Credit Rating

Credit rating
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A credit rating is a formal assessment of a corporation, autonomous governments, individuals,

conglomerates or even a country. Credit rating is evaluated on the basis of financial transactions
carried in the past and assets and liabilities at present. Credit rating allows a lender or a credit
granter to evaluate the ability of the borrower top repay a loan.
In case of personal credit rating, the financial statistics of an individual is studied by a credit
rating agency. These agencies are called as credit bureaus. They keep a record of the credit
history of an individual. Generally, a fee is charged for allocating a credit score. The agency then
allots the individual a 3-digit score called the FICO credit score.
Credit rating is very important. You need to manage a healthy credit score, especially if you are
planning to borrow a loan or buy a real estate or an automobile. A low credit rating is considered
as a sign of a high risk of non-payment of debt.
Credit rating has the power to qualify you for more credit card offers or rule you out for many
credit card offers. Moreover, credit ratings are used to ascertain the amount of a utility or leasing
a deposit. It is also used to adjust insurance premium. The ratings are also important to
substantiate an individual's eligibility for employment.
Important credit bureaus in the United States are Equifax, Trans Union and Experian. Major
credit bureaus for individuals are Equifax, Experian and Trans Union whereas Moody's,
Standard and Poor's and Fitch are leading global credit rating agencies.
A credit rating estimates the credit worthiness of an individual,

corporation, or even a country. It is an evaluation made by credit
bureaus of a borrower’s overall credit history.[1] A credit rating is also
known as an evaluation of a potential borrower's ability to repay debt,
prepared by a credit bureau at the request of the lender (Black's Law
Dictionary). Credit ratings are calculated from financial history and
current assets and liabilities. Typically, a credit rating tells a lender or
investor the probability of the subject being able to pay back a loan.
However, in recent years, credit ratings have also been used to adjust
insurance premiums, determine employment eligibility, and establish the
amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and

thus leads to high interest rates, or the refusal of a loan by the creditor.
Contents
[hide]
• 1 Personal credit ratings

o 1.1 North America
o 1.2 Australasia (Australia and NZ)
o 1.3 European Union
• 2 Corporate credit ratings
• 3 Sovereign credit ratings
• 4 Short-term rating
• 5 Credit bureaus and credit rating agencies
• 6 See also
• 7 References
[edit] Personal credit ratings
An individual's credit score, along with his or her credit report, affects
his or her ability to borrow money through financial institutions such as
banks.
The factors that may influence a person's credit rating are:[2]
• ability to pay a loan

• interest
• amount of credit used
• saving patterns[not in citation given]
• spending patterns
• debt
In different parts of the world different personal credit rating systems
exist.
[edit] North America
In the United States, an individual's credit history is compiled and

maintained by companies called credit bureaus. Credit worthiness is
usually determined through a statistical analysis of the available credit
data.
• A common form of this analysis is a 3-digit credit score provided

by independent financial service companies such as the FICO
credit score.
• The term FICO is a registered trademark, comes from Fair Isaac
Corporation, which pioneered the credit rating concept in the late
1950s.
In Canada, the most common ratings are the North American Standard
Account Ratings, also known as the "R" ratings, which have a range
between R0 and R9. R0 refers to a new account; R1 refers to on-time
payments; R9 refers to bad debt. Very few people maintain the R0 status
for long, as there are similar mechanisms in place in Canada that would
allow for monthly updates of one's credit rating.
[edit] Australasia (Australia and NZ)
In Australia, The Australian Government "Office of the Privacy

Commissioner" provides information on how to obtain a copy of your
credit report. Personal credit reports in Australia are generally required
to be given free of charge.
There are two main credit reporting agencies, "Veda Advantage" and
"Dun & Bradstreet"
People living in Tasmania can also contact "Tasmanian Collection

Service"
[edit] European Union
Please help improve this article by expanding it. Further

information might be found on the talk page. (March 2010)
[edit] Corporate credit ratings
Main article: Bond credit rating
The credit rating of a corporation is a financial indicator to potential

investors of debt securities such as bonds. These are assigned by credit
rating agencies such as A.M. Best, Dun & Bradstreet, Standard & Poor's,
Moody's or Fitch Ratings and have letter designations such as A, B, C.
The Standard & Poor's rating scale is as follows, from excellent to poor:
AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-,
B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB-
rating is considered a speculative or junk bond.[3] The Moody's rating
system is similar in concept but the naming is a little different. It is as
follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1,
Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. A.M.
Best rates from excellent to poor in the following manner: A++, A+, A,
A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S.
[edit] Sovereign credit ratings
A sovereign credit rating is the credit rating of a sovereign entity, i.e. a

national government. The sovereign credit rating indicates the risk level
of the investing environment of a country and is used by investors
looking to invest abroad. It takes political risk into account.
Source: Euromoney Country risk March 2010[4]
Country risk rankings (March
2010)
Overall
Least risky countries, Score out of Previous Country
score
100
Rank
1 1 Norway 94.05
2 2 Luxembourg 92.35
3 3 Switzerland 90.65
4 4 Denmark 88.55
5 6 Finland 87.81
6 5 Sweden 86.81
7 7 Austria 86.50
8 11 Canada 86.09
9 8 Netherlands 84.86
10 9 Australia 84.16
The table shows the ten least-risky countries for investment as of March
2010. Ratings are further broken down into components including
political risk, economic risk. Euromoney's bi-annual country risk index
"Country risk survey" monitors the political and economic stability of
185 sovereign countries. Results focus foremost on economics,
specifically sovereign default risk and/or payment default risk for
exporters (a.k.a. "trade credit" risk).
This article in the Guardian contains a map of S&P sovereign ratings.
A.M. Best defines "country risk" as the risk that country-specific factors
could adversely affect an insurer's ability to meet its financial
obligations.
[edit] Short-term rating

A short-term rating is a probability factor of an individual going into
default within a year. This is in contrast to long-term rating which is
evaluated over a long timeframe.
[edit] Credit bureaus and credit rating agencies
Main articles: Credit bureau and Credit rating agency
Credit scores for individuals are assigned by credit bureaus (US; UK:
credit reference agencies). Credit ratings for corporations and sovereign
debt are assigned by credit rating agencies.
In the United States, the main credit bureaus are Experian, Equifax, and
TransUnion. A relatively new credit bureau in the US is Innovis.[5]
In the United Kingdom, the main credit reference agencies for

individuals are Experian, Equifax, and Callcredit. There is no universal
credit rating as such, rather each individual lender credit scores based on
its own wish-list of a perfect customer.[6]
In Canada, the main credit bureaus for individuals are Equifax,

TransUnion and Northern Credit Bureaus/ Experian.[7]
In India, commercial credit rating agencies include CRISIL, CARE,

ICRA and Brickwork Ratings [8]. The credit bureaus for individuals in
India are Credit Information Bureau (India) Limited (CIBIL) and Credit
Registration Office (CRO).
The largest commercial credit rating agencies (which tend to operate

worldwide) are Dun & Bradstreet, Moody's, Standard and Poor's and
Fitch Ratings.[citation needed]
On 14.07.2010 Dagong International Credit Rating Co. from China

released a credit rating that is a break with other western credit rating
agencies in an attempt to compete with them.
[edit] See also

• Alternative data
• Credit risk
• Default (finance)
• Credit history
• Credit score
• Risk-based pricing
[edit] References
1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics:

Principles in action. Upper Saddle River, New Jersey 07458:
Pearson Prentice Hall. pp. 512. ISBN 0-13-063085-3.
http://www.pearsonschool.com/index.cfm?
locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&P
MDbCategoryId=&PMDbProgramId=12881&level=4.
2. ^ "Consumer information center FAQ", Equifax
3. ^ de Servigny, Arnaud and Olivier Renault (2004). The Standard
& Poor's Guide to Measuring and Managing Credit Risk.
McGraw-Hill. ISBN 13 978-0071417556.
4. ^ "Country risk survey": Bi-annual survey which monitors the
political and economic stability of 185 sovereign countries,
according to ratings agencies and market experts. The information
is compiled from Risk analysts; poll of economic projections; on
GNI; World Bank’s Global Development Finance data; Moody’s
Investors Service, Standard & Poor’s and Fitch IBCA; OECD
consensus groups (source: ECGD); the US Exim Bank and
Atradius UK; heads of debt syndicate and loan syndications;
Atradius, London Forfaiting, Mezra Forfaiting and WestLB.
5. ^ Holden Lewis (2002-14-14). "The credit report you don't know
about". Bankrate.com.
http://www.bankrate.com/brm/news/mortgages/20021114a.asp.
Retrieved 2007-09-24.
Credit risk

(Redirected from Credit worthiness)
This article needs additional citations for verification.
Please help improve this article by adding reliable references.
Unsourced material may be challenged and removed. (April 2010)
Categories of
financial risk
Credit risk
Concentration risk
Market risk
Interest rate risk
Currency risk
Equity risk
Commodity risk
Liquidity risk
Refinancing risk
Operational risk
Legal risk
Political risk
Reputational risk
Volatility risk
Settlement risk
Profit risk
Systemic risk
v•d•e
Basel II
Bank for International Settlements
Basel Accords - Basel I
Basel II
Background
Banking
Monetary policy - Central bank
Risk - Risk management
Regulatory capital
Tier 1 - Tier 2
Pillar 1: Regulatory Capital
Credit risk
Standardized - F-IRB - A-IRB
PD - LGD - EAD
Operational risk
Basic - Standardized - AMA
Market risk
Duration - Value at risk
Pillar 2: Supervisory Review
Economic capital
Liquidity risk - Legal risk
Pillar 3: Market Disclosure
Disclosure
Business and Economics Portal
Credit risk is an investor's risk of loss arising from a borrower who

does not make payments as promised. Such an event is called a default.
Another term for credit risk is default risk.
Investor losses include lost principal and interest, decreased cash flow,
and increased collection costs, which arise in a number of
circumstances:
• A consumer does not make a payment due on a mortgage loan,

credit card, line of credit, or other loan
• A business does not make a payment due on a mortgage, credit
card, line of credit, or other loan
• A business or consumer does not pay a trade invoice when due
• A business does not pay an employee's earned wages when due
• A business or government bond issuer does not make a payment on
a coupon or principal payment when due
• An insolvent insurance company does not pay a policy obligation
• An insolvent bank won't return funds to a depositor
• A government grants bankruptcy protection to an insolvent
consumer or business
Contents
[hide]
• 1 Assessing credit risk

