CREDIT RATING

WhAT IS CREDIT RATING

• 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.

• Credit Rating is important since individuals and corporations with poor Credit Rating will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

Types of credit Rating

• Personal Credit Ratings• Corporate Credit Ratings• Sovereign Credit Ratings• Instrument Ratings

Rating Process

Credit rating agencies in India

• There are five credit rating agencies in India:– Credit rating information service ltd.(CRISIL).– Investment information and Credit Rating Agency of

India(ICRA)– Credit Analysis and Research(CARE).– Fitch ratings India private limited.(earlier-Duff & Phelps

credit rating )– Onida Individual Credit Rating Agency.(ONICRA)

Functions of credit rating agencies

• Superior information

• Low cost information

• Healthy discipline on corporate borrowers

• Formulation of public policy guidelines on Institutional investment

CRISIL

• CRISIL was incorporated in 1987. It is promoted by ICICI and UTI as a public limited company with its headquarters at Mumbai.

• CRISIL is a Standard & Poor’s company. Its majority shareholder is Standard & Poor’s, the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.

CRISIL’S PROCESS

Credit Rating Symbols

Debenture Rating SymbolsHigh 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

ICRA

• ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency.

• The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. The participation of Moody’s is supported by a Technical Services Agreement, which entails Moody’s providing certain high-value technical services to ICRA

Credit rating Symbols

• Long term Debentures Bonds and Preference shares-Rating Symbols– LAAA: Highest Safety– LAA: High Safety– LA: Adequate Safety– LBBB: Moderate Safety– LBB: Inadequate Safety– LB: Risk prone– LC: Substantial Risk– LD: Default, Extremely speculative

ONICRA

• Onicara Credit Rating Agency of India Limited: (Incorporated in 1993) is an established player in the individual credit assessment and scoring services space in the Indian market. It is the first in India to launch commercial services and provide individual credit rating and reporting services to the Indian financial market.

• ONICRA has been acknowledged as pioneers of Individual Credit Rating in the Economic Survey of India 1993-94 issued by Ministry of Finance, Government of India and its services have been hailed by the financial sector and in the media.

CARE

• Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices.

• CARE Ratings has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April 1993. CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc

Credit Rating Symbols

• Long term debt instruments-Rating Symbols– CARE AAA: Highest Safety– CARE AA: High Safety– CARE A: Adequate Safety– CARE BB: Inadequate Safety– CARE B: High Risk

• For medium term debt instruments– CARE AAA: Highest Safety– CARE AA: High Safety– CARE A: Adequate Safety– CARE BB: Inadequate Safety– CARE C: High Risk

Who uses Credit Rating?• Investors-

– In absence of credit rating system, risk evaluation depends on “name recognition”.

– Credit rating helps investors in selecting appropriate instrument from broad spectrum of investment options.

– Banks use ratings of other banks for decisions regarding interbank lending, swap agreements, etc.

– Credit rating agencies also provides services like industry reports, corporate reports, seminars and open access to the analysts of the agencies.

• Regulators-– Restrict entry to market of new issues rated bellow a

particular grade.– Prohibit investors from purchasing or holding of

instruments rated bellow a particular level.

• Issuers-– Compared to unrated securities, issuers of rated

securities have access to much wider investor base & more faith is placed.

– Investor confidence enables issuers of highly rated instruments to access market even under adverse market conditions.

• Intermediaries-– Merchant bankers use rating for planning, pricing,

underwriting, placement.– Brokers and dealers in securities use rating as an input

for their monitoring of risk exposures.

Who uses Credit Rating?(..Cont)

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)

DISADVANTAGES OF CREDIT RATING

• Biased rating and misrepresentation• Concealment of material information• No guarantee for soundness of the company• Human bias• Reflection of temporary and adverse conditions• Present rating may change (down grade)• Differences in rating of two agencies

Live Case

• S&P cuts 2012 growth forecast to 5.5%

THANK YOU