CREDIT RATING

Credit Rating (CR) as financial service, has come a long way, 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 Credit rating is a technique of credit risk valuation for the corporate debt instruments reflecting borrowers expected capability and inclination to pay interest and principal in a timely manner. In evaluation both qualitative and quantitative criteria are applied. It involves past performance as an assessment of its future prospects and entails judgment of the companys competitive position, operating efficiency management evaluation, accounting quality, legal position, earnings, cash flow adequacy, financial flexibility, the quality of the product etc.

CREDIT RATINGS
An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities Rating is a symbolic indicator of the current opinion on the relative capability of timely servicing of the debts and obligations. Lower rating does not mean lesser funds available rather it suggests higher risk level. Credit rating essentially establishes a link between risk and return. A rating is valid for the lifetime of the debt instrument subject to continuous surveillance and depending upon the performance of the issuer, it may be retained, placed under watch, upgraded or downgraded.

NEED FOR CREDIT RATING

It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. Maintenance of investors confidence, since defaults shatter the confidence of investors in corporate instruments.

Protect the interest of investors who cannot into merits of the debt instruments of a company. Motivate savers to invest in industry and trade.

OBJECTIVES OF CREDIT RATING

The main objective is to provide superior and low cost 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, Lends greater credence to financial and other representations, Facilitates formulation of public guidelines on institutional investment, Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues, Encourages greater information disclosure, better accounting standards, and improved financial information (helps in investors protection), May reduce interest costs for highly rated companies, Acts as a marketing tool

FUNCTIONS OF CREDIT RATING AGENCIES

Superior information Low cost information Basis for proper risk, return & Trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on Institutional investment

BENEFITS
1. Benefits to Investors
Safeguard against bankruptcy Recognition of risk Credibility of issuer Easy understandability of investment proposal Saving of resource Independent of investment decision Choice of investments Benefits of rating surveillance

2. Benefits of Rating to Company

Lower cost of borrowing Wider audience for borrowing Rating as marketing tool Reduction of cost in public issues Motivation for growth Unknown issuer recognition Benefits to brokers and financial intermediaries

3. For Brokers and financial intermediaries

Saves time, money, energy, and manpower in convincing their clients about investments. Less effort in studying companys 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
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.

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 and an independent and professional company.

 It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up. ICRAs major shareholders IFCI (26%), and the balance by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI)

OBJECTIVES OF ICRA
To access the credit instrument and award it a grade consonant to the risk associated with such instrument. To assist investors in making well informed investment decision To assist issuers in raising funds from a wider investors base To enable banks, investment bankers and brokers in placing debt with investors by providing them with a marketing tool To provide regulators with a market driven system to encourage the healthy growth of the capital markets in a disciplined manner without costing an additional burden on the Government for this purpose.

STRATEGIES OF ICRA
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 companys 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.

Investment Information and Credit Rating Agency of India (ICRA)

Medium term including Fixed deposits Rating Symbols
MAAA: Highest Safety MAA: High Safety MA : Adequate Safety MB : Inadequate Safety MC : Risk prone MD : Default Short-term including CPs A-1: Highest Safety A-2: High Safety A-3: Adequate Safety A-4: Risk prone A-5: Default

Long term Debentures, Bonds and Preference shares-Rating Symbols

LAAA : Highest Safety LAA : High Safety LA : Adequate Safety LBBB : Moderate Safety LBB : Inadequate Safety LB : Risk prone LC : Substantial Risk LD : Default, Extremely speculative

CARE Overview
CARE Ratings commenced operations in April 1993 and over nearly two decades, it has established itself as the second-largest credit rating agency in India. With the rating volume of debt of around Rs.45,901 bn (as on December 31, 2012) , CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings has also emerged as the leading agency for covering many rating segments like that for banks, sub-sovereigns and IPO gradings. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk

and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. With majority shareholding by leading domestic banks and financial institutions in India, CAREs intrinsic strengths have also attracted many other investors. CAREs registered office and head office, is located at 4th floor, Godrej Coliseum, Somaiya Hospital Road, Sion (East), Mumbai 400 022. In addition, CARE has regional offices at Ahmedabad, Bangalore, Chennai, Hyderabad, Jaipur, Kolkata, New Delhi, Pune and international operation in Male in the Republic of Maldives. With independent and unbiased credit rating opinions forming the core of its business model, CARE Ratings has the unique advantage in the form an External Rating Committee to decide on the ratings. Eminent and experienced professionals constitute CAREs Rating Committee.