o 1.1 Sovereign risk
o 1.2 Counterparty risk
• 2 Mitigating credit risk
• 3 See also
• 4 Further reading
• 5 References
• 6 External links
[edit] Assessing credit risk
Main articles: Credit analysis and Consumer credit risk
Significant resources and sophisticated programs are used to analyze and

manage risk. Some companies run a credit risk department whose job is
to assess the financial health of their customers, and extend credit (or
not) accordingly. They may use in house programs to advise on
avoiding, reducing and transferring risk. They also use third party
provided intelligence. Companies like Standard & Poor's, Moody's,
Fitch Ratings, and Dun and Bradstreet provide such information for a
fee.
Most lenders employ their own models (credit scorecards) to rank

potential and existing customers according to risk, and then apply
appropriate strategies. With products such as unsecured personal loans
or mortgages, lenders charge a higher price for higher risk customers
and vice versa. With revolving products such as credit cards and
overdrafts, risk is controlled through the setting of credit limits. Some
products also require security, most commonly in the form of property.
Credit scoring models also form part of the framework used by banks or
lending institutions grant credit to clients. For corporate and commercial
borrowers, these models generally have qualitative and quantitative
sections outlining various aspects of the risk including, but not limited
to, operating experience, management expertise, asset quality, and
leverage and liquidity ratios, respectively. Once this information has
been fully reviewed by credit officers and credit committees, the lender
provides the funds subject to the terms and conditions presented within
the contract (as outlined above).
[edit] Sovereign risk
Sovereign risk is the risk of a government becoming unwilling or unable

to meet its loan obligations, or reneging on loans it guarantees.[1] The
existence of sovereign risk means that creditors should take a two-stage
decision process when deciding to lend to a firm based in a foreign
country. Firstly one should consider the sovereign risk quality of the
country and then consider the firm's credit quality.[2]
Five macroeconomic variables that affect the probability of sovereign

debt rescheduling are: [3]
• Debt service ratio

• Import ratio
• Investment ratio
• Variance of export revenue
• Domestic money supply growth
The probability of rescheduling is an increasing function of debt service

ratio, import ratio, variance of export revenue and domestic money
supply growth. Frenkel, Karmann and Scholtens also argue that the
likelihood of rescheduling is a decreasing function of investment ratio
due to future economic productivity gains. Saunders argues that
rescheduling can become more likely if the investment ratio rises as the
foreign country could become less dependent on its external creditors
and so be less concerned about receiving credit from these
countries/investors.[4]
[edit] Counterparty risk
Counterparty risk, otherwise known as default risk, is the risk that an

organization does not pay out on a bond, credit derivative, credit
insurance contract, or other trade or transaction when it is supposed to.[5]
Even organizations who think that they have hedged their bets by buying
credit insurance of some sort still face the risk that the insurer will be
unable to pay, either due to temporary liquidity issues or longer term
systemic issues.[6]
Large insurers are counterparties to many transactions, and thus this is

the kind of risk that prompts financial regulators to act, e.g., the bailout
of insurer AIG.
On the methodological side, counterparty risk can be affected by wrong

way risk, namely the risk that different risk factors be correlated in the
most harmful direction. Including correlation between the portfolio risk
factors and the counterparty default into the methodology is not trivial,
see for example Brigo and Pallavicini[7]
A good introduction can be found in a paper by Michael Pykhtin and

Steven Zhu.[8]
[edit] Mitigating credit risk
Lenders mitigate credit risk using several methods:
• Risk-based pricing: Lenders generally charge a higher interest

rate to borrowers who are more likely to default, a practice called
risk-based pricing. Lenders consider factors relating to the loan
such as loan purpose, credit rating, and loan-to-value ratio and
estimates the effect on yield (credit spread).
• Covenants: Lenders may write stipulations on the borrower, called
covenants, into loan agreements:
o Periodically report its financial condition
o Refrain from paying dividends, repurchasing shares,
borrowing further, or other specific, voluntary actions that
negatively affect the company's financial position
o Repay the loan in full, at the lender's request, in certain
events such as changes in the borrower's debt-to-equity ratio
or interest coverage ratio
• Credit insurance and credit derivatives: Lenders and bond
holders may hedge their credit risk by purchasing credit insurance
or credit derivatives. These contracts the transfer risk from the
lender to the seller (insurer) in exchange for payment. The most
common credit derivative is the credit default swap.
• Tightening: Lenders can reduce credit risk by reducing the amount
of credit extended, either in total or to certain borrowers. For
example, a distributor selling its products to a troubled retailer may
attempt to lessen credit risk by reducing payment terms from net
30 to net 15.
• Diversification: Lenders to a small number of borrowers (or kinds
of borrower) face a high degree of unsystematic credit risk, called
concentration risk. Lenders reduce this risk by diversifying the
borrower pool.
• Deposit insurance: Many governments establish deposit
insurance to guarantee bank deposits of insolvent banks. Such
protection discourages consumers from withdrawing money when
a bank is becoming insolvent, to avoid a bank run), and encourages
consumers to holding their savings in the banking system instead
of in cash.
[edit] See also
• Credit (finance)
• Default (finance)
[edit] Further reading
• Bluhm, Christian, Ludger Overbeck, and Christoph Wagner

(2002). An Introduction to Credit Risk Modeling. Chapman &
Hall/CRC. ISBN 978-1584883265.
• Damiano Brigo and Massimo Masetti (2006). Risk Neutral Pricing
of Counterparty Risk, in: Pykhtin, M. (Editor), Counterparty
Credit Risk Modeling: Risk Management, Pricing and Regulation.
Risk Books. ISBN 1-904339-76-X.
• de Servigny, Arnaud and Olivier Renault (2004). The Standard &
Poor's Guide to Measuring and Managing Credit Risk. McGraw-
Hill. ISBN 978-0071417556.
• Darrell Duffie and Kenneth J. Singleton (2003). Credit Risk:
Pricing, Measurement, and Management. Princeton University
Press. ISBN 978-0691090467.
• Principles for the management of credit risk from the Bank for
International Settlement
[edit] References
1. ^ Country Risk and Foreign Direct Investment. Duncan H.

Meldrum (1999)
2. ^ Cary L. Cooper, Derek F. Channon (1998). The Concise
Blackwell Encyclopedia of Management. ISBN 978-0631209119.
3. ^ Frenkel, Karmann and Scholtens (2004). Sovereign Risk and
Financial Crises. Springer. ISBN 978-3540222484.
4. ^ Cornett, Marcia Millon and Saunders, Anthony (2006).
Financial Institutions Management: A Risk Management
Approach, 5th Edition. McGraw Hill. ISBN 978-0073046679.
5. ^ Investopedia. Counterparty risk. Retrieved 2008-10-06
6. ^ Tom Henderson. Counterparty Risk and the Subprime Fiasco.
2008-01-02. Retrieved 2008-10-06
7. ^ Brigo, Damiano and Andrea Pallavicini (2007). Counterparty
Risk under Correlation between Default and Interest Rates. In:
Miller, J., Edelman, D., and Appleby, J. (Editors), Numerical
Methods for Finance. Chapman Hall. ISBN 158488925X.Related
SSRN Research Paper
8. ^ A Guide to Modeling Counterparty Credit Risk, GARP Risk
Review,July-August 2007 Related SSRN Research Paper
[edit] External links
• The Risk Management Association - leading industry organisation

for credit risk professionals
• Defaultrisk.com - web site maintained by Greg Gupton with
research and white papers on credit risk modelling.
[hide]
v•d•e
Financial risk and financial risk management
Categories Concentration risk

Credit risk
Securitization · Credit derivative
Interest rate risk · Currency risk · Equity risk ·

Market risk
Commodity risk
Liquidity
Refinancing risk
risk
OperationalOperational risk management · Legal risk ·
risk Political risk
Reputational risk · Volatility risk · Settlement risk · Profit

risk · Systemic risk
Risk modeling · Market portfolio · Modern portfolio theory ·

Modeling
Risk adjusted return on capital · Value at risk · Sharpe ratio
Basic Diversification · Systematic risk · Risk pool · Expected

concepts return · Hazard · Risk
Investment management · Financial economics · Mathematical finance

Retrieved from "http://en.wikipedia.org/wiki/Credit_risk"
Categories: Financial risk | Basel II
Hidden categories: Articles needing additional references from April
2010 | All articles needing additional references
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Credit history

This article deals with the general concept of the term credit
history. For detailed information about the same topic in the
United States, see Credit score (United States).
Credit history or credit report is, in many countries, a record of an

individual's or company's past borrowing and repaying, including
information about late payments and bankruptcy. The term "credit
reputation" can either be used synonymous to credit history or to credit
score.
In the U.S., when a customer fills out an application for credit from a
bank, store or credit card company, their information is forwarded to a
credit bureau. The credit bureau matches the name, address and other
identifying information on the credit applicant with information retained
by the bureau in its files.That's why it's very important for creditors,
lenders and others to provide accurate data to credit bureaus. [1]
This information is used by lenders such as credit card companies to

determine an individual's credit worthiness; that is, determining an
individual's willingness to repay a debt. The willingness to repay a debt
is indicated by how timely past payments have been made to other
lenders. Lenders like to see consumer debt obligations paid on a monthly
basis.
There has been much discussion over the accuracy of the data in
consumer reports. However, the only scientifically researched studies
that include sample sizes large enough to be valid have concluded that
by and large the data in credit reports is very accurate. [2] [3] The credit
bureaus point to their own study of 52 million credit reports to highlight
that the data in reports is very accurate. The Consumer Data Industry
Association testified before Congress that less than two percent of those
reports that resulted in a consumer dispute had data deleted because it
was in error.[4]
If a consumer disputes some information in a credit report, the credit

bureau has 30 days to verify the data. Over 70 percent of these consumer
disputes are resolved within 14 days and then the consumer is notified of
the resolution.[4] The Federal Trade Commission states that one large
credit bureau notes 95 percent of those who dispute an item seem
satisfied with the outcome.[5]
The other factor in determining whether a lender will provide a

consumer credit or a loan is dependent on income. The higher the
income, all other things being equal, the more credit the consumer can
access. However, lenders make credit granting decisions based on both
ability to repay a debt (income) and willingness (the credit report) as
indicated in the past payment history.
These factors help lenders determine whether to extend credit, and on

what terms. With the adoption of risk-based pricing on almost all
lending in the financial services industry, this report has become even
more important since it is usually the sole element used to choose the
annual percentage rate (APR), grace period and other contractual
obligations of the credit card or loan.
Contents
[hide]
• 1 How credit rating is determined

