credit rating process in India in details .pptx

Credit Rating - Meaning
A credit rating is an independent assessment of a company's or government entity's creditworthiness in general terms or with respect to a particular debt or financial obligation
Credit Rating - Meaning
Credit rating is an opinion of the relative capacity of a borrowing entity to service its debt obligations within a specified time period and with particular reference to the debt instrument being rated.
History of Credit Rating
The credit rating system originated in the United states in the 70’s.
The high level of default, which occurred after the great depression, in the U.S. Capital markets, gave the impetus for the growth of credit rating.
The default of $82 million of commercial paper by Penn central in the year 1970, and the consequent panic of investors in commercial papers, resulted in massive defaults and liquidity crisis.
This prompted the capital issuers to get their commercial paper programs rated by independent credit rating agencies.
Importance of Credit Rating
Credit rating helps in the development of financial markets.
Credit rating enables investors to draw up the credit–risk profile and assess the adequacy or otherwise of the risk–premium offered by the market.
It saves the investors, time and enables them to take a quick decision.
Issuers have a wider access to capital along with better pricing.
It acts as a marketing tool for the instrument, enhances the company’s reputation and recognition.
Credit rating is a tool in the hands of financial intermediaries.
Credit rating helps the market regulators in promoting stability and efficiency in the securities market.
Credit Rating Process
Credit Rating Process
Features of Credit Rating
Specificity
The rating is specific to the debt instrument
It is intended as a grade and an analysis of the credit risk associated with that particular instrument.
Relativity
The rating is based on the relative capability and willingness of the issuer of the instrument to service debt obligations in accordance with the terms of the contract
Guidance
The rating aims at furnishing guidance to investors/ creditors in determining a credit risk associated with a debt instrument/ credit obligation.
Not a Recommendation
The rating does not provide any sort of recommendation to buy, hold or sell an instrument since it does not take into consideration, factors such as market prices, personal risk preferences and other considerations which may influence an investment decisions.
Broad Parameters
The rating process is based on certain broad parameters of information supplied by the issuer, and also collected from various other sources, including personal interactions with various entities.
No guarantee
The rating furnished by the agency does not provide any guarantee for the completeness or accuracy of the information on which rating is based.

Quantitative and Qualitative
While determining the rating grade, both quantitative as well as qualitative factors are employed.
Advantages
Advantages

1. Credit Rating Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 1

2. Credit Rating - Meaning A credit rating is an independent assessment of a company's or government entity's  creditworthiness  in general terms or with respect to a particular debt or financial obligation Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 2

3. Credit Rating - Meaning Credit rating is an opinion of the relative capacity of a borrowing entity to service its debt obligations within a specified time period and with particular reference to the debt instrument being rated. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 3

4. History of Credit Rating The credit rating system originated in the United states in the 70’s. The high level of default, which occurred after the great depression, in the U.S. Capital markets , gave the impetus for the growth of credit rating. The default of $82 million of commercial paper by Penn central in the year 1970, and the consequent panic of investors in commercial papers, resulted in massive defaults and liquidity crisis. This prompted the capital issuers to get their commercial paper programs rated by independent credit rating agencies. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 4

5. Importance of Credit Rating Credit rating helps in the development of financial markets. Credit rating enables investors to draw up the credit–risk profile and assess the adequacy or otherwise of the risk–premium offered by the market. It saves the investors, time and enables them to take a quick decision. Issuers have a wider access to capital along with better pricing. It acts as a marketing tool for the instrument , enhances the company’s reputation and recognition. Credit rating is a tool in the hands of financial intermediaries. Credit rating helps the market regulators in promoting stability and efficiency in the securities market . Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 5

6. Credit Rating Process Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 6

7. Features of Credit Rating Specificity The rating is specific to the debt instrument It is intended as a grade and an analysis of the credit risk associated with that particular instrument. Relativity The rating is based on the relative capability and willingness of the issuer of the instrument to service debt obligations in accordance with the terms of the contract Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 7

8. Features of Credit Rating Guidance The rating aims at furnishing guidance to investors/ creditors in determining a credit risk associated with a debt instrument/ credit obligation. Not a Recommendation The rating does not provide any sort of recommendation to buy, hold or sell an instrument since it does not take into consideration, factors such as market prices, personal risk preferences and other considerations which may influence an investment decisions. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 8

