CREDIT

RATING

BY: PROF.SHIVGANGA MAINDARGI

 CREDIT RATING
• An assessment of the credit worthiness of
individuals and corporations/ govt.

• It is based upon the history of borrowing and

repayment,

• as well as the availability of assets and extent of

liabilities
 CREDIT RATING

• Evaluation of credit worthiness of an issuer of specific types of

debt issued by a business

• It is an evaluation made by credit rating agency of the debt

issuers likelihood of default

• Credit ratings are determined by credit ratings agencies.

• Not a mathematical calculation

 FACTORS
• Ability to pay a loan
• Interest
• amount of credit used
• saving patterns
• spending patterns
• Debt

• In different parts of the world different personal credit score

systems exist.
FACTORS CONSIDERED FOR RATING

• Industry risk
• Market position
• Ownership and support
• Earning & performance
• Cash flows
• Capital & debt structure
• Corporate governance
DEFINITION --

• “Ratings are designed exclusively for the purpose of grading

bonds according to their investment qualities” - Moody’s

• “Ratings are opinions on the relative capability of timely

servicing of corporate debt & obligations. These are not
recommendations to buy or sell…. Neither the accuracy nor the
completeness of the information is guaranteed” -
ICRA
 WHAT IS A CREDIT RATING?
A credit rating represents the rating agency's opinion on the
likelihood of a rated debt obligation being repaid in full and on
time.

• A simple alphanumeric symbol is normally used to convey a

credit rating.

• It is focused on the risk of non-payment of debt

instruments
 FEATURES

1. An assessment of the capacity of the issuer of debt

security – to repay with interest as per the terms of
debt
2. Collection of qualitative & quantitative data has to be
assessed for rating
3. Rating given is based on an objective judgment of a
team of experts
4. Ratings are given in code numbers
5. Easiest way of understanding without going into the
complicated financial reports
 FEATURES -- CONTD
6. It is only a guidance not a recommendation to
the investors (for the particular debt instrument)

• Investors always look for

• (1) yield to maturity
(2) risk tolerance to investor
(3)credit risk of security
7. Credit rating focuses only on one aspect (3) so it is
only a current opinion of capacity of repayment
 FEATURES

8. In India, rating is done on a security and not on a

company as a whole

9. It is not one time assessment, but a continuous

appraisal

10.It does not create fiduciary relationship between

rating agencies and the users as there is no legal
basis for such relationships
 CRISIL RATES INCLUDES

1. Industrial companies
2. Banks Non-banking financial companies (NBFCs)
3. Infrastructure entities
4. Microfinance institutions
5. Insurance companies
6. Mutual funds
7. State governments
8. Urban local bodies
 ORIGIN
• Concept originated in USA – 1860
• Henry Vannum Poor started publishing financial
statistics of railroad companies
• 1909 Moody’s Investors Agencies started rating railroad
with more thrust
• System of ratings got institutionalised following great
depression
• 1933 US controller of currency enacted a rule that banks
could purchase securities rated onlyBBB/Baa or above
 ORIGIN -CONTD

• 1970: Penn Central, then largest railroad company in

the world went bankrupt with $100 million in
commercial paper

• Which forced investors to ask for rating for commercial

paper

• Today 100% commercial paper and 99% corporate

bond volume are rated in USA
 IN INDIA
• Credit Rating Information Services of India Ltd
was set up in 1987 (CRISIL)
• Investment Information and Credit Rating
Agency of India -1991 (ICRA)
• Credit Analysis and Research Ltd – 1993
(CARE)
• All 3 agencies were approved by RBI
CONTD……..

• The first rating institution in India was DUFFs

and Phelps Credit Rating India Pvt Ltd –
formed in 1995

• After another merger with DCR it is known as

FITCH INDIA LTD
 CREDIT RATING AGENCIES -
INDIA
1. CRISIL Limited, Bombay
2. Fitch Ratings India Private Ltd. Bombay
3. ICRA Limited. Delhi (alliance Moody )
4. Credit Analysis & Research Ltd.
(CARE) Bombay
5. Brickwork Ratings India Private Limited.
Bangalore
6. SME Rating Agency of India Ltd. (SMERA)
Bombay
7. ONICRA (ONIDA credit rating)
8. DUFF PHELPS credit Rating Agency Ltd.,
 REASONS / REQUIREMENT OF
CREDIT RATING

1. The increasing role of money & capital

2. Increased securitization of borrowing and
lending globalization of credit market
3. Withdrawal of government safety nets
4. The trend towards privatization.
5. Growth of confidence in the efficiency of open
market mechanism.
 BENEFITS TO COMPANIES

• Sources of additional information

• Increases investor base
• Encourages financial discipline
• Foreign collaboration made easy
• Rating can be used as a marketing tool to create a better image
among the lenders, creditors,….
• To know the quantum of degault risk
• Gives Small companies better confidence to get credit
• Big companies will get credit at a lower rate
 CRISIL RATING
 CRISIL500 index along with NSE
 Alliance with S&P (S&P acquired 9.68% in CRISIL 1997)
 So far, CRISIL has rated 30,000 debt instruments, covering
the entire debt market.

 The debt obligations rated by CRISIL include:

1. Non-convertible debentures/ bonds/ preference shares

2. Commercial papers/certificates of deposits/short-term
debt
3. Fixed deposits
4. Loans
5. Structured debt
 CREDIT RATING AGENCY AND A
CREDIT BUREAU

A credit rating agency provides an opinion

relating to future debt repayments by
borrowers.

A credit bureau provides information on past

debt repayments by borrowers
 CREDIT RATING SYMBOLS BY CRISIL

 CRISIL uses simple alphanumeric symbols to

convey credit ratings on three basic scales:

1. long-term scale
2. short-term scale
3. fixed deposit scale
 Symbol Description (with regard to the likelihood of
(Rating meeting the debt obligations on time)
category).

AAA Highest Safety (strongly supported by

highest repayment)
AA High Safety (strongly supported by timely
repayment)
A Adequate Safety (satisfactory repayment)
BBB Moderate Safety
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
DEMERITS TO COMPANIES
• Absence of wide spread network limits the skills of
rating
• Unskilled or overloaded staff cannot do justice to the
job
• Rigid Mathematical formulas cannot be used
• Since they work for a fee rating may be manipulated
• It is not permanent in nature