credit rating
DESCRIPTION
indian credit rating agencies and their symbolsTRANSCRIPT
ASSIGNMENT
ON
CREDIT RATING AGENCIES
SUBMITTED TO: SUBMITTED BY:
Ms. Anshu Shweta (1175041)
A.P. RBIM MBA- RBIM
4th Sem
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INDEX
S. NO. CONTENTS PAGE NO.
1. CREDIT RATING MEANING 3
2. INDIAN CREDIT RATING AGENCIES 4
3. NEED, METHODOLOGY, BENEFITS, FUNCTIONS
4,5,6,7
4. ADVANTAGES & DISADVANTAGES 7,8,9,10
5. CRISIL & SYMBOLS 11
6. CARE & SYMBOLS 12
7. ICRA & SYMBOLS 13
8. FITCH & SYMBOLS 15
9. REFRENCES 17
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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.
A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a
government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back
the debt and the likelihood of default.
Credit ratings are determined by credit ratings agencies. The credit rating represents the credit
rating agency's evaluation of qualitative and quantitative information for a company or
government; including non-public information obtained by the credit rating agencies analysts.
Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their
judgment and experience in determining what public and private information should be
considered in giving a rating to a particular company or government. The credit rating is used by
individuals and entities that purchase the bonds issued by companies and governments to
determine the likelihood that the government will pay its bond obligations.
A poor credit rating indicates a credit rating agency's opinion that the company or government
has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of
long term economic prospects.
A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It
is an evaluation made by credit bureaus of a borrower’s overall credit history. A credit rating is
also known as an evaluation of a potential borrower’s ability to repay debt, prepared by a credit
bureau at the request of the lender. Credit ratings are calculated from financial history and
current assets & liabilities. A credit rating tells a lender or investor the probability of the subject
being able to pay back a loan.
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INDIAN CREDIT RATING AGENCIES
A Credit Rating Agency is a company that assigns credit ratings for issuers of
certain types of debt obligations as well as debt instruments.
Four Main Credit Rating Agencies in India:
1. Credit Rating Information Services of India Limited (CRISIL), Associate of
Standards & Poor’s
2. Credit Analysis & Research Ltd. (CARE Ratings)
3. Investment Information and Credit Rating Agency of India Limited (ICRA),
Associate of Moody’s Investors Service
4. Fitch Ratings
Who needs credit ratings:
1. Commercial Banks
2. Mutual Funds
3. Investment Banks
4. Leasing companies
5. Insurance companies
6. Bond Issuers
Why the need of Credit Rating:
As said earlier, credit rating is an opinion expressed by an independent
professional organization, after making a detailed study of all relevant factors.
Such an opinion is of great assistance to investors in making investment decisions.
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It also helps the issuers of debt instruments to price their issues correctly and to
reach out to investors and win their confidence.
Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of
India (SEBI) often use credit rating to determine eligibility criteria for some
instruments. For example, the RBI has stipulated a minimum credit rating by an
approved agency for issue of Commercial Paper. Credit Rating also proves as a
valuable input in establishing business relationships of various types.
Rating Methodology:
A certain methodology is adopted by rating agencies to ascertain the credit
worthiness of the debt issuers.
In brief, following aspects are taken into consideration while assigning a rating:
o Industry Risk
o Market position
o Ownership
o Earnings & Performance
o Cash flows
o Management structure and composition
o Capital & Debt Structure
o Corporate Governance
o Other factors like (for financial institutions): Capital adequacy & Liquidity,
Quality of asset, Asset/Liability structure, Sourcing of funds, cost of funds.
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Benefits of Credit Ratings:
o To Corporates:
o For corporates, a good credit rating enables them to have lower interest
costs, win confidence of investors. Also there is a compulsion from the
regulators to have credit rating assigned to certaindebt issues.
o To Investors:
o For investors it is a boon since they can take informed investment decisions,
can rely on the issues / offers, they get an ease of selection
of investment products.
o Given the benefits of credit ratings, recently, the role of rating agencies
has come under the scanner during the global financial crisis, as many
companies and their issues collapsed despite high rating.
o Reasons for this being like, abnormally high payment of fees to the rating
agencies for getting a high / good rating, biasedness of agencies in analysis
and judgement, etc.