9. Features of Credit Rating Broad Parameters The rating process is based on certain broad parameters of information supplied by the issuer, and also collected from various other sources, including personal interactions with various entities. No guarantee The rating furnished by the agency does not provide any guarantee for the completeness or accuracy of the information on which rating is based. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 9

10. Features of Credit Rating Quantitative and Qualitative While determining the rating grade, both quantitative as well as qualitative factors are employed. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 10

11. Advantages of Credit Rating Advantages to Investors i Security against Bankruptcy: The rating of a credit instrument, performed by the Credit Rating Agency gives an indication to investors about the financial strength of the company that issued the instrument . This helps him decide regarding the investment . Instruments that are highly rated by the company assure investors of the security of the instruments and a low chance of bankruptcy. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 11

12. Advantages of Credit Rating ii. A Simple Understanding of Risk: Credit rating offers investors rating symbols that convey information in a way that is easily recognized . It helps investors see the potential risks associated with investing. It's easier for investors to gauge the worth of the company that is the issuer through symbolism. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 12

13. Advantages of Credit Rating iii. Credibility of Issuers : The symbol of a rating associated with an instrument of credit provides an indication of the reliability of the company that issues the credit instrument . It is independent of the issuer and has no business or other connections with it. The lack of connections to business between the rating agency and the company being rated gives credibility to the rating agency and draws investors. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 13

14. Advantages of Credit Rating iv. The Saving of Resources: Investors depend on credit ratings. This eliminates the hassle of understanding the basic aspects of a business and its strength, financial standing, management information and more. The credit score, which is provided by the experts from this credit rating agency, gives the investor confidence to trust the credit rating to make the right investment decisions. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 14

15. Advantages of Credit Rating V.  Capacity to Make Direct decisions : Usually, investors need to get advice from financial intermediaries, merchant bankers, stock brokers and portfolio managers or financial advisors about the best investment options. But investors do not have to trust the recommendations provided by these brokers when it comes to assessed instruments because the rating symbol that is assigned to any instrument indicates the creditworthiness of the instrument as well as the level of risk associated with it. Therefore, investors are able to make investment decisions on their own. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 15

16. Advantages of Credit Rating vi. Choice of Investments: Many alternative credit-rated instruments are readily available at a specific point in time for investing in the capital markets. Investors can choose according to their risk profile and their diversification strategy. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 16

17. Advantages of Credit Rating vii. Rating Surveillance: Investors can benefit from the ongoing monitoring by the credit rating agency of the instruments that are rated and rating by various businesses. Credit Rating Agency downgrades the rating of any instrument when it is discovered that the strength of the business decreases or if any other incident occurs that requires disclosure of information regarding its financial condition to investors. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 17

18. Advantages of Credit Rating Advantages to Company i . Lower Cost of Borrowing: A company that has an instrument with a high rating is able to cut costs of borrowing money from public sources by quoting lower interest rates on fixed deposits, bonds or debentures. Investors typically prefer to invest in secure securities, even though they yield less return. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 18

19. Advantages of Credit Rating ii. Extensive Borrowing : A company that has an instrument that is highly rated could approach investors frequently to mobilize resources using the media. Investors of all levels of society might be drawn to higher-rated instruments. Investors are aware of the level of confidence in the timely payments of principal and interest on debt instruments with higher ratings. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 19

20. Advantages of Credit Rating iii. Rating as a Marketing Tool: Businesses with rated instruments boost their image and take advantage of rating as an advertising tool that creates an image that is more appealing when dealing with customers, lenders, creditors and constituents. Customers are confident about the utility products made by companies that have high scores for credit products. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 20

21. Advantages of Credit Rating iv. The Self-Discipline of Companies : Ratings encourage businesses to make more information regarding their accounting system as well as financial reporting, management patterns and more. The company has the opportunity and incentive to enhance the practices it has in place to be comparable to the standard of competitors and to maintain the high standard of rating it has earned or improve its rating. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 21