• 2 Acquiring and understanding credit reports and scores
• 3 Credit History of Immigrants
• 4 Adverse Credit
• 5 Consequences
• 6 More than One Credit History Per Person
• 7 See also
• 8 References
[edit] How credit rating is determined
Credit ratings are determined differently in each country, but the factors
are similar, and may include:
• Payment history - a record of delinquent payments, generally being

more than 30 days, will lower the credit rating.
• Control of debt - Lenders want to see that borrowers are not living
beyond their means. Experts estimate that non-mortgage credit
payments each month should not exceed more than 15 percent of
the borrower's after-tax income.[citation needed]
• Signs of responsibility and stability - Lenders perceive things such
as longevity in the borrower's home and job (at least two years) as
signs of stability.[citation needed]
• Re-Aging - Through re-aging, the date of last action on the account
is changed. This can dramatically alter the credit score. In 2000,
the Federal Financial Institutions Examination Council (FFEIC)
clarified guidelines on re-aging accounts for delinquent borrowers.
[1] (PDF)
• Utilization—Lenders ascribe increased risk to accounts with
balances near their limits.
• Credit inquiries – An inquiry is noted every time a company
requests some information from a consumer's credit file. There are
several kinds of inquiries that may or may not affect one's credit
score. Inquiries that have no effect on the creditworthiness of a
consumer (also known as "soft inquiries") are:
o Prescreening inquiries where a credit bureau may sell a
person's contact information to an institution that issues
credit cards, loans and insurance based on certain criteria that
the lender has established.
o A creditor also checks its customers' credit files periodically.
o A credit counseling agency, with the client's permission, can
obtain a client's credit report with no adverse action.
o A consumer can check his or her own credit report without
impacting creditworthiness.
• Inquiries that do have an effect on the creditworthiness of a
consumer (also known as "hard inquiries") are made by lenders
when consumers are seeking credit or a loan, in connection with
permissible purpose. Lenders, when granted a permissible purpose,
as defined by the Fair Credit Reporting Act, can "pull" a consumer
file for the purposes of extending credit to a consumer. Hard
inquiries from lenders directly affect the borrower's credit score.
Keeping credit inquiries to a minimum can help a person's credit
rating. A lender may perceive many inquiries over a short period of
time on a person's report as a signal that the person is in financial
difficulty, and may consider that person a poor credit risk.
• Credit cards that are not used - Although it is believed that having
too many credit cards can have an adverse effect on a credit score,
closing these lines of credit will not necessarily improve your
score. Many risk models consider the difference between the
amount of credit a person has and the amount being used: closing
one or more accounts will reduce your total available credit, lower
the percentage of available credit, and possibly lower your credit
score. Risk models also factor in account age: closing an account
with several years of history that is in good standing will most
likely negatively affect your score.
In the U.S. credit scores are broken down into 5 categories each
contributing to a percentage of your credit score:[6]
• 35% - Payment History: This is whether you have paid on time or

not
• 30% - Debt To Credit Limit Ratio: This is your total debt
compared to your total credit limit
• 15% - Length Of Credit History: This is how long you have had
credit
• 10% - Types Of Credit Accounts: This is the different types of
credit you have
• 10% - Inquiries (hard): This is when a creditor checks your credit
report
[edit] Acquiring and understanding credit reports and scores
There are many businesses that aim to make money by providing

services to consumers to check their credit reports and confirm the
information in them. These companies advertise heavily. In the US, the
Fair Credit Reporting Act and its amendments require that any national
consumer credit reporting agency (including Experian, Equifax, and
TransUnion) and any national specialty consumer reporting agency
(including Innovis, PRBC, Teletrack) provide a free copy of the credit
reports for any consumer who requests it, once per year. Free annual
credit reports for Experian, Equifax and TransUnion may be requested at
https://www.annualcreditreport.com. Note that many imposter websites
with names similar to www.annualcreditreport.com exist, and users will
see promotions for extra credit-checking services that cost money.
Carefully following the process and declining for-pay services will allow
users to get their free annual credit reports. Also note that the free
reports do not include the consumer's credit score. Rather, they provide a
list of accounts so users can confirm that no erroneous information is on
the reports.
Information from the GSA Federal Citizen Information Center (US

government) is available for free download in .pdf form at
http://www.pueblo.gsa.gov. Look for the pamphlets "Building a Better
Credit Report" and "Your Credit Scores."
Free information about understanding one's credit report and credit score
is also available from MoneyWi$e, a non-profit partnership between
Consumer Action and Capital One, at http://www.money-wise.org.
The Government of Canada offers a free publication called

Understanding Your Credit Report and Credit Score. This publication
provides sample credit report and credit score documents with
explanations of the notations and codes that are used. It also contains
general information on how to build or improve credit history, and how
to check for signs that identity theft has occurred. The publication is
available online through http://www.fcac.gc.ca, the site of the Financial
Consumer Agency of Canada. Paper copies can also be ordered at no
charge for residents of Canada.
[edit] Credit History of Immigrants
Credit history usually applies to only one country. Even within the same
credit card network, information is not shared between different
countries. For example, if a person has been living in Canada for many
years and then moves to the United States, when they apply for credit
cards or a mortgage in the U.S., they would usually not be approved
because of a lack of credit history, even if they had an excellent credit
rating in their home country and even if they had a very high salary in
their home country.
An immigrant must establish a credit history from scratch in the new

country. Therefore, it is usually very difficult for immigrants to obtain
credit cards and mortgages until after they have worked in the new
country with a stable income for several years.
Some credit card companies (f.e. American Express) can transfer credit
cards from one county to another and this way help starting a credit
history.
[edit] Adverse Credit
Adverse credit history, also called sub-prime credit history, non-

status credit history, impaired credit history, poor credit history,
and bad credit history, is a negative credit rating.
A negative credit rating is often considered undesirable to lenders and

other extenders of credit for the purposes of loaning money or capital.[7]
In the U.S., a consumer's credit history is compiled by consumer
reporting agencies or credit bureaus. The data reported to these agencies
are primarily provided to them by creditors and includes detailed records
of the relationship a person has with the lender. Detailed account
information, including payment history, credit limits, high and low
balances, and any aggressive actions taken to recover overdue debts, are
all reported regularly (usually monthly). This information is reviewed by
a lender to determine whether to approve a loan and on what terms.
As credit became more popular, it became more difficult for lenders to

evaluate and approve credit card and loan applications in a timely and
efficient manner. To address this issue, credit scoring was adopted.[citation
needed]
A benefit of scoring was that it made credit available to more
consumers and at less cost.[8]
Credit scoring is the process of using a proprietary mathematical

algorithm to create a numerical value that describes an applicant's
overall creditworthiness. Scores, frequently based on numbers (ranging
from 300–850 for consumers in the United States), statistically analyze a
credit history, in comparison to other debtors, and gauge the magnitude
of financial risk. Since lending money to a person or company is a risk,
credit scoring offers a standardized way for lenders to assess that risk
rapidly and "without prejudice."[citation needed] All credit bureaus also offer
credit scoring as a supplemental service.
Credit scores assess the likelihood that a borrower will repay a loan or
other credit obligation. The higher the score, the better the credit history
and the higher the probability that the loan will be repaid on time. When
creditors report an excessive number of late payments, or trouble with
collecting payments, the score suffers. Similarly, when adverse
judgments and collection agency activity are reported, the score
decreases even more. Repeated delinquencies or public record entries
can lower the score and trigger what is called a negative credit rating or
adverse credit history.
Your credit score is a number calculated from factors such as the amount
of credit outstanding versus how much you owe, your past ability to pay
all your bills on time, how long you've had credit, types of credit used
and number of inquiries.The three major consumer reporting agencies,
Equifax, Experian and TransUnion all sell credit scores to lenders. Fair
Isaac is one of the major developers of credit scores used by these
consumer reporting agencies. The complete way in which your FICO
score is calculated is complex. One of the factors in your Fico score is
credit checks on your credit history. When a lender requests a credit
score, it can cause a small drop in the credit score.[9][10] That is because,
as stated above, a number of inquiries over a relatively short period of
time can indicate the consumer is in a financially difficult situation.
[edit] Consequences
The information in a credit report is sold by credit agencies to

organizations that are considering whether to offer credit to individuals
or companies. It is also available to other entities with a "permissible
purpose", as defined by the Fair Credit Reporting Act. The consequence
of a negative credit rating is typically a reduction in the likelihood that a
lender will approve an application for credit under favorable terms, if at
all. Interest rates on loans are significantly affected by credit history; the
higher the credit rating, the lower the interest while the lower the credit
rating, the higher the interest. The increased interest is used to offset the
higher rate of default within the low credit rating group of individuals.
In the United States insurance, housing, and employment can be denied