Functions of a Credit Rating Agency
A credit rating agency serves following functions:
1. Provides unbiased opinion: An independent credit rating agency is likely to
provide an unbiased opinion as to relative capability of the company to service
debt obligations because of the following reasons
It has no vested interest in an issue unlike brokers, financial intermediaries.
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2. Provides quality and dependable information:. A credit rating agency is in a
position to provide quality information on credit risk which is more authenticate
and reliable because:
i. It has highly trained and professional staff who has better ability to assess
risk.
ii.It has access to a lot of information which may not be publicly available.
3. Provides information at low cost: Most of the investors rely on the ratings
assigned by the ratings agencies while taking investment decisions. These ratings
are published in the form of reports and are available easily on the payment of
negligible price. It is not possible for the investors to assess the creditworthiness of
the companies on their own.
4. Provide easy to understand information: Rating agencies first of all gather
information, then analyse the same. At last these interpret and summarise complex
information in a simple and readily understood formal manner. Thus in other
words, information supplied by rating agencies can be easily understood by the
investors. They need not go into details of the financial statements.
5. Provide basis for investment: An investment rated by a credit rating enjoys
higher confidence from investors. Investors can make an estimate of the risk and
return associated with a particular rated issue while investing money in them.
6. Healthy discipline on corporate borrowers: Higher credit rating to any credit
investment enhances corporate image and builds up goodwill and hence it induces
a healthy/ discipline on corporate.
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7. Formation of public policy: Once the debt securities are rated professionally, it
would be easier to formulate public policy guidelines as to the eligibility of
securities to be included in different kinds of institutional port-folio
Benefits to Investors:
1. Safety of investments. Credit rating gives an idea in advance to the investors
about the degree of financial strength of the issuer company. Based on rating he
decides about the investment. Highly rated issues gives an assurance to the
investors of safety of Investments and minimizes his risk.
2. Recognition of risk and returns. Credit rating symbols indicate both the
returns expected and the risk attached to a particular issue. It becomes easier for
the investor to understand the worth of the issuer company just by looking at the
symbol because the issue is backed by the financial strength of the company.
3. Freedom of investment decisions. Investors need not seek advise from the
stock brokers, merchant bankers or the portfolio managers before making
investments. Investors today are free and independent to take investment decisions
themselves. They base their decisions on rating symbols attached to a particular
security. Each rating symbol assigned to a particular investment suggests the
creditworthiness of the investment and indicates the degree of risk involved in it.
4. Wider choice of investments. As it is mandatory to rate debt obligations for
every issuer company, at any particular time, wide range of credit rated
instruments are available for making investment. Depending upon his own ability
to bear risk, the investor can make choice of the securities in which investment is
to be made.
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5. Dependable credibility of issuer. Absence of any link between the rater and
rated firm ensures dependable credibility of issuer and attracts investors. As rating
agency has no vested interest in issue to be rated, and has no
business connections or links with the Board of Directors. In other words, it
operates independent of the issuer company, the rating given by it is always
accepted by the investors.
6. Easy understanding of investment proposals. Investors require no analytical
knowledge on their part about the issuer company. Depending upon rating symbols
assigned by the rating agencies they can proceed with decisions to make
investment in any particular rated security of a
company.
7. Relief from botheration to know company. Credit agencies relieve investors
from botheration of knowing the details of the company, its history, nature of
business, financial position, liquidity and profitability position, composition of
management staff and Board of Directors etc. Credit
rating by professional and specialised analysts reposes confidence in investors to
rely upon the credit symbols for taking investment decisions.
8. Advantages of continuous monitoring. Credit rating agencies not only assign
rating symbols but also continuously monitor them. The Rating agency
downgrades or upgrades the rating symbols following the decline or
improvement in the financial position respectively.
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Disadvantages of Credit Rating
Credit rating suffers from the following limitations:
1. Non-disclosure of significant information. Firm being rated may not provide
significant or material information, which is likely to affect the investor’s decision
as to investment, to the investigation team of the credit rating company.
