ER2A Low Risk ER2B Moderate Risk ER2c High Risk

Good Earning Prospects:

ER3A Low Risk ER3B Moderate Risk ER3C High Risk

Moderate Earning Prospects:

ER4A Low Risk ER4B Moderate Risk ER4C High Risk

 Weak

Earning Prospects:-

ER5A Low Risk ER5B Moderate Risk

Poor

Earning Prospects:-

ER6A Low Risk ER6B Moderate Risk ER6C High Risk

Set up in 1993. Formed jointly by investment companies, banks & finance companies. Recognized by SEBI, Government of India & Reserve Bank of India etc.

It has three largest shareholder SBI ,IDBI & Canara Bank.

 To

earn customer satisfaction & investor confidence through fairness & professional excellence.
provide state of art services of securities rating ,information & related services of international standard.

To

Credit Rating. Information Services Equity Research Rating of Parallel Marketers of LPG and Kerosene. Other Services.

CARE

Loan Rating (CLR) Credit Analysis Rating (CAR)

CARE Rates Long term & Short term instruments Credit Analysis Long term loans Short term loans

Credit Analysis Rating CARE 1: Excellent Debt Management Capacity CARE 2: Very good Debt Management Capability CARE 3: Good capability for Debt Management CARE 4: Barely satisfactory capability for debt management CARE 5: Poor capability for debt management

Agencies must recognize the defaulters. Must ensure no marketing development & the employees involved in credit rating process must not own share of the issuer. Must publish information on historical default rates. Must disclose fees charged to the client in rating debt & default rates. Must maintain records which contain details of discussion held with stake holder ,rating committee including voting details etc.