CREDIT RATING

Group No:- 4
 CREDIT RATING
 Credit rating assesses the credit worthiness of an individual,
corporation or even a country.

 Credit rating are calculated from financial history and current

assets and liabilities.

 A credit rating tells a lender or investors the probability of the

subject being able to pay back a loan.

 A poor credit rating indicates a high risk of defaulting a loan,

and then leads to a high interest rates.
 CREDIT RATING
 Credit is important since individuals & corporation with poor
credit will have difficulty finding financing, and will more
likely have to pay more due to risk of default.

 The rating are expressed in the code numbers which can be

easily comprehended by lay investors.

 Credit rating, as exists in India, is done for a specific security

and for the company as a whole.

 A credit rating does not create fiduciary relationship between

the agency and the users.
 CREDIT RATING AGENCY
 Company that assigns credit rating for issuers of
certain type of debt obligation as well as the debt
instruments themselves.
 Also it is an agency that perform the rating of debt
instruments.
 CRA’s scope of present is not only limited to the
rating of debt but they are also undertaking financial
analysis & assessment of financial products,
individuals & governments.
 CREDIT- RATING AGENCY
 CRA play a key role in the infrastructure of the modern
financial system.
 For investors, credit rating agencies increase the range of
investment alternatives and provide independent, easy to use
measurement of relative credit risks, this generally increases
the efficiency of the market, lowering cost for both borrowers
and lenders.
 This in turn increases the total supply of the risk capital of the
economy, leading to the stronger growth. It also open the
capital market to categories of borrowers who might otherwise
shutout altogether: small governments, start up companies,
hospitals and universities.
 INDIAN CREDIT RATING AGENCIES
 CRISIL: Credit Rating Information Service Of India Limited.

 ICRE: Investment information & credit rating agency of India

limited.

 CARE: Credit analysis and research limited.

 Fitch rating India private limited( earlier- Diff & Phelps credit
ratings).

 Fitch is the only international agency with the presence on the

ground in India.
ICRA
 ICRA was set up by IFCI on 16th Jan 1991.
 It is the public limited company with an authorized
share capital of Rs 10 crores, Rs 5 crores is paid up.
 ICRA major shareholders IFCI(26%) and the balance
by UTI, LIC, GIC, PNB, Central Bank Of India, Bank
Of Baroda, UCO Bank and SBI.
 Objective- To provide information & guidance to
investors for determining the credit risk associated
with the debt Instrument.
CARE
 Itwas set up by IDBI in collaboration with some
banks & financial service companies in Nov 1993.

 It offers services such as credit rating of debentures/

preference share/ information service & equity
research- extensive study of share listed on major
stock exchanges through EIL( Economy, industry,
company) analysis.
 RATING METHODOLOGY
Consists of 4 areas:-
 Business Analysis- Covers an analysis of industry risk, market
position in the country, operating efficiency of the company &
legal position.
 Financial analysis- Analysis of accounting quality, earning
protections, cash flow adequacy & financial flexibility.
 Management evaluation- Study of track record of the
management's capacity to overcome adverse situations, goals,
philosophy & strategies.
 Fundamental analysis- Analysis of liquidity management,
Asset quality, profitability and interest & tax sensitivity.
CONTD………..
 Information is collected and then analyzed by a team of a
professionals in an agency.

 If necessary, meetings with Top management suppliers and dealers

& a visit to the plant or proposed sites are arranged to collect
additional data. This teams of professionals submit their
recommendations to the rating committee.

 Committee discuss this report & assigns ratings.

 Rating assigned is often notified to the issuer & only on his

acceptance, rating is published.

 Assures confidentiality of information.

 RATING SYMBOLS
High investment Grades:-
 AAA & AA- Highest safety.

 A- Adequate safety.

 BBO- Moderate safety.

Speculation Grades:-
 BB- Inadequate safety
 B- High risk

 C- Substantial risk.

 D- Default risk.
THE IMPORTANCE OF CREDIT RATING
 A credit rating is a formal assessment of a corporation,
autonomous governments, individuals, conglomerates or even
a country.

 Credit rating is evaluated on the basis of financial transactions

carried in the past and assets and liabilities at present.

 Credit rating allows a lender or a credit granter to evaluate the

ability of the borrower top repay a loan.
CONTD………..
 Credit rating is very important. You need to manage a
healthy credit score, especially if you are planning to
borrow a loan or buy a real estate or an automobile. A
low credit rating is considered as a sign of a high risk of
non-payment of debt.
• Validation of “Company
Country
• Political
Position” • Economic
• Trends Risk • Industry – Specific factors
• Quality of Earnings • Foreign exchange
& Analytical adjustments
• Peer Group Comparisons

Profitability Industry
/ Peer Group Business Factors
Comparisons
Risk
• Industry Trends
• Industry Structure
• Market Size
• Competitive Factors • Growth Potential
• Market position • Cyclicality
• Keys to Success
Company • Bases of Competition
• Size
• Diversification
Position • Changing Technology
• Operating Risk
• Management • Regulatory Environment
• Operating sources & uses
Of liquidity
• Accounting Regime
• Other potential calls on Accounting
Liquidity
• Reporting & Disclosure
• Debt Characteristics
• Analytical adjustments
• Bank credit facilities

Liquidity / Governance
Short-term Financial Risk
Factors Risk

• Ownership
• Focus on debt • Board of directors
service capability • Management practices
• Analytical distinctions with • Financial Strategy
profitability Cash Flow • Risk Tolerance
• Cash flow measures / Adequacy • Accounting Practices
• ratios • Internal controls