ASSIGNMENT

ON

CREDIT RATING AGENCIES

SUBMITTED TO: SUBMITTED BY:

Ms. Anshu Shweta (1175041)

A.P. RBIM MBA- RBIM

4th Sem

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INDEX

S. NO. CONTENTS PAGE NO.

1. CREDIT RATING MEANING 3

2. INDIAN CREDIT RATING AGENCIES 4

3. NEED, METHODOLOGY, BENEFITS, FUNCTIONS

4,5,6,7

4. ADVANTAGES & DISADVANTAGES 7,8,9,10

5. CRISIL & SYMBOLS 11

6. CARE & SYMBOLS 12

7. ICRA & SYMBOLS 13

8. FITCH & SYMBOLS 15

9. REFRENCES 17

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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 is important since individuals and corporations with poor credit will have difficulty

finding financing, and will most likely have to pay more due to the risk of default.

A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a

government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back

the debt and the likelihood of default.

Credit ratings are determined by credit ratings agencies. The credit rating represents the credit

rating agency's evaluation of qualitative and quantitative information for a company or

government; including non-public information obtained by the credit rating agencies analysts.

Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their

judgment and experience in determining what public and private information should be

considered in giving a rating to a particular company or government. The credit rating is used by

individuals and entities that purchase the bonds issued by companies and governments to

determine the likelihood that the government will pay its bond obligations.

A poor credit rating indicates a credit rating agency's opinion that the company or government

has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of

long term economic prospects.

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. 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. Credit ratings are calculated from financial history and

current assets &  liabilities. A credit rating tells a lender or investor the probability of the subject

being able to pay back a loan.

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INDIAN CREDIT RATING AGENCIES

A Credit Rating Agency is a company that assigns credit ratings for issuers of

certain types of debt obligations as well as debt instruments.

Four Main Credit Rating Agencies in India:

1. Credit Rating Information Services of India Limited (CRISIL), Associate of

Standards & Poor’s

2. Credit Analysis & Research Ltd. (CARE Ratings)

3. Investment Information and Credit Rating Agency of India Limited (ICRA),

Associate of Moody’s Investors Service

4. Fitch Ratings

Who needs credit ratings:

1. Commercial Banks

2. Mutual Funds

3. Investment Banks

4. Leasing companies

5. Insurance companies

6. Bond Issuers

Why the need of Credit Rating:

As said earlier, credit rating is an opinion expressed by an independent

professional organization, after making a detailed study of all relevant factors.

Such an opinion is of great assistance to investors in making investment decisions.

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It also helps the issuers of debt instruments to price their issues correctly and to

reach out to investors and win their confidence.

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. Credit Rating also proves as a

valuable input in establishing business relationships of various types.

Rating Methodology:

A certain methodology is adopted by rating agencies to ascertain the credit

worthiness of the debt issuers.

In brief, following aspects are taken into consideration while assigning a rating:

o Industry Risk

o Market position

o Ownership

o Earnings & Performance

o Cash flows

o Management structure and composition

o Capital & Debt Structure

o Corporate Governance

o Other factors like (for financial institutions): Capital adequacy & Liquidity,

Quality of asset, Asset/Liability structure, Sourcing of funds, cost of funds.

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Benefits of Credit Ratings:

o To Corporates:

o For corporates, a good credit rating enables them to have lower interest

costs, win confidence of investors. Also there is a compulsion from the

regulators to have credit rating assigned to certaindebt issues.

o To Investors:

o For investors it is a boon since they can take informed investment decisions,

can rely on the issues / offers, they get an ease of selection

of investment products.

o Given the benefits of credit ratings, recently, the role of rating agencies

has come under the scanner during the global financial crisis, as many

companies and their issues collapsed despite high rating.

o Reasons for this being like, abnormally high payment of fees to the rating

agencies for getting a high / good rating, biasedness of agencies in analysis

and judgement, etc.

Functions of a Credit Rating Agency

A credit rating agency serves following functions:

1. Provides unbiased opinion: An independent credit rating agency is likely to

provide an unbiased opinion as to relative capability of the company to service

debt obligations because of the following reasons

It has no vested interest in an issue unlike brokers, financial intermediaries.

