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BY SALMAN AHMED !!

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CREDIT RATING INTRODUCTION In a market, financial markets play the role of efficient intermediary. They act as a link between savers and investors, mobilizing capital on one hand, and efficiently allocating them between competing users to the other hand. In addition to this an investor can also base the investment decision on the grading offered by credit rating agencies. Concept of Credit Rating A credit rating is a measure used by creditors to determine how much they can trust a certain borrower, whether the borrower is an individual, a corporation, or a country. The credit rating is derived using past financial data or the borrowers credit history. There are several factors that can affect the credit rating of an individual including: The persons ability to pay a loan Reflected by the persons salary and Other assets The amount of credit in existence This is what credit limits are for. If the Person is near his credit limit or has reached it is harder to get a loan. This Also reflects whether the person is in the habit of going into debtPage 1

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CREDIT RATING

Definition The process of assigning a symbol with specific reference to the instrument being rated, that acts as an indicator of the Current opinion on relative capability on the issuer to service its debt obligation in a timely fashion, is known as credit rating. According to the Moodys, A rating on the future ability and legal obligation of the issuer to make timely payments of Principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument of the expected monetary loss, should a default occur. According to Standard & poors, it helps investors by providing an easily recognizable, simple tool that couples a possibly Unknown issuer with an informative and meaningful symbol of credit quality. According to ICRA, Credit ratings are opinions on the relative capability of timely servicing of corporate debt and obligations.

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CREDIT RATING ORIGIN OF CREDIT RATING

Origin in 1840 following the crisis in 1837 The First Mercantile Credit Agency was set up in New York by Louis Tappan in 1841. First rating guide was published in 1859 John Broad Street set up the similar agency in 1849 which published its Rating books in 1857 In 1900 John Moody founded Moodys Investors Services and in 1909 Published his manual of Rail Road Services

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CREDIT RATING Need and Importance of Credit Rating

1. A wide range of industries take advantage of credit scores to improve fairness, effectiveness and efficiency.

2. Financial companies use credit scores to predict the risk of delinquencies and losses, which enables them to better allocate costs.

3. Insurance companies use specialized credit scores to make fairer underwriting decisions.

4. Credit scores even provide benefits at the macroeconomic level by helping small enterprises attain the funds they need and by facilitating the securitization and sale of financial products in the secondary markets, substantially increasing the influx of capital into a country.Page 4

CREDIT RATING

Importance of credit score A Credit rating is an indicator that reflects how well or badly you manage your financial matters. B By having a look at your credit rating, one can get much information regarding your business organization and particularly the payments made by your organization. C There are several credit bureaus that compile this kind of information and later on sale it to their clients. D It's very important to know your credit score and understand it completely, as it helps you to get loans, mortgage and even a job. E Credit report list personal information such as name, address, date of birth, social security number, number of family member, your employer etc. Financial situations like bankruptcies, tax liens, foreclosure, late payment of your bill...etc, will also be listed in the report.

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CREDIT RATING THE CREDIT RATING SYSTEM

Credit rating has facilitated authorities around the world to issue mandatory rating requirements. For instance, specific rules restrict the new issues that are rated below a particular grade. Growth Factors Credibility and Independence. Capital Market Mechanism. Disclosure requirements. Credit Education. Creation of Debt Market. Major issues in Credit Rating of a Company Investment Vs speculative Grades Continuous Monitoring Grade Surveillance Rating Ceiling Evaluation of Line

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CREDIT RATING CREDIT SCORE Credit score is an estimate of the risk that a bank will take to lend you money. It is also a snapshot of your credit file at a certain point in time. The FICO score is developed by Fair Isaac Corporation and based on credit files maintained by consumer credit reporting agencies. It is widely used by banks, credit unions, insurance agencies, financing companies and other lenders. However, it is not the only factor determining your ability to obtain credit. Other important factors include: income, employment history, previous and current relationships with a lender, to name a few. Each lender decides on its own what will be taken into account when it considers lending money to you. Credit score is a mathematical formula which takes into account many different pieces of information and compares it with hundreds of thousands of other credit reports from the past, to create patterns, which identify statistical possibility of future credit risk.

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CREDIT RATING Every person with a credit file has three credit scores based on Information from three credit bureaus. They are not exactly the same, but for most people they will be only slightly different.

Following are the helpful tips which can improve the credit scores: 1. Collect credit report from Experian, Transfusion and Equifax. Review the report for any error or mistake. 2. Try to reduce the debt of those with high interest. 3. If not in full, try to make payment of minimum balance due of credit cards. 4. Pay all you bills on time. Late payment can do a serious damage to your report. 5. Avoid credit from financial companies. It can negatively affect your score. 6. Don't apply for too many credit accounts. Credit score determine your financial status, so one should always try to keep it as good as possible and avoid any such actions that can affect it and result a low score

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CREDIT RATING CREDIT RATING AGENCY A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations (i.e. assets backed by receivables on loans, such as mortgage-backed securities. These institutions can be companies, cities, non-profit

organizations, or national governments, and the securities they issue can be traded on a secondary market. A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying aAAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. Companies that issue credit scores for individuals are usually called credit bureaus and are distinct from corporate ratings agencies.Page 9

CREDIT RATING Definition of Credit Rating Agency "Credit Rating Agency" means any commercial concern engaged in the business of credit rating of any debt obligation or of any project or programmed requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal Big Three Rating Agencies in U.S are: a. Moody's b. Standard & Poor's c. Fitch Ratings

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CREDIT RATING GROWTH OF CRDIT RATING AGENCIES 1841- Mercantile Credit Agency(USA) 1900- Moodys Investors Services (USA) 1916- Poor Publishing Company (USA) 1922- Standard Statistics Company (USA) 1924- Pitch Publishing Company (USA) 1941- Standard and Poor (USA) 1074- Thomson Bank Watch (USA) 1975- Japanese Bond Rating Institution (JAPAN) 1987- CRISIL by ICICI (INDIA) 1991- ICRA by IFCI (INDIA) 1994- CARE by IDBI (INDIA

Rating Grades Each rating agency has developed its own system of rating grades for sovereign and corporate borrowers. Fitch Ratings developed a rating grade system in 1924that was adopted by Standard & Poor's.Page 11

CREDIT RATING

Moody's grading is slightly different. Moodys sometimes argues that their ratings embed a conceptually superior approach that directly considers not only the likelihood of default but also the severity of loss in the event of default.

Long Term Credit Rankings Fitch Ratings and Standard & Poor's use a system of letter sliding from the best rating "AAA" to "D" for issuers already defaulting on payments Investment Grade: AAA: best quality borrowers, reliable and stable without a Foreseeable risk to future payments of interest and principal AA: very strong borrowers; a bit higher risk than AAA A : upper medium grade; economic situation can affect finance BBB: medium grade borrowers, which are satisfactory at themoment

Non-Investment Grade: BB: lower medium grade borrowers, more prone to changes in thePage 12

CREDIT RATING Economy, somewhat speculative B : low grade, financial situation varies noticeably, speculative CCC: poor quality, currently vulnerable and may default CC: highly vulnerable, most speculative bonds C : Hig