Introduction to Credit Rating

A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities.

A credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

Introduction to 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.

Introduction to Credit Rating

Moodys’: “Ratings are designed exclusively for the purpose of grading bonds according to their investments qualities”.

Australian Ratings: ‘A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely repayment of interest and principal on a particular type of debt can be noted’.

Introduction to Credit Rating

Credit rating is an assessment of the capacity of the issuer of debt security by an independent agency, to pay interest and repay principal as per the terms of issue of debt.

The ratings are expressed in code numbers which can be easily comprehended by the lay investors.

Credit rating, as exists in India, is done for a specific security 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 of the security.

A credit rating does not create fiduciary relationship between the agency and the users

Functions of Credit Rating Agencies

Superior information Low cost information Basis for proper risk, return & Trade

off Healthy discipline on corporate

borrowers Formulation of public policy

guidelines on Institutional investment

Benefits of Credit Rating

Low cost information Quick investment decision Independent investment

decision Investor protection

Benefits to rated companies

Sources of additional certification Increase the investor population Forewarns risk Encourages financial Discipline Merchant bankers job made easy Foreign collaborations made easy Benefits the industry as a whole Low cost of borrowing Rating as a marketing tool

Credit Rating Agencies in India

Credit Rating Information Services Limited (CRISIL)

Investment Information and Credit Rating Agency of India (ICRA)

Credit Analysis and research (CARE) Duff Phelps Credit Rating Pvt. Ltd. (DCR India)

Credit Rating Information Services Ltd.

The first credit agency floated on January 1, 1988. It was jointly started by ICICI and UTI with an equity 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 Ratings market, CRISIL Ratings is the agency of choice for issuers and investors.

CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business.

Credit Rating Information Services Ltd.

The principal objective of CRISIL is to rate the debt obligations of Indian companies.Its rating guides the investors about the risk of timely payment of interest and principal on a particular debt instrument.

CRISIL's rating process and rating committee are designed to ensure that all assigned ratings are based on the highest standards of independence and analytical rigor.

The rating committee comprises members who have the professional competence to meaningfully assess the credit analysis that underlies the rating, and have no interest in the entity being rated. A team of analysts carries out the credit analysis

Credit Rating Information Services Ltd.

A detailed flow chart of CRISIL's rating process is as under:

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

Investment Information and Credit Rating Agency of India (ICRA)

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company.

ICRA is a leading provider of investment information and credit rating services in India.

ICRA’s major shareholders include Moody's Investors Service and leading Indian financial institutions and banks.

With the growth and globalisation of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity gradings, specialised performance gradings and mandated studies spanning diverse industrial sectors.

Investment Information and Credit Rating Agency of India (IICRA)

In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners:

Rating Services  Information,  Grading and Reasearch Services Advisory Services Economic Research  Outsourcing

Investment Information and Credit Rating Agency of India (IICRA)

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

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

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

Investment Information and Credit Rating Agency of India (IICRA)

Long term Debentures Bonds and Preference shares-Rating Symbols

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

Credit Analysis and Research Limited (CARE)

The CARE was promoted in 1993 jointly with investment companies, banks and finance companies.

Services offered by CARE are Credit ratingInformation ServiceEquity Research etc

Credit Analysis and Research Limited (CARE)

Long term debt instruments-Rating SymbolsCARE 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