Credit Rating-Parul (2).pptx credit rating details

credit rating

1. Credit Rating

2. Meaning and Definition Credit rating is the opinion of the rating agency on the relative ability and willingness of tile issuer of a debt instrument to meet the debt service obligations as and when they arise. Rating is usually expressed in alphabetical or alphanumeric symbols. Symbols are simple and easily understood tool which help the investor to differentiate between debt instruments on the basis of their underlying credit quality. Rating companies also publish explanations for their symbols used as well as the rationale for the ratings assigned by them, to facilitate deeper understanding. In other words, the rating is an opinion on the future ability and legal obligation of the issuer to make timely payments of principal and interest on a specific fixed income security.

3. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument may be a matter of days to thirty years or more. In fact, the credit rating is a symbolic indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. It can also be defined as an expression, through use of symbols, of the opinion about credit quality of the issuer of security/instrument.

4. Rating Services Credit Rating Information Services Equity Research

5. Objectives of Credit Rating Rating Debt obligation of companies Guiding investors regarding the risk of investment in a debt security as to timely payment of interest obligations and principle amount. Creating awareness of the concept of credit rating amongst corporations, merchant bankers, brokers and regulatory authorities. It helps in the creation of environment that facilitates debt rating. Inculcating a positive environment regarding investment in debt securities. Helps in creating confidence in the minds of investors. Enable the companies to be quality conscious regarding their securities and creating a positive pressure on them to fulfill their debt obligations.

6. Credit Rating Process Request from issuer and analysis Rating Committee Communication to management and appeal Pronouncement of the rating Monitoring of the assigned rating Rating Watch Rating Coverage Rating Scores

7. Credit Rating Methodologies 1. Business Risk Strategic Risk Compliance Risk Operational Risk Reputational Risk 2. Financial Risk Counter Party Risk Political Risk Interest Rate Risk Currency Risk 3. Management Evaluation 4. Business Environment Analysis

8. CAMEL Model in Credit Rating Capital Assets Management Earnings Liquidity

9. Factors Affecting Assigned Ratings The security issuer’s ability to service its debt. In order, they calculate the past and likely future cash flows and compare with fixed interest obligations of the issuer. The volume and composition of outstanding debt. The stability of the future cash flows and earning capacity of company. The interest coverage ratio i.e. how many number of times the issuer is able to meet its fixed interest obligations. Ratio of current assets to current liabilities (i.e. current ratio (CR)) is calculated to assess the liquidity position of the issuing firm. The value of assets pledged as collateral security and the security’s priority of claim against the issuing firm’s assets. Market position of the company products is judged by the demand for the products, competitors market share, distribution channels etc. Operational efficiency is judged by capacity utilisation, prospects of expansion, modernization and diversification, availability of raw material etc. Track record of promoters, directors and expertise of staff also affect the rating of a company.

10. TYPES OF CREDIT RATING Rating of bonds and debentures. Rating is popular in certain cases for bonds and debentures. Practically, all credit rating agencies are doing rating for debentures and bonds. Rating of equity shares. Rating of equity shares is not mandatory in India but credit rating agency ICRA has formulated a system for equity rating. Even SEBI has no immediate plans for compulsory credit rating of initial public offerings (IPOs). Rating of preference shares. In India preference shares are not being rated, however Moody's Investor Service has been rating preference shares since 1973 and ICRA has provision for it. Rating of medium term loans (Public deposits, CDs etc.). Fixed deposits taken by companies are rated on regular scale in India.

11. Rating of short-term instruments [Commercial Papers (CPs) . Credit rating of short term instruments like commercial papers has been started from 1990. Credit rating for CPs is mandatory which is being done by CRISIL, ICRA and CARE. Rating of borrowers. Rating of borrowers, may be an individual or a company is known as borrower’s rating. Rating of real estate builders and developers. A lot of private colonizers and flat builders are operating in big cities. Rating about them is done to ensure that they will properly develop a colony or build flats. CRISIL has started rating of builders and developers. Rating of chit funds. Chit funds collect monthly contributions from savers and give loans to those participants who offer highest rate of interest. Chit funds are rated on the basis of their ability to make timely payment of prize money to subscribers. CRISIL does credit rating of chit funds.