based on a negative credit rating.
Note that it is not the credit reporting agencies that decide whether a
credit history is "adverse." It is the individual lender or creditor which
makes that decision, each lender has its own policy on what scores fall
within their guidelines. The specific scores that fall within a lender's
guidelines are most often NOT disclosed to the applicant due to
competitive reasons. In the United States, a creditor is required to give
the reasons for denying credit to an applicant immediately and must also
provide the name and address of the credit reporting agency who
provided data that was used to make the decision.
[edit] More than One Credit History Per Person
In some countries, people can have more than one credit history. For
example, in Canada, although most Canadians are not aware of it, every
person who applied for credit before obtaining a Social Insurance
Number has two separate credit histories, one with SIN and one without
SIN. This is due to the credit reporting structure in Canada. This can
lead to two completely separate parallel histories, and often leads to
inconsistencies (although typically the person in question will never
notice the inconsistencies), because when a lender asks for someone's
credit report with SIN, what the lender gets is different from what he
would have gotten if he asked the report without providing the SIN. This
is because, contrary to popular belief, when someone gets a new SIN for
whatever reason, the two credit files are never merged unless the person
requests specifically. As a result, a record with SIN zeroed out is kept
separately from a record with SIN. Note this happens without the person
even knowing it.[citation needed]
[edit] See also
• Alternative data
• Comparison of free credit report websites
• Credit bureau
• Credit card
• Credit rating agency
• Credit reference agency
• Credit score
• Identity theft
• Fair Credit Reporting Act
• Fair and Accurate Credit Transactions Act
• Fair Debt Collection Practices Act
• Office of Fair Trading
• Remortgage
• Seasoned trade lines
[edit] References
1. ^ http://www.washingtontimes.com/news/2009/jan/19/credit-
agencies-are-the-messengers/
2. ^ Credit Report Accuracy and Access to Credit. Federal Reserve
Bulletin. Summer 2004
3. ^ Allstate Insurance Company’s Additional Written Testimony:
Allstate’s Use of Insurance Scoring. 23 Jul 2002.
a b
4. ^ Prepared Statement of the Federal Trade Commission on
Credit Reports: Consumers' Ability to Dispute and Change
Inaccurate Information: Hearing Before the Committee on
Financial Services. 19 Jun 2007.
5. ^ Report to Congress on the Fair Credit Reporting Act Dispute
Process. Federal Trade Commission. Board of Governors of the
Federal Reserve System. Aug 2006.
6. ^ Morales, Tatiana (2003-04-30). "Understanding Your Credit
Score". CBS News.
http://www.cbsnews.com/stories/2003/04/29/earlyshow/contributor
s/raymartin/main551521.shtml. Retrieved 2010-04-12.
7. ^ Turner, Michael A et al., Give Credit Where Credit Is Due,
Political and Economic Research Council, 1.
8. ^
http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/
creditscore.pdf
9. ^ "Facts & Fallacies". Fair Isaac Corporation.
http://www.myfico.com/CreditEducation/FactsFallacies.aspx.
10. ^ "What’s In Your Score". Fair Isaac Corporation.
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx.
Retrieved from "http://en.wikipedia.org/wiki/Credit_history"

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Credit Rating
What Does Credit Rating Mean?

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.
Employers
often look at
your credit
report as a
way to help
them judge
your
character—
another
important
reason to pay
your bills on
time.
You’ve probably received offers for

credit cards. Chances are, you've
gotten letters in the mail or you've
picked up a credit card application at
the campus bookstore. But do you
know what credit is and why it's
important? In this section, you'll find
out:
What is credit?
Credit is a privilege and a convenience. Credit
lets you charge a meal on a credit card, pay for
an appliance on an installment plan, take out a
loan to buy a house, or pay for college. Credit
allows you to make a purchase without ready
cash.
A credit card enables you to buy things now and

pay for them later. You get credit by promising
to pay in the future for something you receive in
the present. Credit usually costs something, and
what is borrowed must be paid back. [top]
Why do I need credit?

Credit gives a number of benefits you don't get
when paying with cash or checks:
• Convenient, hassle-free shopping. When you

use a credit card to make a purchase, you
don't have to carry a lot of cash, pay by
check, or present additional identification. A
credit card also simplifies online purchases.
• Emergency help. Credit cards are the
ultimate financial security blanket. They can
get you through nearly any situation where
you need money in an emergency.
• Easier budgeting. With a credit card, you can
make purchases and pay them off on a
schedule that fits your budget. Credit cards
also allow you to take advantage of sales
and special offers.
• Security. If you lose cash, it can be used by
anyone. If you lose a credit card and report
the loss to the card's issuer before it is used,
the issuer cannot hold you responsible for
any unauthorized charges. If a thief uses
your card before you report it missing, the
most you will owe is $50.
• Travel expenses. You'll find that a credit card
is almost essential for renting a car,
purchasing an airline ticket, or booking a
hotel room. Whether you're across town or
on another continent, a credit card is the
universal guarantee of your good financial
standing. And if you need cash, you can get
it at ATMs or banks around the world that
accept your credit card. [top]
What is a credit report?

When you apply for credit, the lender reviews
your credit report before approving your
application. The three major credit reporting
agencies are Equifax, Experian, and TransUnion.
These agencies, which are sometimes referred to
as "credit bureaus", collect and report
information about consumers' financial habits
and put the information into a credit report. Each
agency's report contains the same basic
information: name; Social Security number;
current and previous addresses; details about
loans and how they've been handled; public-
record information, such as bankruptcies, court
judgments, or liens; and a list of companies that
have reviewed the credit report. [top]
Why is it important to establish a good

credit history?
Establishing a good credit history is an important
part of your personal and financial future. It can
help open doors for you or keep them closed.
A variety of people and businesses make

decisions affecting your future that are based on
your credit history. Banks and other lenders
consider your credit report when reviewing
applications for mortgages, revolving lines of
credit, or other loans. Landlords sometimes use
credit reports to decide among rental applicants.
And a potential employer may even assess an
applicant's credit report before extending a job
offer.
Your credit report may also be reviewed when

you apply for auto insurance or homeowner's
insurance, or even a mobile phone. That's why it
is so important to establish a good credit history.
[top]
How do I establish a good credit history?

In short, it’s by consistently paying your bills on
time. Remember, to establish a good credit
rating, you should always pay at least the
minimum amount due every month by the due
date. [top]
CREDIT RATING AGENCIES AND THEIR POTENTIAL

IMPACT ON DEVELOPING COUNTRIES
Marwan Elkhoury
Abstract
Credit rating agencies (CRAs) play a key role in financial markets by
helping to reduce the
informative asymmetry between lenders and investors, on one side, and
issuers on the other
side, about the creditworthiness of companies or countries. CRAs' role
has expanded with
financial globalization and has received an additional boost from Basel
II which incorporates
the ratings of CRAs into the rules for setting weights for credit risk.
Ratings tend to be sticky,
lagging markets, and overreact when they do change. This overreaction
may have aggravated
financial crises in the recent past, contributing to financial instability
and cross-country
contagion.
The recent bankruptcies of Enron, WorldCom, and Parmalat have
prompted legislative
scrutiny of the agencies. Criticism has been especially directed towards
the high degree of
concentration of the industry. Promotion of competition may require
policy action at national
and international level to encourage the establishment of new agencies
and to channel
business generated by new regulatory requirements in their direction.
I. INTRODUCTION
Credit rating agencies (subsequently denoted CRAs)
specialize in analysing and evaluating
the creditworthiness of corporate and sovereign issuers
of debt securities. In the new
financial architecture, CRAs are expected to become
more important in the management of
both corporate and sovereign credit risk. Their role has
recently received a boost from the
revision by the Basel Committee on Banking Supervision
(BCBS) of capital standards for
banks culminating in Basel II.
The logic underlying the existence of CRAs is to solve the
problem of the informative
asymmetry between lenders and borrowers regarding the
creditworthiness of the latter.
Issuers with lower credit ratings pay higher interest rates
embodying larger risk premiums
than higher rated issuers. Moreover, ratings determine
the eligibility of debt and other
financial instruments for the portfolios of certain
institutional investors due to national
regulations that restrict investment in speculative-grade
bonds.
The rating agencies fall into two categories: (i)
recognized; and (ii) non-recognized. The
former are recognized by supervisors in each country for
regulatory purposes. In the United
States, only five CRAs of which the best known are
Moody’s and Standard and Poor’s (S&P)
are recognized by the Security and Exchange Commission
(SEC). The majority of CRAs such
as the Economist Intelligence Unit (EIU), Institutional
Investor (II), and Euromoney are "nonrecognized".
There is a wide disparity among CRAs. They may differ in
size and scope
(geographical and sectoral) of coverage. There are also
wide differences in their
methodologies and definitions of the default risk, which
renders comparison between them
difficult.
II. CREDIT RATING AGENCIES IN THE INTERNATIONAL

FINANCIAL SYSTEM
A. Asymmetry of information and CRAs as "opinion" makers
A credit rating compresses a large variety of information
that needs to be known about the
creditworthiness of the issuer of bonds and certain other
financial instruments. The CRAs
thus contribute to solving principal agent problems by
helping lenders "pierce the fog of
asymmetric information that surrounds lending
relationships and help borrowers emerge from
that same fog"1.
CRAs stress that their ratings constitute opinions. They
are not a recommendation to buy, sell
or hold a security and do not address the suitability of an
investment for an investor. Ratings
have an impact on issuers via various regulatory schemes
by determining the conditions and
the costs under which they access debt markets.
Regulators have outsourced to CRAs much of
the responsibility for assessing debt risk. For investors,
ratings are a screening tool that
influences the composition of their portfolios as well as
their investment decisions.
B. Credit ratings and Basel II
Regulatory changes in banks’ capital requirements under
Basel II have resulted in a new role
to credit ratings. Ratings can be used to assign the risk
weights determining minimum capital
charges for different categories of borrower. Under the
Standardized Approach to credit risk,
Basel II establishes credit risk weights for each
supervisory category which rely on "external
credit assessments" (see box 1). Moreover, credit ratings
are also used for assessing risks in
some of the other rules of Basel II.
1 White
III. CREDIT RATING AGENCIES’ PROCEDURES AND

