CREDIT RATING AND CREDIT

RATING AGENCIES OF INDIA

OBJECTIVES
 To assess how CR acts as a measuring scale for
investors.

 To understand the platform/boon given by CR to various

companies.

 To study the process of CR through various agencies.

HISTORY
The concept of credit rating started in 1840.
Louis Tappan established the first mercantile
credit agency in New York in 1841. The agency
was used to assess the abiIity of merchants to
pay their financial obligations. Later on, it was
acquired by Robert Dun, and its first rating guide
was published in 1859. In 1849, John Bradstreet
set up similar agency, and it established a rating
book in 1857. In 1933, these two agencies were
merged together to Dun and Bradstreet, which
finally became the owner of Moody's Investors
services in 1962.
MEANING
A credit rating defines the financial strength of a borrower and
helps the investor determine the likelihood that the bond issuer will
pay coupon payments in a timely fashion and more importantly the
initial investment at maturity.

A credit rating assesses the credit worthiness of an individual,

corporation, or even a country. Credit ratings are calculated from
financial history and current assets and liabilities. Typically, a credit
rating tells a lender or investor the probability of the subject being
able to pay back a loan.
However, in recent years, credit ratings have also been used to
adjust insurance premiums, determine employment eligibility, and
establish the amount of a utility or leasing deposit. A poor credit
rating indicates a high risk of defaulting on a loan, and thus leads to
high interest rates, or the refusal of a loan by the creditor. 
FACTORS DETERMING ASSIGNED
RATINGS
TYPES OF CREDIT RATING

CORPORATE

SOVEREIGN

SHORT TERM
CORPORATE CREDIT RATING
The credit rating of a corporation is a financial indicator
to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as
Standard & Poor's, Moody's or Fitch Ratings and have
letter designations such as AAA, B, CC. The Standard &
Poor's rating scale is as follows: AAA, AA, A, BBB, BB,
B, CCC, CC, C, D. Anything lower than a BBB rating is
considered a speculative or junk bond. The Moody's
rating system is similar in concept but the verbage is a
little different. It is as follows: AAA, Aa1, Aa2, Aa3, A1,
A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3,
Caa1, Caa2, Caa3, Ca, C.
SOVEREIGN CREDIT RATING

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

country. 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.

Ratings are further broken down into components including political risk,
economic risk. Euromoney's bi-annual country risk index
"Country risk survey" monitors the political and economic stability of 185
sovereign countries. Results focus foremost on economics, specifically
sovereign default risk and/or payment default risk for exporters (a.k.a. "trade
credit" risk).
SHORT TERM CREDIT 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. 
CREDIT RATING AGENCIES
In some cases, the servicers
A credit rating of the underlying debt are
agency (CRA) is a also given ratings. In most
cases, the issuers of
company that assigns securities are companies,
credit ratings for special purpose entities,
issuers of certain state and local
governments, non-profit
types of debt
organizations, or national
obligations as well as governments issuing debt-
the debt instruments like securities that can be
traded on a secondary
themselves.
market.
A credit rating for an issuer
takes into consideration the
issuer's credit worthiness and
affects the interest rate
applied to the particular
security being issued. (In
contrast to CRAs, a company
that issues credit scores for
individual credit-worthiness
is generally called a
credit bureau or
consumer credit reporting ag
ency
.)
CRITICISM
Credit rating agencies have been subject to the following criticisms:

 Credit rating agencies do not downgrade companies promptly enough

 Large corporate rating agencies have been criticized for having too familiar a
relationship with company management, possibly opening themselves to undue
influence or the vulnerability of being misled.
 The lowering of a credit score by a CRA can create a vicious cycle, as not only
interest rates for that company would go up, but other contracts with financial
institutions may be affected adversely, causing an increase in expenses and ensuing
decrease in credit worthiness.
 Agencies are sometimes accused of being oligopolists, because barriers to market
entry are high and rating agency business is itself reputation-based (and the finance
industry pays little attention to a rating that is not widely recognized).
 Credit Rating Agencies have made errors of judgment in rating structured products,
particularly in assigning AAA ratings to structured debt, which in a large number of
cases has subsequently been downgraded or defaulted. This has led to problems for
several banks whose capital requirements depend on the rating of the structured assets
they hold, as well as large losses in the banking industry
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 & Poor’s company. Its majority
shareholder is Standard & Poor’s, the world’s foremost
provider of independent credit ratings, indices, risk
evaluation, investment research and data.
CRISIL’S PROCESS
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 Moody’s
Investors Service is ICRA’s largest shareholder. The
participation of Moody’s is supported by a Technical
Services Agreement, which entails Moody’s providing
certain high-value technical services to ICRA
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 AND
SUBPRIME
 Trading in many bonds backed by subprime mortgages
reveals a widening gap between investors' perception of
their risk and the opinions of large ratings providers like
Moody's Investors Service, Standard & Poor's and Fitch
Ratings. Some subprime-mortgage bonds that were
assigned investment-grade ratings as recently as 2006
are even trading at prices that imply they could be as
risky as junk bonds. Yet most of their ratings haven't
changed.
 Many of the ratings are being called into question as
market prices of some subprime bonds suggest investors
expect them to lose some of their principal.
CONCLUSION

A credit They are The credit Credit

Credit ratings
rating calculated rating of a Rating
are used by
assesses the from corporation is Agencies are
investors,
credit worthin a financial
ess financial issuers, not a secure
indicator to
of an history and investment approach to
potential
individual, current banks, broker- have they
investors of
corporation, assets and dealers, and also make
debt securities
or even a liabilities. governments. errors.
such as bonds.
country.
 Presented By-

ISHWAR LOHIA
B.B.A. 3RD YEAR
ROLL NUMBER-65
ST. XAVIER’S COLLEGE