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2. Provides quality and dependable information:. A credit rating agency is in a

position to provide quality information on credit risk which is more authenticate

and reliable because:

i. It has highly trained and professional staff who has better ability to assess

risk.

ii.It has access to a lot of information which may not be publicly available.

3. Provides information at low cost: Most of the investors rely on the ratings

assigned by the ratings agencies while taking investment decisions. These ratings

are published in the form of reports and are available easily on the payment of

negligible price. It is not possible for the investors to assess the creditworthiness of

the companies on their own.

4. Provide easy to understand information: Rating agencies first of all gather

information, then analyse the same. At last these interpret and summarise complex

information in a simple and readily understood formal manner. Thus in other

words, information supplied by rating agencies can be easily understood by the

investors. They need not go into details of the financial statements.

5. Provide basis for investment: An investment rated by a credit rating enjoys

higher confidence from investors. Investors can make an estimate of the risk and

return associated with a particular rated issue while investing money in them.

6. Healthy discipline on corporate borrowers: Higher credit rating to any credit

investment enhances corporate image and builds up goodwill and hence it induces

a healthy/ discipline on corporate.

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7. Formation of public policy: Once the debt securities are rated professionally, it

would be easier to formulate public policy guidelines as to the eligibility of

securities to be included in different kinds of institutional port-folio

Benefits to Investors:

1. Safety of investments. Credit rating gives an idea in advance to the investors

about the degree of financial strength of the issuer company. Based on rating he

decides about the investment. Highly rated issues gives an assurance to the

investors of safety of Investments and minimizes his risk.

2. Recognition of risk and returns. Credit rating symbols indicate both the

returns expected and the risk attached to a particular issue. It becomes easier for

the investor to understand the worth of the issuer company just by looking at the

symbol because the issue is backed by the financial strength of the company.

3. Freedom of investment decisions. Investors need not seek advise from the

stock brokers, merchant bankers or the portfolio managers before making

investments. Investors today are free and independent to take investment decisions

themselves. They base their decisions on rating symbols attached to a particular

security. Each rating symbol assigned to a particular investment suggests the

creditworthiness of the investment and indicates the degree of risk involved in it.

4. Wider choice of investments. As it is mandatory to rate debt obligations for

every issuer company, at any particular time, wide range of credit rated

instruments are available for making investment. Depending upon his own ability

to bear risk, the investor can make choice of the securities in which investment is

to be made.

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5. Dependable credibility of issuer. Absence of any link between the rater and

rated firm ensures dependable credibility of issuer and attracts investors. As rating

agency has no vested interest in issue to be rated, and has no

business connections or links with the Board of Directors. In other words, it

operates independent of the issuer company, the rating given by it is always

accepted by the investors.

6. Easy understanding of investment proposals. Investors require no analytical

knowledge on their part about the issuer company. Depending upon rating symbols

assigned by the rating agencies they can proceed with decisions to make

investment in any particular rated security of a

company.

7. Relief from botheration to know company. Credit agencies relieve investors

from botheration of knowing the details of the company, its history, nature of

business, financial position, liquidity and profitability position, composition of

management staff and Board of Directors etc. Credit

rating by professional and specialised analysts reposes confidence in investors to

rely upon the credit symbols for taking investment decisions.

8. Advantages of continuous monitoring. Credit rating agencies not only assign

rating symbols but also continuously monitor them. The Rating agency

downgrades or upgrades the rating symbols following the decline or

improvement in the financial position respectively.

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Disadvantages of Credit Rating

Credit rating suffers from the following limitations:

1. Non-disclosure of significant information. Firm being rated may not provide

significant or material information, which is likely to affect the investor’s decision

as to investment, to the investigation team of the credit rating company.

2. Static study. Rating is a static study of present and past historic data of the

company at one particular point of time. Number of factors including economic,

political, environment, and government policies have direct bearing on the working

of a company.