22. Advantages of Credit Rating vi. Motivation to grow: Ratings provide confidence to the company's growth because the individuals who promote the company are confident about their efforts and are encouraged to pursue the expansion of their business or to develop new initiatives. With a more positive image by a higher credit score, it is able to access money from public banks and institutions. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 22

23. Disadvantages of Credit Rating i . Misrepresentation and biased rating :  At certain levels, there is a high possibility of misrepresentation And the absence of quality rating which is problematic for the capital market industry. ii. Static study :  Sometimes present as well as past historic data of the company remains static, therefore it increases the risk of rating. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 23

24. Disadvantages of Credit Rating iii. Temporary adverse conditions :  Company should maintain its goodwill as well as its standards as once it gets downgraded, it may affect the rating and result in impairing the name and the image of the company. iv.Human bias :  Investigation team at times suffer from human bias, personal matters of the employee might affect the rating. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 24

25. Global Credit Rating Agencies Fitch Ratings Fitch operates in New York and London , basing ratings on company debt and its sensitivity to changes like  interest rates . Countries request Fitch and other agencies to evaluate their financial situation and political and economic climates . John Knowles  Fitch  founded the Fitch Publishing Company in 1913 to provide financial statistics for the investment industry via "The Fitch Stock and Bond Manual" and "The Fitch Bond Book. In 1924, Fitch introduced the AAA through D rating system that has become the basis for ratings throughout the industry Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 25

26. Global Credit Rating Agencies Moody's Investors Service John Moody and Company first published  " Moody's Manual" in 1900 with basic statistics and general information about stocks and bonds of various industries. From 1903 until the  stock market  crash in 1907, "Moody's Manual" was a national publication . In 1909, Moody began publishing "Moody's Analyses of Railroad Investments," which added analytical information about the  value  of securities. Expanding this idea led to the 1914 creation of Moody's Investors Service to provide ratings for nearly all government  bond markets . In the 1970s and late '80s, Moody's began rating  commercial paper  and  bank deposits , becoming the full-scale rating agency it is today. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 26

27. Global Credit Rating Agencies Standard & Poor's Henry Varnum Poor first published the "History of Railroads and Canals in the United States" in 1860, the forerunner of securities analysis and reporting that would be developed over the next century . Standard Statistics was formed in 1906, which published corporate bonds, sovereign debt, and municipal bond ratings . Standard Statistics merged with Poor's Publishing in 1941 to form  Standard and Poor's Corporation , which was acquired by The McGraw-Hill Companies in 1966. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 27

28. Global Credit Rating Agencies S&P has ten letter-based ratings where 'AA' to 'CCC' may be modified with plus or minus symbols. Anything rated AAA to BBB- is considered  investment grade , or the ability to repay debt. Debt rated as BB+ to D is considered speculative, with an uncertain future . The lower the rating, the more potential it has to default, with a D rating as the worst. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 28

29. Credit Rating Agencies in India Credit Rating Information Services of India Ltd. (CRISIL ) Incorporated in 1987, CRISIL Ratings Limited (A subsidiary of CRISIL Limited, an S&P Global company) is a full-service credit rating agency that serves investors, lenders, issuers, and market intermediaries and regulators by covering banks, NBFCs, PSUs, manufacturing companies, financial institutions, state governments, urban local bodies, etc. Credit Rating Information Services of India Limited (CRISIL) evaluates the creditworthiness of commercial entities based on their strengths, market reputation and market share Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 29

30. Credit Rating Agencies in India CRISIL generates and provides various ratings services, such as Independent Credit Evaluation, Corporate and financial Sector ratings, Fund Ratings, Recovery Risk Ratings, Expected Loss (EL) Ratings, etc . The rating generated by the agency ranges from AAA to D, wherein AAA is the highest or creditworthy and D being the lowest or even defaulted. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 30

31. Credit Rating Agencies in India Investment Information and Credit Rating Agency of India (ICRA) Ltd. ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) is an independent and professional investment Information and Credit Rating Agency . Formed in 1991, ICRA offers guidance and information to institutional and individual investors and creditors. It rates rupee-dominated debt instruments issue by commercial banks, NBFCs, PSUs, manufacturing companies and municipalities. The agency uses a transparent rating system to assign comprehensive credit ratings to corporates . Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 31

