VIRAJ 47 AISHWARYA 21 SOWJANYA 50 KOMAL 53 PULKIT 07 AANCHAL 38

What is credit rating?

•A credit rating is an evaluation of the credit worthiness of a debtor, especially a business(company) or a government, but not individual consumers.

•The evaluation is made by a credit rating agency. It is basically the debtor's ability to pay back the debt and the likelihood of default.

•Credit rating is built up on the basis of the (1)credit history, (2) present financial position, and the (3) likely future income.

•These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues.

PROCESS

OBJECTIVE &TYPES

LIMITATIONS

AGENCIES

IN INDIA

Credit Rating process/ methodolody

• The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee.

• Information provided by the company• The primary focus of the rating exercise is to

assess future cash generation capability.

• The analysis attempts to determine the long-term fundamentals and the probabilities of change in these fundamentals, which could affect the credit-worthiness of the borrower.

• The analytical framework of CARE's rating methodology is divided into two interdependent Segments-

• Quantitative and Qualitative. • Both these factors play a very important role

in arriving at the rating for an instrument

•

Objectives of credit rating

The main objective is to provide superior and low cost info to investors for taking a decision regarding risk return trade off, but it also helps to market participants in the following way;

• Improves a healthy discipline on borrowers.• Lends greater credence to financial and other representations.• Facilitates formulation of public guidelines on institutional investments.• May reduce interest costs for highly rated companies.• Acts as a marketing tool.• Helps merchant bankers, brokers, regulatory authorities etc. in discharging

their functions related to debt issues.• Encourages greater information declaration.

Benefits of credit rating

• To investors

1. Helps in Investment Decision2. Benefits of Rating Reviews3. Assurance of Safety4. Easy Understand ability

of Investment Proposal5. Choice of Instruments6. Saves Investor's Time and

Effort

• To company

1. Improves Corporate Image2. Lowers Cost of Borrowing3. Wider Audience for

Borrowing4. Good for Non-Popular

Companies5. Act as a Marketing Tool6. Helps in Growth and

Expansion

Types of credit rating

• Sovereign credit ratings A sovereign credit rating is the credit rating of a sovereign entity, i.e., a

national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account.

• Short-term rating A short-term rating is a probability factor of an individual going into default

within a year. This is in contrast to long-term rating which is evaluated over a long timeframe

• Corporate credit ratings Credit ratings that concern corporations are usually of a corporation's

financial instruments i.e. debt security such as a bond, but corporations themselves are also sometimes rated.

Limitations1.Credit ratings do not directly address any risk other than credit risk.

2.Biasness in ratings.

3.Credit ratings do not comment on the adequacy of market price or market liquidity for rated instruments.

4. Ratings are not facts, and therefore cannot be described as being "accurate" or "inaccurate".

5.Ratings are relative measures of risk..

ISSUES OF CREDIT RATING• A part of the financial crisis has been blamed on

credit rating agencies who did not rate certain securities properly.

• The existing system is fundamentally flawed as the issuers of securities would pay credit rating agencies to rate their products. There is conflict of interest inherent in the system as there would be a bias towards giving better ratings.

• A better way of administering this is to have one central government body that all issuers of securities products would have to pay a fee to whenever they have a new product that needs to be rated.

WHAT RATINGS DO NOT MEASURE

• They are not recommendations to invest. They do not take into account many aspects which influence an investment decision.

• They do not, for example, evaluate the reasonableness of the issue price, possibilities for capital gains or take into account the liquidity in the secondary market.

• Ratings also do not take into account the risk of prepayment by issuer. Although these are often related to the credit risk, the rating essentially is an opinion on

• the relative quality of the credit risk.

Credit Rating AgencyA credit rating agency (CRA) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default.

An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt, but not of individual consumers.

The debt instruments rated by CRAs include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such as mortgage-backed securities and collateralized debt obligations.

Credit rating is a highly concentrated industry, with the two largest CRAs—Moody's Investors Service and Standard & Poor's(S&P)—controlling 80% of the global market share, and the "Big Three" credit rating agencies—Moody's, S&P, and Fitch Ratings—controlling approximately 95% of the ratings business.

As of December 2012, S&P is the largest of the three, with 1.2 million outstanding ratings and 1,416 analysts and supervisors; Moody's has 1 million outstanding ratings and 1,252 analysts and supervisors; and Fitch is the smallest, with approximately 350,000 outstanding ratings, and is sometimes used as an alternative to S&P and Moody’s.