3. Rating is no certificate of soundness. Rating grades by the rating agencies are

only an opinion about the capability of the company to meets its interest

obligations. Rating symbols do not pinpoint towards quality of products or

management or staff etc. In other words rating does not give a certificate of the

complete soundness of the company. Users should form an independent view of

the rating symbol.

4. Rating may be biased. Personal bias of the investigating team might affect the

quality of the rating. The companies having lower grade rating do not advertise or

use the rating while raising funds from the public. In such a case the investors

cannot get the true information about the risk involved in the instrument.

5. Rating under unfavorable conditions. Rating grades are not always

representative of the true image of a company. A company might be given low

grade because it was passing through unfavorable conditions when rated. Thus,

misleading conclusions may be drawn by the investors which hampers the

company’s interest.

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INDIAN CREDIT AGENCIES

CRISIL

CRISIL is the largest credit rating agency in India. It was established in 1987. The world’s

largest rating agency Standard & Poor's now holds majority stake in CRISIL. Till date it has

rated more than 5178 SMEs across India and has issued more than 10,000 SME ratings.

Rating scale for Long-Term Instruments

CRISIL AAA

(Highest Safety)

Instruments with this rating are considered to have the highest degree of

safety regarding timely servicing of financial obligations. Such

instruments carry lowest credit risk.

CRISIL AA

(High Safety)

Instruments with this rating are considered to have high degree of safety

regarding timely servicing of financial obligations. Such instruments

carry very low credit risk.

CRISIL A

(Adequate Safety)

Instruments with this rating are considered to have adequate degree of

safety regarding timely servicing of financial obligations. Such

instruments carry low credit risk.

CRISIL BBB

(Moderate Safety)

Instruments with this rating are considered to have moderate degree of

safety regarding timely servicing of financial obligations. Such

instruments carry moderate credit risk.

CRISIL BB

(Moderate Risk)

Instruments with this rating are considered to have moderate risk of

default regarding timely servicing of financial obligations.

CRISIL B

(High Risk)

Instruments with this rating are considered to have high risk of default

regarding timely servicing of financial obligations.

CRISIL C

(Very High Risk)

Instruments with this rating are considered to have very high risk of

default regarding timely servicing of financial obligations.

CRISIL D

Default

Instruments with this rating are in default or are expected to be in

default soon.

CARE: Credit Analysis & Research Ltd.

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Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research

and advisory committee promoted by Industrial Development Bank of India (IDBI), Canara

Bank, Unit Trust of India (UTI) and other financial and lending institutions. CARE has

completed over 7,564 rating assignments since its inception in 1993.

Symbols:

CARE AAA- Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

CARE AA- Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

CARE A- Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.

CARE BBB- Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

CARE BB- Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.

CARE B- Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.

CARE C- Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.

CARE D- Instruments with this rating are in default or are expected to be in default soon.

ICRA - Investment   Information and Credit Rating Agency of India Limited,

Associate of Moody’s Investors Service

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ICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It analyzes data and

provides rating solutions for Individuals and Small and Medium Enterprises(SMEs). ONICRA

has an extensive experience in operating a wide range of business processes in areas such as

Finance, Accounting, Back-end Management, Application Processing, Analytics, and Customer

Relations. It has rated more than 2500 SMEs.

SYMBOLS:

LAAA- The highest credit quality rating assignned by ICRA. The rated instrument carries the

lowest credit risk.

LAA - The high credit-quality rating assigned by ICRA. The rated instrument carries low credit

risk.

LA- The adequate credit quality rating assigned by ICRA. The rated instrument carries average

credit risk.

LBBB- The moderate credit quality rating assigned by ICRA. The rated instrument carries

higher than average credit risk.

LBB- The inadequate credit quality rating assigned by ICRA. The rated instrument carries

high credit risk.

LB- The risk prone credit quality rating assigned by ICRA. . The rated instrument carries very

high credit risk.

LC- The poor credit quality rating assigned by ICRA. The rated instrument has limited prospects

of recovery.

LD- The lowest credit quality rating assigned by ICRA. The rated instrument has very low

prospects of recovery.

ICRA’s Medium-Term Rating Scale (only for Public Deposits)

Medium-Term Rating Scale: All Public Deposit Programmes.