METHODS
A. Quantitative and qualitative methods
The processes and methods used to establish credit
ratings vary widely among CRAs.
Traditionally, CRAs have relied on a process based on a
quantitative and qualitative
assessment reviewed and finalized by a rating
committee. More recently, there has been
increased reliance on quantitative statistical models
based on publicly available data with the
result that the assessment process is more mechanical
and involves less reliance on
confidential information. No single model outperforms all
the others. Performance is heavily
influenced by circumstances.
A sovereign rating is aimed at "measuring the risk that a
government may default on its own
obligations in either local or foreign currency. It takes into
account both the ability and
willingness of a government to repay its debt in a timely
manner.3" The key measure in credit
risk models is the measure of the Probability of Default
(PD) but exposure is also determined
by the expected timing of default and by the Recovery
Rate (RE) after default has occurred:
• Standard and Poor's ratings seek to capture only the
forward-looking probability of the
occurrence of default. They provide no assessment of the
expected time of default or
mode of default resolution and recovery values;
• By contrast, Moody's ratings focus on the Expected Loss
(EL) which is a function of
both Probability of Default (PD) and the expected
Recovery Rate (RE). Thus EL =
PD (1- RE); and
• Fitch's ratings also focus on both PD and RE (Bhatia,
2002). They have a more
explicitly hybrid character in that analysts are also
reminded to be forward-looking
and to be alert to possible discontinuities between past
track records and future trends.
The credit ratings of Moody's and Standard and Poor's are
assigned by rating committees and
not by individual analysts. There is a large dose of
judgement in the committees’ final ratings.
CRAs provide little guidance as to how they assign
relative weights to each factor, though
they do provide information on what variables they
consider in determining sovereign ratings.
Identifying the relationship between the CRAs' criteria
and actual ratings is difficult, in part
because some of the criteria used are neither
quantitative nor quantifiable but qualitative. The
analytical variables are interrelated and the weights are
not fixed either across sovereigns or
over time. Even for quantifiable factors, determining
relative weights is difficult because the
agencies rely on a large number of criteria and there is
no formula for combining the scores to
determine ratings.
In assessing sovereign risk, CRAs highlight several risk
parameters of varying importance:
(i) economic; (ii) political; (iii) fiscal and monetary
flexibility; and (iv) the debt burden (see
box 2). Economic risk addresses the ability to repay its
obligations on time and is a function
of both quantitative and qualitative factors. Political risk
addresses the sovereign's
willingness to repay debt. Willingness to pay is a
qualitative issue that distinguishes
sovereigns from most other types of issuers. Partly
because creditors have only limited legal
redress, a government can (and sometimes does) default
selectively on its obligations, even
when it possesses the financial capacity for debt service.
In practice, political risk and
economic risk are related. A government that is unwilling
to repay debt is usually pursuing
economic policies that weaken its ability to do so.
Willingness to pay, therefore, encompasses
the range of economic and political factors influencing
government policy (see box 2).
IV. IMPACT OF RATINGS

A. Costs and benefits of obtaining a rating
As mentioned earlier, the primary purpose of obtaining a
rating is to enhance access to private
capital markets and lower debt issuance and interest
costs. Theoretical work (Ramakrishnan
and Thakor, 1984; Millon and Thakor, 1985) suggests that
credit rating agencies, in their role
as information gatherers and processors, can reduce a
firm's capital costs by certifying its
value in a market, thus solving or reducing the
informative asymmetries between purchasers
and issuers. For sovereign borrowers, there is evidence of
a clear correlation between bond
spreads and ratings grade as shown in figure 1, (BCBS,
2006), the lower the rating, the higher
the spread.
Figure 1
Bond spreads by ratings
Source: BIS Quarterly Review, JPMorgan Chase and EMBI
Global Diversified
(EMBIGD)
The Objective and Importance of Credit
Ratings
Home Loans
 Your credit rating will most likely determine whether or not you become a homeowner.
Home loans, home equity loans and re-financing are only made available to those with a good
credit rating.
Renting
 Your credit rating may also impact your ability to rent. When a landlord conducts a
background check, he often looks to your credit rating before determining whether or not to
approve your application.
Credit Cards
 Nowadays, having at least one credit card is almost a requirement. A good credit rating will
not only ensure that you can get a credit card, but it may qualify you for instant credit with low
interest rates. There are a number of credit card perks for those with a good credit rating.
Purchasing
 Some businesses won't accept anything but credit cards. Without a high credit rating and the
ability to get a credit card, you may be missing out. For example, many airline companies only
accept credit cards on board the aircraft.
Saving Money
 A high credit rating may save you thousands each year in interest and other fee
Read more: The Objective and Importance of Credit Ratings | eHow.com

http://www.ehow.com/facts_5019129_objective-importance-credit-
ratings.html#ixzz0wCCsgp2E
REPORT ON THE ROLE AND FUNCTION OF CREDIT RATING

AGENCIES IN THE OPERATION OF THE SECURITIES MARKETS
As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002
EXECUTIVE SUMMARY
The Securities and Exchange Commission (“Commission” or “SEC”) has
prepared this Report on the role and function of credit rating agencies in the operation of
the securities markets in response to the Congressional directive contained in the
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”).1 The Report is designed to address
each of the topics identified for Commission study in the Sarbanes-Oxley Act, including
the role of credit rating agencies and their importance to the securities markets,
impediments faced by credit rating agencies in performing that role, measures to improve
information flow to the market from rating agencies, barriers to entry into the credit
rating business, and conflicts of interest faced by rating agencies. As the report called for
by the Sarbanes-Oxley Act coincided with a review of credit rating agencies already
underway at the Commission, the Report addresses certain issues regarding rating
agencies, such as allegations of anticompetitive or unfair practices, the level of diligence
of credit rating agencies, and the extent and manner of Commission oversight, that go
beyond those specifically identified in the Sarbanes-Oxley Act.
While the Commission has made significant progress in its review of credit rating
agencies, and identified a wide range of issues that deserve further study, much work
remains to be done. Accordingly, the Commission plans to publish a concept release
within 60 days of this Report to address concerns related to credit rating agencies and
expects to issue proposed rules, after reviewing and evaluating the comments received on
the concept release, within a reasonable period of time after the close of the comment
period.2 The Commission hopes to elicit extensive comments on these issues, from
market participants, other regulators, and the public at large.
The issues to be studied by the Commission in more depth include the following:
Information Flow
Whether rating agencies should disclose more information about their ratings
decisions.
Whether there should be improvements to the extent and quality of disclosure by
issuers (including disclosures relating to ratings triggers).
1 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 702(b), 116 Stat. 745 (2002).
2 TheCommission is mindful that some of the concepts discussed in this report may raise questions
about the limits of the Commission’s authority. We will, of course, consider those issues carefully.
2
Potential Conflicts of Interest
Whether rating agencies should implement procedures to manage potential
conflicts of interest that arise when issuers pay for ratings.
Whether rating agencies should prohibit (or severely restrict) direct contacts
between rating analysts and subscribers.
Whether rating agencies should implement procedures to manage potential
conflicts of interest that arise when rating agencies develop ancillary fee-based
businesses.
Alleged Anticompetitive or Unfair Practices
The extent to which allegations of anticompetitive or unfair practices by large
credit rating agencies have merit and, if so, possible Commission action to
address them.
Reducing Potential Regulatory Barriers to Entry
Whether the current regulatory recognition criteria for rating agencies should be
clarified.
Whether timing goals for the evaluation of applications for regulatory recognition
should be instituted.
Whether rating agencies that cover a limited sector of the debt market, or confine
their activity to a limited geographic area, should be recognized for regulatory
purposes.
Whether there are viable alternatives to the recognition of rating agencies in
Commission rules and regulations.
Ongoing Oversight
Whether more direct, ongoing oversight of rating agencies is warranted and, if so,
the appropriate means for doing so (and whether it is advisable to ask Congress
for specific legislative oversight authority).
Whether rating agencies should incorporate general standards of diligence in
performing their ratings analysis, and with respect to the training and
qualifications of credit rating analysts.
Ratings awarded by major credit rating agencies:
• AAA - : Highest Safety

• AA - :
High Safety
• A-:
Adequate Safety
• BBB - : Moderate Safety
• BB - : Sub -moderate Safety
• B - : Inadequate Safety
• C - : Substantial Risk
• D - : Default
Credit Rating Information Services of India Limited (CRISIL)

Investment Information and Credit Rating Agency of India (ICRA)
Credit Analysis & Research Limited (CARE)
Duff & Phelps Credit Rating India Private Ltd. (DCR India)
ONICRA Credit Rating Agency of India Ltd.
India Business Directory
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Home » Finance Commission » Institutions » Credit rating agencies in India
Credit rating agencies in India

The credit rating agencies in India mainly include ICRA and CRISIL. ICRA was
formerly referred to the Investment Information and Credit Rating Agency of India Limited.
Their main function is to grade the different sector and companies in terms of performance and
offer solutions for up gradation.
Functions of Credit rating agencies in India:
The credit rating agencies in India offer varied services like mutual consulting services, which
comprises of operation up gradation, risk management.
The have special sections to carry on research and development work of the industries. They
provide training to the employees and executives of the companies for better management. They
examine the risk involved in a new project, chalk out plans to fight with the problem successfully
and thus ameliorate the percentage of risk to a great extent. For this they carry on thorough
research into the respective industry. They have started offering services to the mutual fund
sector through the application of fund utilization services. The major industries currently graded
by the credit rating agencies include agriculture, health care industry, infrastructure, and
maritime industry.
Guidelines for Credit rating agencies in India:
The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 offers
various guidelines with regard to the registration and functioning of the credit rating agencies in
India. The registration procedure includes application for the establishment of a credit rating
agency, matching the eligibility criteria and providing all the details required. They have to
undergo the strict examination procedure with regard to the details furnished by them. They are
required to prepare internal procedures, abidance with circulars. They are offered guidelines
regarding the credit rating procedure, by the Act. The credit rating agencies are provided with
compliance officers. They are required to show their accounting records.
CRISIL:
CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field of
assessment service for the banks. Highly skilled members manage the agency. Ms. Roopa Kudva
who acts as the Managing Director and Chief Executive Officer of the company heads it. The
company has set up large number of committees to look after dispersal of various services
offered by the company for example, investor grievance committee, investment committee,
rating committee, allotment committee, compensation committee and so on. The head office of
the company is located at Mumbai and it has established offices outside India also.
ICRA:
ICRA was established in the year 1991 by the collaboration of financial institutions, investment
companies, and banks. The company has formed the ICRA group together with its subsidiaries.
The company is headed by Mr. Piyush G. Mankad and offers products like short-term debt
schemes, Issue-specific long-term rating and offers fund based as well as non-fund based
facilities to its clients.
For more information on this topic please refer to the following links:
Financial Institutions in India
• Commercial Banks
• Insurance Companies
• Credit rating agencies
• Finance Minister
• The New Role of Finance
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Compare Infobase Limited (An ISO 9001:2000 Certified Company)
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Rating/Grading Services
CARE's Credit Rating is an opinion on the relative ability and willingness of an issuer to make
timely payments on specific debt or related obligations over the life of the instrument. CARE
rates rupee denominated debt of Indian companies and Indian subsidiaries of multinational
companies.
CARE undertakes credit rating of all types of debt and related obligations. These include all types
of medium and long term debt securities such as debentures, bonds and convertible bonds and all
types of short term debt and deposit obligations such as commercial paper, inter-corporate
deposits, fixed deposits and certificates of deposit.
CARE also rates quasi-debt obligations such as the ability of insurance companies to meet
policyholders’ obligations. CARE's preference share ratings measure the relative ability of a
company to meet its dividend and redemption commitments.
CARE has a strong structured finance team and has been instrumental in developing rating
methodologies for innovative asset backed securities in the Indian capital market. The term
'structured financing' refers to securities where the servicing of debt and related obligations is
backed by some sort of financial assets and/ or credit support from a third party to the transaction.
CARE’s credit ratings consider a medium to long term horizon which is typically defined as three
to five years. While the time horizon of a short term instrument is up to one year.
FAQs on Ratings
What is credit rating?