VISSION

To be a respected company that provides best - in its field - quality and value services

MISSION

To offer a range of high-quality services to all the stakeholders in the capital market To build a pre-eminent position for ourselves in India in securities analysis, research and information services and to be an international credit rating agency To earn customer satisfaction and investor confidence through fairness and professional excellence To remain deeply committed to our internal and external stakeholders To apply the best possible tools & techniques for securities analysis aimed to ensure efficiency and top quality To ensure globally comparable quality standards in our rating, research and information services

VALUES

Integrity and Transparency: Commitment to be ethical, sincere and

open in our dealings Pursuit of Excellence: Committed to strive relentlessly to constantly improve ourselves Fairness: Treat clients, employees and other stakeholders fairly Independence: Unbiased and fearless in expressing our opinion Thoroughness: Rigorous analysis and research on every assignment that we take

CARE's role in Indian Capital Market

Capital Market, both primary and secondary segments, play a vital role in economic development because of its linkages with the banking systems and investment communities (including foreign capital flows). The vibrancy of capital market comes from its volume and varieties of trades of financial instruments, its liquidity and ability to raise capital by attracting fresh investments, which are derivatives of sound investor confidence and transparency. CARE is committed to play a key role by providing professional, insightful and independent informed opinion through various grading and rating services, which can serve as a valuable input to build investor confidence. CAREs credit rating for debt instruments (viz debentures, bonds, assetbacked securities etc) is a highly-valued credit risk opinion, which helps the investors to effectively monitor and manage investments based on their respective risk-return policies. On the other hand, it imparts the issuers with financial flexibility for wider access to funds at a market-determined cost related to their credit risk. It can also provide a helping hand for establishing business relationships (including collaborations) and awarding contracts to the counter parties. CAREs grading products viz IPO Grading and Equi-Grade have proved to be valuable means for primary and secondary market development respectively. IPO Grading, through its opinion on fundamentals, works as one of the important inputs to form long-term equity investment decision for public offerings. On the other hand, the investor community can have an unbiased and analytical opinion on the fundamentals and valuations of any listed entity through Equi-Grade product. For the regulators, CAREs rating services facilitate in determining the eligibility criteria and entry barriers for different types of securities, to monitor financial soundness of borrowers and to promote overall efficiency in the debt market. Our Equi-Grade product can also be useful to the stock

exchanges for investor education and improve liquidity in the secondary market. Thus, services of CARE increase the transparency, leading to a healthy development of the capital market.

CREDIT FINANCE
Credit (from Latin credo translation. "I believe" ) is the trust which allows one party to provide resources to another party where that second party does notreimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting aloan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by acreditor, also known as a lender, to a debtor, also known as a borrower. Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services. However, in modern societies credit is usually denominated by aunit of account. Unlike money, credit itself cannot act as a unit of account. Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swapmarket, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

TYPES OF CREDIT

Bank credit Commerce Consumer credit Investment credit International Public credit Real estate

TRADE CREDIT
The word credit is used in commercial trade in the term "trade credit" to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

CONSUMER CREDIT
Consumer debt can be defined as money, goods or services provided to an individual in lieu of payment. Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), consumer lines of credit, retail loans (retail installment loans) and mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England's definition of "Lending to individuals". Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit - such as the one adopted by the Federal Reserve in the US. The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the

lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement. Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote truth in lending, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation (Finlay 2009).

THE SIX Cs OF CREDIT

Lenders, especially bankers, use a formula known as the six C's of credit when evaluating a credit application. Understanding them will help you make your applications as attractive as possible. Character. This is essentially a summary of the individual. Creditors look for people who appear to be trustworthy and reliable, and who are willing and able to meet their financial obligations. Capacity. This is the individual's ability to repay the loan; it is based on present and anticipated earnings balanced against existing debts. Collateral. The item pledged by the borrower as security for the loan, which may be real state, stocks, savings, a mortgage, etc. Conditions. Both regulatory and economic conditions are considered. Regulatory conditions apply to the lenders individual circumstances; for example, when banks are not lending in specific areas. Economic conditions determine the lender's general policy towards loan. Both are affected by the current economic cycle.

Credit. This is the individual's credit history. Capital. This is the net worth on an individual as indicated by a personal financial statement.