2. Static study. Rating is a static study of present and past historic data of the
company at one particular point of time. Number of factors including economic,
political, environment, and government policies have direct bearing on the working
of a company.
3. Rating is no certificate of soundness. Rating grades by the rating agencies are
only an opinion about the capability of the company to meets its interest
obligations. Rating symbols do not pinpoint towards quality of products or
management or staff etc. In other words rating does not give a certificate of the
complete soundness of the company. Users should form an independent view of
the rating symbol.
4. Rating may be biased. Personal bias of the investigating team might affect the
quality of the rating. The companies having lower grade rating do not advertise or
use the rating while raising funds from the public. In such a case the investors
cannot get the true information about the risk involved in the instrument.
5. Rating under unfavorable conditions. Rating grades are not always
representative of the true image of a company. A company might be given low
grade because it was passing through unfavorable conditions when rated. Thus,
misleading conclusions may be drawn by the investors which hampers the
company’s interest.
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INDIAN CREDIT AGENCIES
CRISIL
CRISIL is the largest credit rating agency in India. It was established in 1987. The world’s
largest rating agency Standard & Poor's now holds majority stake in CRISIL. Till date it has
rated more than 5178 SMEs across India and has issued more than 10,000 SME ratings.
Rating scale for Long-Term Instruments
CRISIL AAA
(Highest Safety)
Instruments with this rating are considered to have the highest degree of
safety regarding timely servicing of financial obligations. Such
instruments carry lowest credit risk.
CRISIL AA
(High Safety)
Instruments with this rating are considered to have high degree of safety
regarding timely servicing of financial obligations. Such instruments
carry very low credit risk.
CRISIL A
(Adequate Safety)
Instruments with this rating are considered to have adequate degree of
safety regarding timely servicing of financial obligations. Such
instruments carry low credit risk.
CRISIL BBB
(Moderate Safety)
Instruments with this rating are considered to have moderate degree of
safety regarding timely servicing of financial obligations. Such
instruments carry moderate credit risk.
CRISIL BB
(Moderate Risk)
Instruments with this rating are considered to have moderate risk of
default regarding timely servicing of financial obligations.
CRISIL B
(High Risk)
Instruments with this rating are considered to have high risk of default
regarding timely servicing of financial obligations.
CRISIL C
(Very High Risk)
Instruments with this rating are considered to have very high risk of
default regarding timely servicing of financial obligations.
CRISIL D
Default
Instruments with this rating are in default or are expected to be in
default soon.
CARE: Credit Analysis & Research Ltd.
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Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research
and advisory committee promoted by Industrial Development Bank of India (IDBI), Canara
Bank, Unit Trust of India (UTI) and other financial and lending institutions. CARE has
completed over 7,564 rating assignments since its inception in 1993.
Symbols:
CARE AAA- Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
CARE AA- Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
CARE A- Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
CARE BBB- Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
CARE BB- Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
CARE B- Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
CARE C- Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
CARE D- Instruments with this rating are in default or are expected to be in default soon.
ICRA - Investment Information and Credit Rating Agency of India Limited,
Associate of Moody’s Investors Service
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ICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It analyzes data and
provides rating solutions for Individuals and Small and Medium Enterprises(SMEs). ONICRA
has an extensive experience in operating a wide range of business processes in areas such as
Finance, Accounting, Back-end Management, Application Processing, Analytics, and Customer
Relations. It has rated more than 2500 SMEs.
SYMBOLS:
LAAA- The highest credit quality rating assignned by ICRA. The rated instrument carries the
lowest credit risk.
LAA - The high credit-quality rating assigned by ICRA. The rated instrument carries low credit
risk.
LA- The adequate credit quality rating assigned by ICRA. The rated instrument carries average
credit risk.
LBBB- The moderate credit quality rating assigned by ICRA. The rated instrument carries
higher than average credit risk.
LBB- The inadequate credit quality rating assigned by ICRA. The rated instrument carries
high credit risk.
LB- The risk prone credit quality rating assigned by ICRA. . The rated instrument carries very
high credit risk.
