Credit rating

Module 7

Credit rating is an analysis of the credit risks

associated with a financial instrument or a

financial entity.

Definition: Credit rating is an analysis of the

credit risks associated with a financial instrument

or a financial entity. It is a rating given to a

particular entity based on the credentials and the

extent to which the financial statements of the

entity are sound, in terms of borrowing and

lending that has been done in the past.

Definition:

An assessment of the credit worthiness of a

borrower in general terms or with respect to a

particular debt or financial obligation. A credit

rating can be assigned to any entity that seeks to

borrow money—an individual, corporation, state

or provincial authority, or sovereign government.

Credit assessment and evaluation for companies

and governments is generally done by a credit

rating agency such as Standard &

Poor’s, Moody’s or Fitch. These rating agencies

are paid by the entity that is seeking a credit

rating for itself or for one of its debt issues.

securitization of debt

Securitization of debt:

Meaning: securitization of debt refers to the

process of liquidating the illiquid and long term

assets like loans and receivables of financial

institutions like banks by issuing marketable

securities against them.

In other words it is a technique by which a long

term, non negotiable and high valued financial

asset like hire purchase is converted into

securities of small values which can be tradable

in the market just like shares.

Features of securitization

Incorporation & Registration of Special Purpose

Vehicles:

Securitization act intends to securitize and

reconstruct the financial assets through two

special purpose vehicles (SPV’s) Securitization

Company and Reconstruction Company. Both of

these companies have to be incorporated under

the Companies act, 1956 and also having them

as the main purpose. It is a requirement for the

Securitization Company and the reconstruction

company to be registered compulsorily with the

RBI before commencing their business

operations.

Enforcement of security interest:

The main aim of the Securitization act is to make available the enforcement of security interest which is to take possession of the assets that have been given as security for the loan. In the event of default by a borrower this act authorizes the lender to issue a demand notice to both the borrower and guarantor to pay off the dues within 60 days from the date of the notice. Even after which the borrower fails to make the payment the lender (Bank or financial institution) could resort to any of the following: (i) Take ownership of the security; (ii) Sale or lease or assign the right over the security; (iii) Employ Manager to manage the security; (iv) Ask any debtors of the borrower to pay any sum due to the borrower. In situations where there are more than one secured creditors the provisions of this act will be valid only when 75% of them agree on the decision.