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CREDIT RATING

WhAT IS 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 Rating is important since individuals and corporations with poor Credit Rating will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

Types of credit Rating


Personal Credit Ratings Corporate Credit Ratings Sovereign Credit Ratings Instrument Ratings

Rating Process

Credit rating agencies in India


There are five credit rating agencies in India:
Credit rating information service ltd.(CRISIL).
Investment information and Credit Rating Agency of India(ICRA) Credit Analysis and Research(CARE). Fitch ratings India private limited.(earlier-Duff & Phelps credit rating ) Onida Individual Credit Rating Agency.(ONICRA)

Functions of credit rating agencies


Superior information Low cost information Healthy discipline on corporate borrowers

Formulation of public policy guidelines on Institutional investment

CRISIL
CRISIL was incorporated in 1987. It is promoted by ICICI and UTI as a public limited company with its headquarters at Mumbai. CRISIL is a Standard & Poors company. Its majority shareholder is Standard & Poors, the worlds foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.

CRISILS PROCESS

Credit Rating Symbols


Debenture Rating Symbols High Investment Grades: AAA(triple A): Highest Safety AA (double A): High Safety Investment Grades: A: Adequate Safety BBB (triple B): Moderate Safety Speculative Grades: BB: Inadequate Safety B: High Risk C: Substantial Risk D: Default

ICRA
ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency. The international Credit Rating Agency Moodys Investors Service is ICRAs largest shareholder. The participation of Moodys is supported by a Technical Services Agreement, which entails Moodys providing certain high-value technical services to ICRA

Credit rating Symbols


Long term Debentures Bonds and Preference shares-Rating Symbols
LAAA: Highest Safety LAA: High Safety LA: Adequate Safety LBBB: Moderate Safety LBB: Inadequate Safety LB: Risk prone LC: Substantial Risk LD: Default, Extremely speculative

ONICRA
Onicara Credit Rating Agency of India Limited: (Incorporated in 1993) is an established player in the individual credit assessment and scoring services space in the Indian market. It is the first in India to launch commercial services and provide individual credit rating and reporting services to the Indian financial market. ONICRA has been acknowledged as pioneers of Individual Credit Rating in the Economic Survey of India 1993-94 issued by Ministry of Finance, Government of India and its services have been hailed by the financial sector and in the media.

CARE
Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. CARE Ratings has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April 1993. CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc

Credit Rating Symbols


Long term debt instruments-Rating Symbols

CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE B: High Risk
CARE AAA: Highest Safety CARE AA: High Safety CARE A: Adequate Safety CARE BB: Inadequate Safety CARE C: High Risk

For medium term debt instruments

Who uses Credit Rating?


Investors In absence of credit rating system, risk evaluation depends on name recognition. Credit rating helps investors in selecting appropriate instrument from broad spectrum of investment options. Banks use ratings of other banks for decisions regarding interbank lending, swap agreements, etc. Credit rating agencies also provides services like industry reports, corporate reports, seminars and open access to the analysts of the agencies.

Regulators Restrict entry to market of new issues rated bellow a particular grade. Prohibit investors from purchasing or holding of instruments rated bellow a particular level.

Who uses Credit Rating?(..Cont)


Issuers Compared to unrated securities, issuers of rated securities have access to much wider investor base & more faith is placed. Investor confidence enables issuers of highly rated instruments to access market even under adverse market conditions.

Intermediaries Merchant bankers use rating for planning, pricing, underwriting, placement. Brokers and dealers in securities use rating as an input for their monitoring of risk exposures.

Major Agencies Renowned Globally


Moody investors services (MOODYS)
Standard and poors corporation (S&P)

Duff and phelps credit rating co. (DCR)


Japan credit rating agencies (JCR)

DISADVANTAGES OF CREDIT RATING


Biased rating and misrepresentation Concealment of material information No guarantee for soundness of the company Human bias Reflection of temporary and adverse conditions Present rating may change (down grade) Differences in rating of two agencies

Live Case
S&P cuts 2012 growth forecast to 5.5%

THANK YOU

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