32. . Credit Rating Agencies in India Credit Analysis and Research (CARE) Ltd Established in 1993, Credit Analysis and Research Limited (CARE) is an experienced credit rating agency that covers various market sectors, including infrastructure, manufacturing, and financial sector, including banks and non-financial services. The agency provides ratings to companies related to developing bank debt and capital market instruments that include CPs, corporate bonds and debentures, and structured credit . Its credit ratings can be used by investors to make informed decisions on the basis of credit risk and risk-return expectations. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 32

33. Credit Rating Agencies in India Acuite Ratings & Research Ltd. Acuité Ratings & Research Limited (Formerly known as SMERA Ratings Limited) is a SEBI registered and RBI accredited credit rating agency that offers ratings to companies serving structured finance, corporate and financial sectors . Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 33

34. Credit Rating Agencies in India Brickwork Ratings India Private Ltd Brickwork Ratings (BWR) is a SEBI registered and RBI accredited Credit Rating Agency that offers rating services on Bank Loans, Fixed Deposits, Non-convertible debentures (NCD), Commercial Paper, Securitised paper, Security receipts, etc. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 34

35. Credit Rating Agencies in India India Ratings and Research Pvt. Ltd. India Ratings and Research ( Ind -Ra), a wholly owned subsidiary of the Fitch Group is one of the leading credit rating agencies recognized by SEBI and accredited by RBI. Ind -Ra offers credit rating services to banks, insurance companies, corporate issuers, finance and leasing companies, urban local bodies and managed funds, structured finance and project finance companies. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 35

36. Credit Rating Regulatory Framework in India Credit rating has been made mandatory in India for issuance of instruments. Following are some of the important regulatory agencies connected with credit rating. SEBI As per the regulations of SEBI, a public issue of debentures and bonds beyond a period of 18 months needs credit rating Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 36

37. RBI According to guidelines of RBI commercial paper issuance in India has to be credit rated. NBFC’s having net owned funds of more than Rs . 2 crores must get their fixed deposit programmes rated . Ministry of Petroleum Marketers of Liquified Petroleum Gas are subject to mandatory rating Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 37

38. Indian Companies Act The proposal for making the rating of fixed deposit programme by limited companies, other than NBFC’s has to be rated by credit rating agencies. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 38

39. ICRA credit rating symbols For securities with original maturity exceeding one year. [ICRA]AAA  Securities with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such securities carry lowest credit risk. [ICRA]AA  Securities with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such securities carry very low credit risk. [ICRA]A  Securities with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such securities carry low credit risk. [ICRA]BBB  Securities with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such securities carry moderate credit risk. [ICRA]BB  Securities with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations. [ICRA]B  Securities with this rating are considered to have high risk of default regarding timely servicing of financial obligations. [ICRA]C  Securities with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. [ICRA]D  Securities with this rating are in default or are expected to be in default soon . Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 39

40. ICRA credit rating symbols ICRA’s Short-Term Rating Scale For securities with original maturity within one year. [ICRA]A1  Securities with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such securities carry lowest credit risk. [ICRA]A2  Securities with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such securities carry low credit risk. [ICRA]A3  Securities with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such securities carry higher credit risk as compared to securities rated in the two higher categories. [ICRA]A4  Securities with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such securities carry very high credit risk and are susceptible to default. [ICRA]D  Securities with this rating are in default or expected to be in default on maturity. Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 40

41. CRISIL Rating Symbols Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 41

42. Rating Framework Business Factors Nature of industry Market position Efficiency of operation Project risk Protective factors Quality of management Financial Factors Financing policies Flexibility of financial structure Past track of record Quality of accounting policy Financial performance indicators Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 42

43. References Dr.S. Gurusamy , Merchant Banking and Financial Services, New Delhi: Tata McGraw Hill M.Y. Khan, Financial Services, New Delhi: Tata McGraw Hill https ://www.paisabazaar.com/credit-score/credit-rating-agencies-in-india/ Dr. R.K.Sudhamathi, Associate Professor, MBA, NGPiTech 43