Credit RatingCredit Rating

Dr. Vivek SharmaKhandelwal College of Management Science &

Technology, Bareilly

Introduction

There are four types of investors in the market. 1. Investors having money but not the

investment skill; 2. Investors having money and

investment skill both; 3. Investors having investment skill but

less money; and 4. Investors possessing less money and

poor investment skill.

Contd…

These who do not have enough of money but are equipped with enough of skill there are many individuals and institutions to help them by procuring funds as per need. But those who have money to invest (either from their own resources or from borrowed ones) need guidance and advice with expert opinion as to where to invest? What forms safer outlet both from income and get back point of view, Credit Rating Agencies(CRAs) serve this cause.

What Credit Rating is?

Credit Rating is a simple and easy to understand symbolic indicator of the opinion of a credit rating agency about the risk involved in a borrowing program of an issuer with reference to the capability of the issuer to repay the debt as per terms of issue. This is neither a general purpose evaluation of the company nor a recommendation to buy, hold or sell a debt instrument.

Definition "A rating is an opinion on the future ability

and legal obligation of the issuer to make timely payments of the 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, may be a matter of 30 days to 30 years or more. In addition long term rating incorporate an assessment of the expected monetary loss should default occur,“ Moody's

Credit Rating - Acronym

C- Credit WorthinessR- Risk AnalysisE - Equity AssessmentD- Dividend and Earning ProspectsI - Intentions of PromotersT - Transparency of Organization

Credit Rating - Acronym

R- Relative StrengthA - Authentic InformationT - Technical AnalysisI - Industrial Climate of ProfileN- Network AssessmentG- Guidance to Investors,

Companies, and the Government

Credit Rating Agency- Defined

"Credit rating agency" is a commercial concern engaged in the business of credit rating of any debt obligation or of any project or program 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 to timely payment of interest or principal.

Credit Rating Agencies in India

CRISIL Limited  ICRA Limited Credit Analysis & Research Ltd.

(CARE) Fitch Ratings India Private Ltd. 

Input - Analysis – Output Chart

INPUT ANALYSIS OUTPUTInformation on :Economic/Political System RatingIndustry Analysis Rating Local Business - ExerciseAccounting &Financial Market

How does a rating help an Investor?

The credit ratings provide an investor with critical information to enable him to take an informed investment decision based on his risk-return preferences. These also help investors to select the appropriate investment opportunities from a large range of options available.

How are credit ratings done?

In general the ratings are based on an in-depth study of the industry as also an evaluation of the strengths and weaknesses of the company.

Some of the factors are :- inherent protective factors marketing strategies competitive edge level of technological development

Contd….

operational efficiency, competence and effectiveness of

management, hedging of risks, cash flow trends and potential, liquidity, financial flexibility, government policies, past record of debt servicing,etc.

How long does a rating remain valid?

Once a rating has been accepted by the company, CRAs continuously monitor the corporate and the rating is monitored till the life of the instrument. This process is known as surveillance. During the surveillance period, all changes affecting the company are taken into account and the rating, if necessary, is changed, upwards or downwards. In other words, a rating is valid during the life of the instrument unless it is changed.

What does the suffix + or - with the rating mean?

The suffix + or - may be used with the rating symbol to indicate the comparative position of the instrument within the group covered by the symbol. Thus MAA- lies one notch above MA+.

How does CRAs ensure dependability of ratings?

The CRAs maintain absolute independence from market participants to provide unbiased opinions. The ratings are a result of collective judgement of committee members. The CRA's in-house research and data base ensure that opinions are supported by objective benchmarks and peer comparison.

Factors considered while doing an Equity Grading/Assessment? The factors are:-management quality, industry outlook, corporate operations and

competitive character, financial strength (both past and

future).

Contd…

In other words, all relevant factors affecting the corporates' earnings prospects and inherent risks are looked into. Grades are comments on the fundamentals and do not forecast the future market price or comment upon the compliance or violation of statutory guidelines relates to issues.

How does the CRAs ensure dependability of Equity Grades / Assessment? CRAs maintain absolute

independence from market participants to provide unbiased opinions as it does not buy or sell equity. The Gradings are a result of deliberations of the committee members. Benchmarks set up by CRA's in-house research ensure that gradings are consistent.

How does equity grading help the investors?

Equity Grading gives investors timely access to independent, unbiased and dependable opinions on a company's fundamental strengths and weaknesses in form of the earnings prospects and the associated risks and, therefore, help investors design their portfolios by choosing investment options according to their risk and return preferences.

An example of an Equity Grade The equity grades range from ER1A to

ER6C. To illustrate, an equity grade of ER3B indicates Good Earnings Prospects: Moderate Risk-Indicated fundamentally on above average position. The level, growth and quality of earnings over the medium term are of a high grade. However, changes in business/economic circumstances, as may be visualised, may moderately impair the likely earnings and underlying fundamentals.

Rating – Banks & FIs

CRAMEL model is used by the rating agencies, comprising of: -

C = Capital Adequacy R = Resource Raising Ability A = Asset Quality M = Management Quality and System

Evaluation E = Earning Potential and Prospects. L = Liquidity / Asset - Liability

Management

System for Rating

Management Ability [20]

Growth Potential [25] Stability [45] Disclosure/

Reputation [10] Total [100]

COMPANY ANALYSIS Points

・Asset for Collateral ・Attitude ・Experience

12

・Sales Growth ・Profit Growth ・Marketability

15

・History ・Net Worth ・Settlement ・Collateral ・Partners

30

・Degree of Disclosure ・Public Reputation

7

64

ExplanationA. NO CAUTION SHOULD BE NEEDED 80 - 100

B. NO CAUTION SHOULD BE NEEDED AT PRESENT

65 - 79

C. MORE OR LESS CARE MAY BE NEEDED 50 - 64

D. CAUTION SHOULD BE RECOMMENDED 30 - 49

E. CAUTION SHOULD BE NEEDED 0 - 29

(all points are examples)

Thank You.Thank You.