MAAA- The highestcredit quality rating assigned by ICRA. The rated deposits programme

carries the lowest credit risk

MAA- The high-creditquality rating assigned by ICRA. The rated deposits programme carries

slow credit risk.

MA- The adequate credit quality rating assigned by ICRA. The rated deposits programme carries

average credit risk.

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MB-The inadequate credit quality rating assigned by ICRA. The rated deposits programme

carries high credit risk.

MC- The risk prone credit quality rating assigned by ICRA. The rated deposits programme

carries very high credit risk.

MD- The lowest-credit-quality rating assigned by ICRA. The rated instrument has very low

prospects of recovery.

ICRA’s Short-Term Rating Scale

Short-Term Rating Scale: All instruments with original maturity within one year.

A1- The highest-credit quality rating assigned by ICRA to short term debt instruments.

Instruments rated in this category carry the lowest credit risk in the short term. Within this

category, certain instruments are assigned the rating of A1+ to reflect their relatively stronger

credit quality.

A2- The above average credit quality rating assigned by ICRA to short term debt instruments.

However, instruments rated in this category carry higher credit risk than instruments rated A1.

A3- The moderate credit quality rating assigned by ICRA to short term debt instruments.

However, instruments rated in this category carry higher credit risk than instruments rated A2

and A1.

A4- The risk prone credit quality rating assigned by ICRA to short term debt instruments.

Instruments rated in this category carry high credit risk.

A5- The lowest credit quality rating assigned by ICRA to short term debt instruments.

Instruments rated in this category have very low prospect of recovery.

FITCH RATINGS

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Fitch Ratings is a global rating agency committed to providing the world's credit markets with

independent and prospective credit opinions, research, and data. Fitch Ratings is headquartered

in New York and London and is part of the Fitch Group.

Long-Term Rating Scales.

AAA: Highest credit quality.

‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of

exceptionally strong capacity for payment of financial commitments. This capacity is highly

unlikely to be adversely affected by foreseeable events.

AA: Very high creditquality.

‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for

payment of financial commitments. This capacity is not significantly vulnerable to foreseeable

events.

A: High credit quality.

‘A’ ratings denote expectations of low default risk. The capacity for payment of financial

commitments is considered strong. This capacity may, nevertheless, be more vulnerable to

adverse business or economic conditions than is the case for higher ratings.

BBB: Good credit quality.

‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for

payment of financial commitments is considered adequate but adverse business or economic

conditions are more likely to impair this capacity.

BB: Speculative.

‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse

changes in business or economic conditions over time; however, business or financial flexibility

exists which supports the servicing of financial commitments.

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B: Highly speculative.

‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains.

Financial commitments are currently being met; however, capacity for continued payment is

vulnerable to deterioration in the business and economic environment.

CCC: Substantial credit risk.

Default is a real possibility.

CC: Very high levels of credit risk.

Default of some kind appears probable.

C: Exceptionally high levels of credit risk.

Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a

‘C’ category rating for an issuer include:

a. the issuer has entered into a grace or cure period following non payment of a material financial

obligation;

b.the issuer has entered into a temporary negotiated waiver or standstill agreement following a

payment default on a material financial obligation.

RD: Restricted default.

‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured

payment default on a bond, loan or other material financial obligation but which has not entered

into bankruptcy filings, administration, receivership, liquidation or other formal winding-up

procedure, and which has not otherwise ceased operating.

D: Default.

‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings,

administration, receivership, liquidation or other formal winding-up procedure, or which has

otherwise ceased business.

REFERENCES

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http://www.iloveindia.com/finance/encyclopedia/crisil.html

http://smallb.in/%20/fund-your-business%20/credit-rating%20/msme-rating%20/rating-

agencies-india

http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf

http://taxguru.in/finance/all-about-credit-rating-in-brief.html

http://crisil.com/ratings/credit-rating-scale.html

http://www.careratings.com/Portals/0/Content/Bank%20Loan%20Rating.pdf

http://www.icra.in/files/content/ratingsscale-2008.pdf

http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pf

http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf

http://taxguru.in/finance/all-about-credit-rating-in-brief.html

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