Credit rating 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 obligations as and when
they arise.
Why do rating agencies use symbols like AAA, AA, rather than give marks or descriptive
credit opinion?
The great advantage of rating symbols is their simplicity, which facilitates universal
understanding. Rating companies also publish explanations for their symbols used as well as the
rationale for the ratings assigned by them, to facilitate deeper understanding.
Why is credit rating necessary at all?

Credit rating is an opinion expressed by an independent professional organisation, after making a
detailed study of all relevant factors. Such an opinion will be of great assistance to investors in
making investment decisions. It also helps the issuers of debt instruments to price their issues
correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and
Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility
criteria for some instruments. For example, the RBI has stipulated a minimum credit rating by an
approved agency for issue of Commercial Paper. In general, credit rating is expected to improve
quality consciousness in the market and establish, over a period of time, a more meaningful
relationship between the quality of debt and the yield from it. Credit Rating is also a valuable
input in establishing business relationships of various types.
Does credit rating constitute an advice to the investors to buy?

It does not. The reason is that some factors, which are of significance to an investor in arriving at
an investment decision, are not taken into account by rating agencies. These include
reasonableness of the issue price or the coupon rate, secondary market liquidity and pre-payment
risk. Further, different investors have different views regarding the level of risk to be taken and
rating agencies can only express their views on the relative credit risk.
What kind of responsibility or accountability will attach to a rating agency if an investor,

who makes his investment decision on the basis of its rating, incurs a loss on the
investment?
A credit rating is a professional opinion given after studying all available information at a
particular point of time. Nevertheless, such opinions may prove wrong in the context of
subsequent events. Further, there is no privity of contract between an investor and a rating
agency and the investor is free to accept or reject the opinion of the agency. Nevertheless, rating
is essentially an investor service and a rating agency is expected to maintain the highest possible
level of analytical competence and integrity. In the long run, the credibility of a rating agency
has to be built, brick by brick, on the quality of its services.
Do rating companies undertake unsolicited ratings?
Not in India, at least not yet. There is however, a good case for undertaking unsolicited ratings. It
will be relevant to mention here that any rating based entirely on published information has
serious limitations and the success of a rating agency will depend, to a great extent, on its ability
to access privileged information. Co-operation from the issuers as well as their willingness to
share even confidential information are important pre-requisites. On its part, the rating agency
has a great responsibility to ensure confidentiality of the sensitive information that comes into its
possession during the rating process.
How reliable and consistent is the rating process? How do rating agencies eliminate the
subjective element in rating?
To answer the second question first, it is neither possible nor even desirable, to totally eliminate
the subjective element. Rating does not come out of a pre-determined mathematical formula,
which fixes the relevant variables as well as the weights attached to each one of them. Rating
agencies do a great amount of number crunching, but the final outcome also takes into account
factors like quality of management, corporate strategy, economic outlook and international
environment. To ensure consistency and reliability, a number of qualified professionals are
involved in the rating process. The Rating Committee, which assigns the final rating, consists of
professionals with impeccable credentials. Rating agencies also ensure that the rating process is
insulated from any possible conflicts of interest.
Is it customary to have the same issue rated by more than one rating agency? Do the
ratings for the same instrument vary from agency to agency?
The answer to both the questions is yes. In the well-developed capital markets, debt issues are,
more often than not, rated by more than one agency. And, it is only natural that the opinions
given by two or more agencies will vary, in some cases. But it will be very unusual if such
differences are very wide. For example, a debt issue may be rated DOUBLE A PLUS by one
agency and DOUBLE A or DOUBLE A MINUS by another. It will indeed be unusual if one
agency assigns a rating of DOUBLE A while another gives a TRIPLE B.
Why do rating agencies monitor the issues already rated?

A rating is an opinion given on the basis of information available at a particular point of time. As
time goes by, many things change, affecting the debt servicing capabilities of the issuer, one way
or the other. It is, therefore, essential that as a part of their investor service, rating agencies
monitor all outstanding debt issues rated by them. In the context of emerging developments, the
rating agencies often put issues under credit watch and upgrade or downgrade the ratings as and
when necessary. Normally, such action is taken after intensive interaction with the issuers.
Do issuers have a right of appeal against a rating assigned?

Yes. In a situation where an issuer is unhappy with the rating assigned, he may request for a
review, furnishing additional information, if any, considered relevant. The rating agency will,
then, undertake a review and thereafter indicate its final decision. Unless the rating agency had
overlooked critical information at the first stage, (which is unlikely), chances of the rating being
changed on appeal are rare.
How much time does rating take?

The rating process is a fairly detailed exercise. It involves, among other things, analysis of
published financial information, visits to the issuer’s office and works, intensive discussion with
the senior executives of issuer, discussions with auditors, bankers, etc. It also involves an in-
depth study of the industry itself and a degree of environment scanning. All this takes time and a
rating agency may take three to four weeks or more to arrive at a decision, subject to availability
of all the solicited information. It is of paramount importance to rating companies to ensure that
they do not, in any way, compromise on the quality of their analysis, under pressure from issuers
for quick results. Issuers would also be well advised to approach the rating agencies sufficiently
in advance so that issue schedules can be adhered to.
Is it possible that not satisfied with the rating assigned by one rating agency, an issuer
approaches another, in the hope of getting a better result?
It is possible, but rating companies do not and should not indulge in competitive generosity. Any
attempt by issuers to play one agency against another will have to be discouraged by all the
rating companies. It may, however, be pointed out here that two rating companies may, and often
do, arrive at different conclusions on the same issue. This is only natural, as perceptions differ.
Who rates the rating companies?

Informed public opinion will be the touchstone on which the rating companies have to be
assessed and the success of a rating agency should be measured by the quality of the services
offered, consistency and integrity.
Is the rating assigned for an instrument or for the Issuer Company?

Both. Rating of instruments would consider instruments’ specific characteristics like maturity,
credit reinforcements specific to the issue etc. Issuer ratings consider the overall debt
management capability of an issuer on a medium term perspective, typically three to five years.
While issuer ratings are more often than not, one time assessments of credit quality, instrument
ratings are monitored over the life of the instrument.
Why are equity shares not rated?

By definition, credit rating is an opinion on the issuers capacity to service debt. In the case of
equity, there is no pre-determined servicing obligation, as equity is in the nature of venture
capital. So, credit rating in the conventional sense does not apply to equity shares. However, of
late, credit rating agencies offer grading of IPOs which take into account the fundamentals of the
issuer.
If a rating is downgraded, how would it "benefit" (or compensate ) the investor?

A credit rating is a professional opinion on the ability and willingness of an issuer to meet debt-
servicing obligations. It is an opinion on future debt servicing capabilities given on the basis,
inter-alia, of past performance and all available information (from audited financial statements,
interaction with company management, banks and financial institutions, statutory auditors, etc.)
at a particular time. While rating agencies make all possible efforts to project corporate business
prospects, industry trends and management capabilities, many events are unpredictable. Hence,
such opinions may prove wrong in the context of subsequent events. On the occurrence of such
an event, a rating agency can only review and make appropriate changes in the rating. Moreover,
when there are recessionary trends in certain segments of the economy, companies in such
segments or with large exposures to such segments are adversely affected and their credit ratings
get downgraded. Such downgradations are a natural consequence of the recessionary trends. In
other words, credit quality (and credit rating) is dynamic, not static and all rating agencies review
their ratings periodically and make changes, wherever considered appropriate. Such changes are
reported widely through the media. It is the experience of all rating agencies that some
instruments initially rated as investment grade fall below investment grade or go into default,
over a period of time.
Further, it must be noted that there is no privity of contract between an investor or a lender and a
rating agency and the investor is free to accept or reject the opinion of the agency. A credit rating
is not an advice to buy, sell or hold securities or investments and investors are expected to take
their investment decisions after considering all relevant factors and their own policies and
priorities. A credit rating is not a guarantee against future losses. Please also note that credit
ratings do not take into account many aspects which influence investment decisions. They do
not, for example, evaluate the reasonableness of the issue price, possibilities for capital gains or
take into account the liquidity in the secondary market. Ratings also do not take into account the
risk of prepayment by issuer, or interest or exchange risks. Although these are often related to the
credit risk, the rating essentially is an opinion on the relative quality of the credit risk, based on
the information available at a given point of time.
Fitch Ratings
November 12, 2002
BY ELECTRONIC MAIL
Mr. Jonathan G. Katz

