WHAT IS

RATING

Rating symbolizes grade of quality.

 WHAT IS
CREDIT
RATING

• Credit rating is an assessment of the capacity of an

issue of debt security by an independent agency, to
pay interest and repay the principal as per the terms
of issue of debt.

• A credit rating tells investors or lenders the

probability of the issuer of debt to honour the debt.
• Ratings are expressed in code number, which can be
easily known by investor.

• Credit rating is a ongoing appraisal. It is not one time

evaluation of credit risk. The agencies keep on
modifying the rating as per the financial condition of
the issuer.
 WHY CREDIT
RATING

• Credit rating provides guidance to investors/creditors

in determining a credit risk associated with a debt
instrument/credit obligation.

• A rated institution can easily get loan finance from

different financial institutions.
Cont…

• The foreign collaborators become interested in

investing in a company rated well.

• Rating acts as a check post over the performance of

the companies to be rated.

• Provides stability in the stock market when the rated

securities are traded.
 Contd…

• establish a link between risk and return

• Credit rating shows the exact worth of the

organization
 Types of Credit Rating:

Domestic rating: Domestic rating covers both the

corporates and other institution within any country. The
rating would assess the degree of safety of the investment
and the capacity of the issuer, to serve without default
obligation arising out of the funds raised.

Sovereign rating: it is the assessment of the economic health

and financial capability of a country, to serve its
obligations against the external borrowings and the
investment received by it from other countries.
 HOW CREDIT
RATING IS
DONE?

• The rating exercise commences at the request of a

company.
• A rating applies to a particular debt obligation of the
company and is not a general purpose evaluation of
the company.
• In evaluation and monitoring ratings, both
qualitative and quantitative criteria are employed.
• Rating is based on several analysis like-
 Business Analysis

• Industry Risk like nature and basis of competition;

key success factors; demand-supply position;
• Market position of the company within the industry.
• Operating efficiency of the company like location
advantages; labour relationships; cost structure;
technological advantages.
• Legal position in terms of prospectus, trustees and
their responsibilities;
 Financial Analysis

• Accounting quality –method of accountong,qualification

of accountant.
• Adequacy of cash flows
• Financial flexibility -alternative financing plans in times of
stress; ability to raise funds.
• Earnings protection -sources of future earnings growth;
profitability ratios; earnings in relation to fixed income
charges; etc.
 Fundamental Analysis

• Capital Adequacy-assessment of true net worth of the

company,
• Asset Quality-quality of the company's credit-risk
management; systems for monitoring credit;
• Liquidity Management -capital structure; term matching of
assets and liabilities;
• Profitability and Financial Position
• Interest and Tax Sensitivity -exposure to interest rate
changes; tax law changes and hedge against interest rate etc.
Resources rated by agencies

• Primary equity issues

• Debt instruments-both long term and short term

• Secured and unsecured bonds-both long term and

short term

• Structured obligations-where securities are backed by

credit enhancement or third party guarantee
Rating process:
Review of the public information on the client

Questionnaire

Meeting with client

Preparation of draft report

Draft report sent to subject client for review as to factual

accuracy

Amended report (following client comments) sent to rating

committee members

Rating committee meeting/discussion and assignment of rating

Client advised of rating

Rating made public

Credit Rating in India

• CRISIL -Credit rating and information

services of India ltd

• ICRA -Investment information and credit

rating agency of India ltd.

• CARE -Credit analysis and research limited

• ONICRA- Onida Individual credit rating

agency
 CRISIL

• It is the first rating agency in India

• It was promoted in 1987 by the Industrial Credit and
Investment Corporation of India Limited (ICICI) and Unit
Trust of India (UTI).
• The head office of the company is located at Mumbai and it
has established offices outside India also.
• CRISIL's principal objective is to rate debt obligations of
Indian companies.
• CRISIL rates debentures, fixed deposit programmes, short-
term instruments like commercial paper, structured
obligations and preference shares.
• CRISIL has rated in all 926 debt instruments issued by 668
companies.
• CRISIL has introduced CRISIL Card, CRISIL View, CRISIL
Ban Card and CRISIL Rating Digest Service.
Rating process of CRISIL
Rating Symbols
 ICRA
• ICRA was established in the year 1991 by the collaboration of
financial institutions, investment companies, and banks at
Delhi.
• It is an associate of moody’s Investors’ service.

• ICRA undertakes rating of debt instruments.

• ICRA provides 'general assessment' report on different aspects

of the company's operations and management.
• Since its inception, ICRA has rated 300 and above debt
instruments.
Rating Symbol:
 CARE

• It is promoted by the Industrial Development Bank of India

(IDBl) jointly with Canara Bank, UTI, private sector banks
and financial services companies.
• CARE, incorporated on April 21, 1993, commenced its
operations in October 1993.
• CARE undertakes rating of all types of debt instruments like
commercial paper, fixed deposits, bonds, debentures.
• Its services includes credit rating and information services.
Rating Symbol:
 ONICRA

• It is the first credit agency in India which is promoted

by ‘ONIDA’ groups for consumer durables.

• It formulates methodology for assessing small and

medium enterprises.
 Credit Rating Mandatory in India

Credit Rating is mandatory in India for the issuance of certain

debt instruments of the following nature:
• Public issue of debentures/bonds with conversion/redemption
period exceeding 18 months.
• Commercial paper can be issued in India, inter alia, if the
programme has a rating not below 'A2' from ICRA (or its
equivalent from the other rating agencies) and
• Fixed deposit programmes of all non-banking finance
companies with net owned funds above Rs. 200 lakh need to be
compulsorily rated.
Major Agencies Renowned Globally

• Moody investors services (MOODY’S)

• Standard and poor’s corporation (S&P)

• Duff and phelps credit rating co. (DCR)

• Japan credit rating agencies (JCR)

• Thomas bank watch.

ANY QUESTION