LC- The poor credit quality rating assigned by ICRA. The rated instrument has limited prospects
of recovery.
LD- The lowest credit quality rating assigned by ICRA. The rated instrument has very low
prospects of recovery.
ICRA’s Medium-Term Rating Scale (only for Public Deposits)
Medium-Term Rating Scale: All Public Deposit Programmes.
MAAA- The highestcredit quality rating assigned by ICRA. The rated deposits programme
carries the lowest credit risk
MAA- The high-creditquality rating assigned by ICRA. The rated deposits programme carries
slow credit risk.
MA- The adequate credit quality rating assigned by ICRA. The rated deposits programme carries
average credit risk.
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MB-The inadequate credit quality rating assigned by ICRA. The rated deposits programme
carries high credit risk.
MC- The risk prone credit quality rating assigned by ICRA. The rated deposits programme
carries very high credit risk.
MD- The lowest-credit-quality rating assigned by ICRA. The rated instrument has very low
prospects of recovery.
ICRA’s Short-Term Rating Scale
Short-Term Rating Scale: All instruments with original maturity within one year.
A1- The highest-credit quality rating assigned by ICRA to short term debt instruments.
Instruments rated in this category carry the lowest credit risk in the short term. Within this
category, certain instruments are assigned the rating of A1+ to reflect their relatively stronger
credit quality.
A2- The above average credit quality rating assigned by ICRA to short term debt instruments.
However, instruments rated in this category carry higher credit risk than instruments rated A1.
A3- The moderate credit quality rating assigned by ICRA to short term debt instruments.
However, instruments rated in this category carry higher credit risk than instruments rated A2
and A1.
A4- The risk prone credit quality rating assigned by ICRA to short term debt instruments.
Instruments rated in this category carry high credit risk.
A5- The lowest credit quality rating assigned by ICRA to short term debt instruments.
Instruments rated in this category have very low prospect of recovery.
FITCH RATINGS
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Fitch Ratings is a global rating agency committed to providing the world's credit markets with
independent and prospective credit opinions, research, and data. Fitch Ratings is headquartered
in New York and London and is part of the Fitch Group.
Long-Term Rating Scales.
AAA: Highest credit quality.
‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high creditquality.
‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality.
‘A’ ratings denote expectations of low default risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more vulnerable to
adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit quality.
‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for
payment of financial commitments is considered adequate but adverse business or economic
conditions are more likely to impair this capacity.
BB: Speculative.
‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse
changes in business or economic conditions over time; however, business or financial flexibility
exists which supports the servicing of financial commitments.
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B: Highly speculative.
‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued payment is
vulnerable to deterioration in the business and economic environment.
CCC: Substantial credit risk.
Default is a real possibility.
CC: Very high levels of credit risk.
Default of some kind appears probable.
C: Exceptionally high levels of credit risk.
Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a
‘C’ category rating for an issuer include:
a. the issuer has entered into a grace or cure period following non payment of a material financial
obligation;
b.the issuer has entered into a temporary negotiated waiver or standstill agreement following a
payment default on a material financial obligation.
RD: Restricted default.
‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured
payment default on a bond, loan or other material financial obligation but which has not entered
into bankruptcy filings, administration, receivership, liquidation or other formal winding-up
procedure, and which has not otherwise ceased operating.
D: Default.
‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure, or which has
otherwise ceased business.
REFERENCES
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http://www.iloveindia.com/finance/encyclopedia/crisil.html
http://smallb.in/%20/fund-your-business%20/credit-rating%20/msme-rating%20/rating-
agencies-india
http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf
http://taxguru.in/finance/all-about-credit-rating-in-brief.html
http://crisil.com/ratings/credit-rating-scale.html
http://www.careratings.com/Portals/0/Content/Bank%20Loan%20Rating.pdf
http://www.icra.in/files/content/ratingsscale-2008.pdf
http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pf
http://www.psnacet.edu.in/courses/MBA/Financial%20services/16.pdf
http://taxguru.in/finance/all-about-credit-rating-in-brief.html
.
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