• Credit rating agencies generate revenue from a variety of activities related to the production and distribution of credit ratings.

• The sources of the revenue are generally the issuer of the securities or the investor. Most agencies operate under one or a combination of business models: the subscription model and the issuer-pays model. However, agencies may offer additional services using a combination of business models.

• Under the subscription model, the credit rating agency does not make its ratings freely available to the market, so investors pay a subscription fee for access to ratings.

• This revenue provides the main source of agency income, although agencies may also provide other types of services.

• Under the issuer-pays model, agencies charge issuers a fee for providing credit rating assessments.

• This revenue stream allows issuer-pays credit rating agencies to make their ratings freely available to the broader market, especially via the Internet.

Credit Information Bureau (India) Limited (CIBIL)• Credit Information Bureau (India) Limited (CIBIL) is India’s first Credit Information Company

(CIC) founded in August 2000.

• CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards.

• These records are submitted to CIBIL by member banks and credit institutions, on a monthly basis.

• This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to credit institutions in order to help evaluate and approve loan applications.

• Whether it is to help loan providers manage their business or help consumers secure credit faster and at better terms, the use of CIBIL’s products have led to a significant change in the way the credit life cycle is managed by both loan providers and consumers.

• CIBIL is ISO 27001:2005 certified- the most recognized security standard in the world. CIBIL is one of the 1000 companies in the world, which have achieved ISO 27001 certification, and one of the first few in India.

Credit Rating Information Services of India Limited (CRISIL)

• Credit Rating Information Services of India Limited (CRISIL) is a global analytical company providing ratings, research, and risk and policy advisory services.

• CRISIL Ratings has rated/assessed over 61,000 entities in India. Its rating capabilities span the entire range of debt instruments and it has worked across the corporate strata, from large corporates in the country to the SMEs.

• Under Research, CRISIL Global Research & Analytics serves global investment banks and financial institutions with high-end research, risk, analytics, equity and credit research services.

• Its credit research supports 80 per cent of the global structured finance market, and over 60 per cent of the global credit markets.

• The company's equity research covers over 90 per cent of the global trading volumes and 88 per cent of the global market capitalization.

Investment Information & Credit Rating Agency of India Ltd. (ICRA)

• ICRA Limited (ICRA) is an Indian independent and professional investment information and credit rating agency.

• It is second largest Indian rating company in term of customer base.

• ICRA’s credit ratings are symbolic representations of its current opinion on the relative credit risks associated with the rated debt obligations/issues.

• These ratings are assigned on an Indian credit rating scale for Rupee (local currency) denominated debt obligations.

• ICRA ratings may be understood as relative rankings of credit risk within India.

• Credit ratings apart, ICRA also assigns Corporate Governance Ratings, besides Performance Ratings, Gradings and Rankings to mutual funds, construction companies and hospitals.

• ICRA’s ratings convey the relative likelihood of default, that is, the possibility of the debt obligation not being met as promised.

CREDIT RATING IN INDIA

• Credit ratings are playing an increasingly important role in financial markets.

• The most significant change in the recent relates to emphasis on their accountability and more important, the caution in regulators' use of ratings.

• In India, rating is a more recent phenomenon, but the changing global perspectives on the subject do impact the financial system.

• In India, rating is a more recent phenomenon, but the changing global perspectives on the subject do impact the financial system.

• India was perhaps the first amongst developing countries to set up a credit rating agency in 1988.

• The function of credit rating was institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments.

• In June 1994, RBI made it mandatory for Non-Banking Financial Companies (NBFCs) to be rated. Credit rating is optional for Public Sector Undertakings (PSUs) bonds and privately placed nonconvertible debentures up to Rs. 50million.

• In India, CRISIL (Credit Rating and Information Services of India Ltd.) was setup in 1987 as the first rating agency followed by ICRA Ltd. (formerly known as Investment Information & Credit Rating Agency of India Ltd.) in 1991, and Credit Analysis and Research Ltd. (CARE) in 1994.

• All the three agencies have been promoted by the All-India Financial Institutions. The rating agencies have established their creditability through their independence, professionalism, continuous research, consistent efforts and confidentiality of information. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Ltd. in 1996.