Secretary
United States Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re: File No. 4-467
Dear Sir:
We set forth below Fitch's views on the role and function of rating agencies in the operation of
securities markets provided in anticipation of the hearings on credit rating agencies scheduled for
November 15 and 21, 2002.
Introduction
Fitch Ratings traces it roots to the Fitch Publishing Company established in 1913. In the 1920s,
Fitch introduced the now familiar "AAA" to "D" rating scale. Fitch was one of the three rating
agencies (together with Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's"))
first recognized as a nationally recognized statistical rating organization (a so-called "NRSRO")
by the Securities and Exchanges Commission ("SEC") in 1975.
Since 1989 when Fitch was recapitalized by a new management team, Fitch has experienced
dramatic growth. Throughout the 1990's, Fitch especially grew in the new area of structured
finance, by providing investors original research, clear explanations of complex credits, and
more rigorous surveillance than the other rating agencies.
In 1997, Fitch merged with IBCA Limited, another NRSRO headquartered in London,
significantly increasing Fitch's worldwide presence and coverage in banking, financial
institutions and sovereigns. Through the merger with IBCA, Fitch became owned by the French
holding company, Fimalac S.A., which acquired IBCA in 1992. The merger of Fitch and IBCA
represented the first step in our plan to respond to investors' need for an alternative global, full
service rating agency capable of successfully competing with Moody's and S&P across all
products and market segments.
Our next step in building Fitch into a global competitor was our acquisition of Duff & Phelps
Credit Rating Co., an NRSRO headquartered in Chicago, in April, 2000 followed by the
acquisition later that year of the rating business of Thomson BankWatch. These acquisitions
strengthened our coverage in the corporate, financial institution, insurance and structured finance
sectors, as well as adding a significant number of international offices and affiliates.
As a result of Fitch's growth and acquisitions, it today has approximately 1,200 employees,
including over 700 analysts, in over 40 offices and affiliates worldwide. Fitch currently covers
2,300 banks and financial institutions, 1,000 corporations, 70 sovereigns and 26,000 municipal
offerings in the United States. In addition, we cover over 7,000 issues in structured finance,
which remains our traditional strength.
The Role of Rating Agencies
Fitch is in the business of publishing research and independent ratings and credit analysis of
securities issued around the world. A rating is our published opinion as to the creditworthiness of
a security distilled in a simple, easy to use grading system ("AAA" to "DDD"). Explanatory
information is typically provided with each rating.
Rating agencies gather and analyze a variety of financial, industry, market and economic
information, synthesize that information and publish independent, credible assessments of the
creditworthiness of securities and issuers thereby providing a convenient way for investors to
judge the credit quality of various alternative investment options. Rating agencies also publish
considerable independent research on credit markets, industry trends and economic issues of
general interest to the investing public.
By focusing on credit analysis and research, rating agencies provide independent, credible and
professional analysis for investors more efficiently than the investors could perform that analysis
themselves.
Currently, we have over 3,200 institutional investors, financial institutions and government
entities subscribing to our research and ratings and thousands of investors and other interested
parties that access our research and ratings through our free website and other published sources
and wire services such as Bloomberg, Business Wire, Dow Jones, Reuters and The Wall Street
Journal.
Ratings are used by a diverse mix of both short-term and long-term investors as a common
benchmark to grade the credit risk of various securities.
In addition to their ease of use, efficiency and wide availability, we believe that credit ratings are
most useful to investors because they allow for reliable comparisons of credit risk across diverse
investment opportunities.
Credit ratings accurately assess credit risk in the overwhelming majority of cases. Credit ratings
have proven to be a reliable indicator for assessing the likelihood that a security will default.
Fitch's most recent corporate bond and structured finance default studies are summarized below.
The performance of ratings by the three NRSROs is quite similar. We believe this similarity
results from the reliance on fundamental credit analysis by the NRSROs and the similar
methodology and criteria of all of the NRSROs.
Through the years, NRSRO ratings also have been increasingly used in safety and soundness and
eligible investment regulations for banks, insurance companies and other financial institutions.
While the use of ratings in regulations has not been without controversy, we believe that
regulators rely on NRSRO ratings for the same reason that investors do: ease of use, wide spread
availability and proven performance over time.
Although other methods can be used to assess the creditworthiness of a security, such as the use
of yield spreads and price volatility, we believe that such methods, while valuable, lack the
simplicity, stability and track record of performance to supplant ratings as the preferred method
used by investors to assess creditworthiness.
However, we also believe that the market is the best judge of the value of ratings. We believe
that if ratings begin to disappoint investors they will stop using them as a tool to assess credit
risk and the ensuing market demand for a better way to access credit risk will rapidly facilitate
the development of new tools to replace ratings and rating agencies.
The Credit Rating Process
We believe that for the most part credit rating agencies have adequate access to the information
they need to form an independent and objective opinion about the creditworthiness of an issuer.
While the rating agency exemption under Regulation FD helps to promote an uninhibited
response to requests for information, the nature and level of nonpublic information provided to
Fitch varies widely by company, industry and country. Nonpublic information frequently
includes budgets and forecasts, as well as advance notification of major corporate events such as
a merger. Nonpublic information may also include more detailed financial reporting.
While access to nonpublic information and senior levels of management at an issuer is

beneficial, an objective opinion about the creditworthiness of an issuer can be formed based
solely on public information in many jurisdictions. Typically, it is not the value of any particular
piece of nonpublic information that is important to the rating process, but that access to such
information and senior management can assist us in forming a qualitative judgment about a
company's management and prospects.
It is also important that rating agencies not be inhibited in requesting information and thereafter
subjecting that information to vigorous internal analysis and discussion. In that connection it is
critical that the courts afford shield law and journalist privilege protection to rating agencies so
that rating agencies are not unduly burdened by third-party discovery and the confidentiality of
their deliberative processes are respected.
Another factor critical to the adequate flow of information to the rating agencies is the
understanding that information can be provided to a rating agency without necessitating an
intrusive and expensive verification process that would largely if not entirely duplicate the work
of other professionals in the issuance of securities. Thus rating agencies do not perform due
diligence and assume the accuracy of the information that is provided to them by issuers and
their advisors. Since rating agencies are part of the financial media, we believe that our ability to
operate on this assumption, and to exercise discretion in deciding how to respond to
informational concerns, is protected by the First Amendment.
Conflicts of Interest
Fees. We do not believe that the fact that the issuer pays a fee to Fitch creates an actual conflict
of interest, i.e., a conflict that impairs the objectivity of Fitch's judgment about creditworthiness
reflected in Fitch ratings. Rather, for the reasons stated below and based on our experience, it is
more appropriately classified as a potential conflict of interest, i.e., something that should be
disclosed and managed to assure that it does not become an actual conflict.
By way of context, our revenue comes from two principal sources: the sale of subscriptions for
our research and fees paid by issuers for the analysis we conduct with respect to ratings. In this
we are similar to other members of the media which derive revenue from subscribers and
advertisers that include companies that they cover. Like other journalists, we emphasize
independence and objectivity because our independent, unbiased coverage of the companies and
securities we rate is important to our research subscribers and the marketplace in general.
Fitch goes to great efforts to assure that our receipt of fees from issuers does not affect our
editorial independence. We have a separate sales and marketing team that works independently
of the analysts that cover the issuers. In corporate finance ratings, analysts generally are not
involved in fee discussions. Although structured finance analysts may be involved in fee
discussions, they are typically senior analysts who understand the need to manage the potential
conflict of interest.
We also manage the potential conflict through our compensation philosophy. The revenue Fitch
receives from issuers covered by an analyst is not a factor in that analyst's compensation. Instead,
an analyst's performance, such as the quality and timeliness of research, and Fitch's overall
financial performance determine an analyst's compensation. Similarly, an analyst's performance
relative to his or her peers and the overall profitability of Fitch determine an analyst's bonus. The
financial performance of analysts' sectors or groups do not factor into their bonuses.
Fitch does not have an advisory relationship with the companies it rates. It always maintains full
independence. Unlike an investment bank, our fees are not based on the success of a bond issue
or tied to the level of the rating issued. The fee charged an issuer does not go up or down
depending on the ratings assigned or the successful completion of a bond offering.
Our fee is determined in advance of the determination of the rating and we do not charge a fee
for a rating unless the issuer agrees in advance to pay the fee. While we do assign ratings on an
unsolicited basis, we do not send bills for them. Any issuer may terminate its fee arrangement
with Fitch without fear that its rating will be lowered, although we do reserve the right to
withdraw a rating for which we are not paid if there is insufficient investor interest in the rating
to justify continuing effort to maintain it.
Why Issuers Request Our Ratings. In the case of Fitch's corporate finance ratings, over 95% of
the companies and financial institutions that we rate requested our rating (or the rating was
requested by the company's financial advisors or investors) and agreed to pay our fee even
though the entity is almost always already rated by both Moody's and S&P.
In structured finance, which accounts for over 50% of our revenue, we are frequently one of two
rating agencies rating a security chosen by the issuer from among the three agencies.
In structured finance, issuers select us to rate securities because of the excellent reputation we
have built for transparent, high-quality analysis, extensive research and comprehensive and
timely surveillance. In the case of corporate finance ratings, we believe that companies, financial
advisors and investors request a Fitch rating, and issuers agree to pay us to conduct our analysis,
because of the equally strong reputation of our corporate and financial institutions research.
Issuers chose to use and pay for a Fitch rating because our independent research improves
investor awareness, increases the liquidity of the issuer's securities and reduces the cost of funds.
In corporate finance ratings, academic research also supports the value of a third rating showing
that companies rated by a third rating agency improve their cost of funding.1
Disclosure. Charging a fee to the issuer for the analysis done in connection with a rating dates
back to the late 1960s. It is widely known by investors. Fitch firmly believes that the disclosure
of the arrangement by which an issuer pay fees to Fitch in connection with Fitch's ratings of the
issuer is appropriate. Accordingly, Fitch currently discloses that it receives fees from issuers in
connection with our ratings as well as the range of fees paid. This has been our practice for many
years. We do not believe, however, that it is necessary or appropriate to provide disclosure of the
specific fees or any more extensive financial disclosure. We believe that the specific fees we
charge and the revenue we derive from other sources are proprietary and if known by our
competitors, both of whom possess dominant market power in certain markets, would cause us
competitive injury. We believe that the far more important disclosure is that the fee arrangement
exists and the range of those fees.
Rating Advisory Services. We also understand that concerns have been expressed that additional
conflict of interest issues are posed by rating agencies providing consulting or ratings advisory
services.
By way of background, Fitch only recently introduced our Ratings Assessment Service. Since
the introduction of this service in May of this year, we have performed only two assessments.
Traditionally, Fitch received inquiries from time to time from issuers and their financial advisors
about the impact potential major corporate events such as acquisitions, recapitalizations and
major asset sales might have on the issuer's rating. As with all reasonable questions raised by an
issuer, the Fitch analyst receiving the inquiry would discuss the matter internally and attempt to
provide the issuer with an indication of the likely effect the event would have on the rating. We
considered this type of feedback to be a routine part of the rating process. The feedback was
informal and uncompensated.
Over the past few years, issuers and their financial advisors frequently asked Fitch to provide
them with a more definitive response to inquiries regarding the rating effect of major corporate
events. Frequently, they also would request our views on multiple scenarios relating to these
major events. These inquiries began to become more demanding in terms of the time
commitment required to address the inquiries.
Both of our competitors (S&P and Moody's) have for sometime been offering a similar paid
service to issuers. Several issuers and major financial advisors also told us that we were at a
competitive disadvantage because we did not offer a ratings assessment service. After significant
internal discussion, we launched our new service in reaction to issuer demand for more certainty
in the process of assessing the rating impact of a major corporate event.
Fitch does not tell issuers what they have to do to get a specific rating. The engagement letter
used for this service also asks the issuer to acknowledge that Fitch is not acting as its advisor in
this process and that a material change in the information provided, transaction structure,
economic environment or business conditions of the issuer may affect the final rating.
Based upon these procedures and the clear understanding of the issuer that the final rating can
change if circumstances change, Fitch believes that it will be at complete liberty to issue a
different final rating if circumstances change between the issuance of the conditional rating and
the final rating.
We are, however, mindful of the need to assure the independence of our ratings and we welcome
any suggestions as to how we might improve the rating assessment service to avoid or mitigate
any potential conflicts of interest.
Competition and Barriers to Entry
Fitch believes that our emergence as a global, full service rating agency capable of competing
against Moody's and S&P across all products and market segments has created meaningful
competition in the ratings market for the first time in years. Fitch's challenge to the
Moody's/S&P monopoly has enhanced innovation, forced transparency in the rating process,
improved service to investors and created much needed price competition.
Academic research confirms our belief that innovations in the ratings industry have often "been
initiated by the smaller rating firms [Fitch and its legacy firms], with the larger two [Moody's
and S&P] then following."2 At Fitch, we are particularly proud of the work that we have done in
the development of innovative methodologies to analyze new structured finance securities. These
innovations in the securities markets have had substantial economic benefits. For instance,
academic research has found that securitization has had a positive impact on both the availability
and cost of credit to households and businesses.3
Fitch firmly believes in the power of competition. We also believe that there is always a demand
for insightful, independent credit research. The NRSRO system is designed, appropriately in our
view, to assure that recognized organizations possess the competence to develop accurate and
reliable ratings and protect against the establishment of rating organizations that would
haphazardly issue investment grade ratings to low quality securities at any time. Without a
system to recognize rating organizations for their competence, many important capital adequacy
and eligible investment rules used in financial institution regulation would be ineffective.
We believe that the SEC should formalize the process by which a rating organization is
recognized. The criteria for recognition should include an evaluation of the organization's
capability, resources and independence, use of the organization's ratings by market participants
and studies of the performance of the ratings over time. We believe these are the reasons that
market participants widely use NRSRO ratings, whether or not they are subject to regulations
that refer to ratings. We also believe that the SEC should consider continuing the practice of
limited recognition that acknowledges the special expertise of smaller organizations in selected
areas of specialty such as the recognition of IBCA and BankWatch for their expertise in rating
banking and financial institutions.
While the NRSRO system is often cited as a barrier to entry for new rating organizations, we
believe that the debate over the NRSRO system ignores the single most important barrier to entry
in the ratings market: the Moody's/S&P monopolies.
Moody's and S&P are a dual monopoly, each possessing separate monopoly power in a market
that has grown to demand two ratings. Each engages in practices designed to perpetuate its
market dominance and extend it to otherwise competitive markets such as structured finance. As
we have publicly stated for more than a year, through their discriminatory practice known as
"notching", Moody's and S&P are successfully altering competition in the commercial and
residential mortgage-backed securities market by leveraging their monopoly position in other
markets.
No matter what the ultimate outcome is in the debate concerning the NRSRO system, new
entrants will have limited success competing with Moody's and S&P until their anticompetitive
behavior is appropriately addressed. Despite a decade of effort, multiple mergers and millions of
dollars of expense devoted to our effort to become fully competitive with Moody's and S&P,
Fitch may still be marginalized in formerly competitive markets because of the monopoly power
Moody's and S&P wield.
If the SEC wishes to address barriers to entry in the ratings market, the Commissioners should
consider enacting rules prohibiting anticompetitive conduct by NRSROs and precluding
NRSROs from discriminating against the ratings by other NRSROs for the purpose of preserving
market share.
Please feel free to contact me here at Fitch if you have any questions regarding Fitch or this
statement.
Very truly yours,
Stephen W. Joynt
President and Chief Executive Officer
________________________
1
Jeff Jewell and Miles Livingston , The Impact Of the Third Credit Rating On the Pricing of
Bonds, Journal of Fixed Income, December 2000; see also Jeff Jewell and Miles Livingston,
The Impact of Fitch's Bond Ratings, March 1998 (unpublished study).
2
Lawrence J. White, The Credit Rating Industry: An Industrial Organization Analysis, June
2001 (paper presented at the conference on "Rating Agencies in the Global Financial System",
presented at the Stern School of Business, New York University, June 1, 2001.
3
Mark M. Zandi, The Securitization of America, Regional Financial Review, February 1998;
Ali Anari, Donald R. Fraser and James W. Kolari, The Effects of Securitization on Mortgage
Market Yields: A Cointegration Analysis, Real Estate Economics, 1998.
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Determination of the Credit Rating for Securities
Rate your securities in order to understand their value Because of the varying degrees of pricing
structures that affect the securities market, it is important to have some sort of credit rating
system that assesses whic.
Liquidity and the Value of Securities
The easier it is to sell the less value it has Generally the intention of the securities market is to
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Browse: Investment Club → Analysis → Determination of the Credit Rating for Securities
Determination of the Credit Rating for

