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Introduction to Credit Rating

A credit rating assesses the credit worthinessof an individual, corporation, or even acountry. Credit ratings are calculated fromfinancial history and current assets andliabilities.A credit rating tells a lender or investor theprobability of the subject being able to payback a loan.

A poor credit rating indicates a high risk ofdefaulting on a loan, and thus leads to highinterest rates.

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An assessment of the credit worthiness ofindividuals and corporations. It is based uponthe history of borrowing and repayment, aswell as the availability of assets and extent ofliabilities.

Credit is important since individuals andcorporations with poor credit will havedifficulty finding financing, and will most likely

have to pay more due to the risk of default.

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MEANING OF CREDIT RATING

Credit rating is an assessment of the capacity of theissuer of debt security by an independent agency, topay interest and repay principal as per the terms ofissue of debt.

The ratings are expressed in code numbers whichcan be easily comprehended by the lay investors.Credit rating, as exists in India, is done for a specificsecurity and not for a company as a whole.A debt rating is not one time evaluation of credit risk,

which can be regarded as valid for the entire life ofthe security. A credit rating does not create fiduciary relationshipbetween the agency and the users

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Functions of Credit Rating Agencies

Superior informationLow cost informationBasis for proper risk, return & Trade offHealthy discipline on corporate borrowersFormulation of public policy guidelines on

Institutional investment

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Benefits of Credit Rating

Low cost informationQuick investment decisionIndependent investment decisionInvestor protection

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Benefits to rated companies

Sources of additional certification

Increase the investor populationForewarns riskEncourages financial DisciplineMerchant bankers job made easyForeign collaborations made easyBenefits the industry as a wholeLow cost of borrowingRating as a marketing tool

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Credit Rating Agencies in India

Credit Rating Information Services Limited(CRISIL)Investment Information and Credit RatingAgency of India (IICRA)Credit Analysis and research (CARE)Duff Phelps Credit Rating Pvt. Ltd.(DCR India)

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Credit Rating Information Services Ltd.

The first credit agency floated on January 1,1988.It was jointly started by ICICI and UTI with anequity capital of 4 crores.CRISIL is India's leading rating agency, and is

the fourth largest in the world. With over a 60% share of the Indian Ratingsmarket, CRISIL Ratings is the agency of choicefor issuers and investors .

CRISIL Ratings is a full service rating agency thatoffers a comprehensive range of rating services.

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Credit Rating Information Services Ltd.

The principal objective of CRISIL is to rate the debtobligations of Indian companies.

Its rating guides the investors about the risk of timelypayment of interest and principal on a particulardebt instrument.

CRISIL's rating process and rating committeeare designed to ensure that all assignedratings are based on the highest standards ofindependence.

The rating committee comprises memberswho have the professional competence tomeaningfully assess the credit analysis thatunderlies the rating, and have no interest inthe entity being rated. A team of analystscarries out the credit analysis

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Credit Rating SymbolsDebenture Rating Symbols

High Investment Grades:

AAA(triple A): Highest SafetyAA (double A): High SafetyInvestment Grades:A: Adequate SafetyBBB (triple B): Moderate SafetySpeculative Grades:BB: Inadequate Safety B: High RiskC: Substantial Risk D: Default

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Investment Information and CreditRating Agency of India (ICRA)

ICRA Limited was incorporated in 1991 as anindependent and professional company.ICRA is a leading provider of investmentinformation and credit rating services in India.

With the growth and globalisation of theIndian capital markets leading to anexponential surge in demand for professionalcredit risk analysis, ICRA has been proactivein widening its service offerings, executingassignments including credit ratings, equity

grading's, specialised performance gradingsand mandated studies spanning diverseindustrial sectors.

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Investment Information and Credit

Rating Agency of India (IICRA)

In addition to being a leading creditrating agency with expertise in virtuallyevery sector of the Indian economy,ICRA has broad-based its services forthe corporate and financial sectors,both in India and overseas, andcurrently offers its services under thefollowing ba nners:Rating Services Information,Grading and Rea search Services Advisory ServicesEconomic Research Outsourcing

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Investment Information and Credit

Rating Agency of India (IICRA)

IICRA was set up by Industrial Finance Corporationof India on 16 th January 1991.

It is a public limited company with an authorizedshare capital of 10 crores.

The initial paid up capital of Rs. 3.50 crores wassubscribed by IFC, UTI, LIC, GIC SBI and others.

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Investment Information and Credit

Rating Agency of India (IICRA)

Long term Debentures Bonds andPreference shares-Rating Symbols

LAAA: Highest SafetyLAA: High SafetyLA: Adequate SafetyLBBB: Moderate SafetyLBB: Inadequate SafetyLB: Risk proneLC: Substantial RiskLD: Default, Extremely speculative

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Credit Analysis and Research Limited(CARE)

The CARE was promoted in 1993 jointlywith investment companies, banks and

finance companies.Services offered by CARE areCredit ratingInformation ServiceEquity Research etc

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Credit Analysis and Research Limited(CARE)Long term debt instruments-Rating Symbols

CARE AAA: Highest SafetyCARE AA: High SafetyCARE A: Adequate SafetyCARE BB: Inadequate SafetyCARE B: High RiskFor medium term debt instrumentsCARE AAA: Highest SafetyCARE AA: High SafetyCARE A: Adequate SafetyCARE BB: Inadequate SafetyCARE C: High Risk