12. Ratings of insurance companies. With the entry of private sector insurance companies, credit rating of insurance companies is also gaining ground. Insurance companies are rated on the basis of their claim paying ability (whether it has high, adequate, moderate or weak claim-paying capacity). ICRA is doing the work of rating insurance companies. Rating of collective investment schemes. When funds of a large number of investors are collectively invested in schemes, these are called collective investment schemes. Credit rating about them means (assessing) whether the scheme will be successful or not. ICRA is doing credit rating of such schemes. Rating of banks. Private and cooperative banks have been failing quite regularly in India. People like to deposit money in banks which are financially sound and capable of repaying back the deposits. CRISIL and ICRA are now doing rating of banks.

13. Rating of states. States in India are now being also rated whether they are fit for investment or not. States with good credit ratings are able to attract investors from within the country and from abroad. Rating of countries . Foreign investors and lenders are interested in knowing the repaying capacity and willingness of the country to repay loans taken by it. They want to make sure that investment in that country is profitable or not. While rating a country the factors considered are its industrial and agricultural production, gross domestic product, government policies, rate of inflation, extent of deficit financing etc. Moody’s, and Morgan Stanley are doing rating of countries.

14. BENEFITS OF CREDIT RATING TO INVESTORS Assessment of risk. Information at low cost. Advantage of continuous monitoring. Provides the investors a choice of Investment.

15. BENEFITS OF CREDIT RATING TO THE RATED COMPANY Ease in borrowings. Borrowing at cheaper rates. Facilitates growth. Recognition of lesser known companies. Adds to the goodwill of the rated company.

16. BENEFITS OF CREDIT RATING TO INTERMEDIARIES 1. Merchant bankers' and brokers' job made easy. In the absence of credit rating, merchant bankers or brokers have to convince the investors about financial position of the borrowing company. If a borrowing company's credit rating is done by a reputed credit agency, the task of merchant bankers and brokers becomes much easy.

17. BENEFITS OF CREDIT RATING TO THE BUSINESS WORLD Increase in investor population. If investors get good guidance about investing the money in debt instruments through credit ratings, more and more people are encouraged to invest their savings in corporate debts. Guidance to foreign investors. Foreign collaborators or foreign financial institutions will invest in those companies only whose credit rating is high. Credit rating will enable them to instantly identify the position of the company.

18. Credit Rating Agencies in India 1 . Credit Rating and Information Services of India Limited (CRISIL) It is India’s first credit rating agency which was incorporated and promoted by the erstwhile ICICI Ltd, along with UTI and other financial institutions in 1987. After 1 year, i.e. in 1988 it commenced its operations. It has its head office in Mumbai. It is India’s foremost provider of ratings, data and research, analytics and solutions, with a strong track record of growth and innovation. It delivers independent opinions and efficient solutions. CRISIL’s majority shareholder is Standard & Poor’s of USA. It also works with governments and policy-makers in India and other emerging markets in the infrastructure domain.

19. 2. Investment Information and Credit rating agency (ICRA) The second credit rating agency incorporated in India was ICRA in 1991. It was set up by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. It is a public limited company. It has its head office in New Delhi. ICRA’s majority shareholder is Moody’s. It covers over 2500 instruments.

20. 3. Fitch Ratings India (P) Ltd . The Fitch group an internationally recognized statistical rating agency has established its base in India through Fitch rating India (P) Ltd. It is 100 % subsidiary of the parent organization Its credit rating apply to a variety of corporates/issues and is not limited to Governments, structured financial arrangements and debt instruments. 4 . Credit Analysis & Research Ltd. (CARE) The next credit rating agency to be set up was CARE in 1993. It is the second-largest credit rating agency in India. It has its head office in Mumbai. CARE Ratings is one of the 5 partners of an international rating agency called ARC Ratings.

21. 5. ONICRA It is a private sector agency set up by Onida Finance. It has its head office in Gurgaon. It provides ratings, risk assessment and analytical solutions to Individuals, MSMEs and Corporates. It is one of only 7 agencies licensed by NSIC (National Small Industries Corporation) to rate SMEs. 6. SMERA (SME Rating Agency of India) SMERA is founded in 2005 especially for MSME sector. It is founded by SIDBI, Dun & Bradstreet Information Services India Pvt Ltd, various public and private sector banks. Its headquarters are situated at Mumbai.

22. Credit Rating Agencies Abroad Standard and Poor’s (S & P) Ratings- More than 150 years old World’s leading provider of Credit ratings Operating in 28 countries Fitch Ratings Headquartered in New York & London Global leader I n Financial Information Services Operating in 30 Countries Moody’s Ratings Operating in 36 Countries

23. Limitations of Credit Rating Rating Changes Industry Specific rather than Company Specific Conflict of Interest Rating is no certificate of soundness . Rating under unfavorable conditions Difference in rating grades