Securities
Analysis
Tags: Assets, Credit Rating, Investment Adviser, Market Sentiments, Securities Market,
Securities Valuation
Rate your securities in order to understand their value
Because of the varying degrees of pricing structures that affect

the securities market, it is important to have some sort of credit rating system that assesses which
securities are performing better than the others.
I am interested in the criteria that are used to assess the credit worthiness of the securities
industry and therefore I have come up with a list of factors that might possibly point towards the
reasons for the credit rating. This is not an exhaustive list but it explores some of the major
issues that will determine how a security is viewed by potential investors.
The list of credit criteria
1. The current state of the security will have an impact on the credit worthiness that is
attached to it. For example if you find that the security is having a very sharp fall in its
price value then that could be a warning sign that the credit worthiness is in question. On
the other hand if you find that the security is experiencing a very sharp rise in its price,
you might reasonably conclude that it is because the credit rating of that security has also
risen. This is not a cast iron formula because there are blatant exceptions. However it
does provide a general direction of where the credit rating is going.
2. The past performance of the securities portfolio will also be considered when making a
credit rating decision. For example if over the past twelve month, that particular line of
securities has experienced great turbulence in terms of its share value, the credit rating
will tumble as well. However if the securities portfolio has been steady throughout a
significant period, the chances are that it will be allocated a good credit score. Please note
that stability can be subjective and has context attached to it. If the market is generally
stable, then it is very easy for a particular security to fall into the category of unstable
assets. However if generally the financial market is uncertain then the threshold for
instability will be significantly raised. You have to study the subtle details before you can
come to the conclusion about the credit rating of your securities.
3. Related to context is the relative strength of weakness of other securities. Context is very
important when you are examining an individual security instrument because speculation
plays a crucial part in determining the value of any portfolio in this industry. Thus if
other securities seem to be doing well and yours is falling behind, then logic would
suggest that its credit rating will not be very high. However if your security is the best
among a poor bunch, then its relative credit rating will be high.
4. The methods that are used to assess credit rating for securities have a significant role to
play because they bring into play the issues of subjectivity. One credit rating organization
may take a dim view of the same set of circumstances that another rating organization
would ignore. Sometimes the credit rating in the securities market appears to be a lottery.
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Credit rating

From Wikipedia, the free encyclopedia

A credit rating is a formal assessment of a corporation, autonomous governments, individuals,

A credit rating estimates the credit worthiness of an individual,

A poor credit rating indicates a high risk of defaulting on a loan, and

• 1 Personal credit ratings

[edit] Personal credit ratings

The factors that may influence a person's credit rating are:[2]

• ability to pay a loan

[edit] North America

In the United States, an individual's credit history is compiled and

• A common form of this analysis is a 3-digit credit score provided

[edit] Australasia (Australia and NZ)

In Australia, The Australian Government "Office of the Privacy

People living in Tasmania can also contact "Tasmanian Collection

Please help improve this article by expanding it. Further

[edit] Corporate credit ratings

Main article: Bond credit rating

The credit rating of a corporation is a financial indicator to potential

[edit] Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign entity, i.e. a

This article in the Guardian contains a map of S&P sovereign ratings.

[edit] Short-term rating

[edit] Credit bureaus and credit rating agencies

Main articles: Credit bureau and Credit rating agency

In the United Kingdom, the main credit reference agencies for

In Canada, the main credit bureaus for individuals are Equifax,

In India, commercial credit rating agencies include CRISIL, CARE,

The largest commercial credit rating agencies (which tend to operate

On 14.07.2010 Dagong International Credit Rating Co. from China

[edit] See also

1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics:

From Wikipedia, the free encyclopedia

Risk - Risk management

Credit risk is an investor's risk of loss arising from a borrower who

• A consumer does not make a payment due on a mortgage loan,

• 1 Assessing credit risk

[edit] Assessing credit risk

Main articles: Credit analysis and Consumer credit risk

Significant resources and sophisticated programs are used to analyze and

Most lenders employ their own models (credit scorecards) to rank

[edit] Sovereign risk

Sovereign risk is the risk of a government becoming unwilling or unable

Five macroeconomic variables that affect the probability of sovereign

• Debt service ratio

The probability of rescheduling is an increasing function of debt service

[edit] Counterparty risk

Counterparty risk, otherwise known as default risk, is the risk that an

Large insurers are counterparties to many transactions, and thus this is

On the methodological side, counterparty risk can be affected by wrong

A good introduction can be found in a paper by Michael Pykhtin and

Lenders mitigate credit risk using several methods:

• Risk-based pricing: Lenders generally charge a higher interest

[edit] See also

[edit] Further reading

• Bluhm, Christian, Ludger Overbeck, and Christoph Wagner

1. ^ Country Risk and Foreign Direct Investment. Duncan H.

[edit] External links

• The Risk Management Association - leading industry organisation

Categories Concentration risk

Interest rate risk · Currency risk · Equity risk ·

Reputational risk · Volatility risk · Settlement risk · Profit

Risk modeling · Market portfolio · Modern portfolio theory ·