Credit Rating Vivek

Presentation
on
Credit Rating
Vivek A Mehta
Roll No. 51
Overview…..
Meaning of Credit Rating:
• A judgment made by a bank, etc. about

how likely somebody is to pay back
money that they borrow, and how safe it
is to lend money to them----Oxford
dictionary
• A published ranking based on detailed financial
analysis by a credit bureau, of one's financial
history, specifically as it relates to one's ability to
meet debt obligations.
• The highest rating is usually AAA, and the
lowest is D. Lenders use this information to
decide whether to approve a loan.
Continue…
• A credit rating estimates the credit worthiness of
an individual, corporation, or even a country.
• A credit rating is also known as an evaluation of a
potential borrower's ability to repay debt, prepared
by a credit bureau at the request of the lender.
• Credit ratings are calculated from financial history
and current assets and liabilities.
Continue…
• In short, a credit rating tells a lender or investor
the probability of the subject being able to pay
back a loan.
• in recent years, credit ratings have also been
used to adjust insurance premiums, determine
employment eligibility, and establish the amount
of leasing deposit.
• Rating is assigned to a company after an evaluation of
factors like industry risk factors, market position of the
company, its operating efficiency, the legal soundness,
the company’s accounting quality, its earning protection
adequacy of cash flow, its financial flexibility, its
management quality, its capital adequacy, its asset
quality, liquidity management profitability and financial
position, interest and tax sensitivity, and many other
pertinent details
Importance….
Credit rating is important since individuals and corporations
with poor credit rating will have difficulty finding financing, will
most likely have to pay more due to the risk of default and
refusal of a loan by the creditor, on the other hand corporate
with good credit rating can easily raise fund via different
sources.
Continue…
Continue…
• Minimises the role of “name recognition” for

companies which are less famous, because on
the basis of good credit rating, they can easily
approach the market.
• Useful to the bank and other FIs when they
decide on lending and investment strategy.
Various types:
• Personal credit rating 7. Competitive Position
• Corporate credit rating (e.g.) Marketing
Factors: (e.g.) Technology
1. Business Risk (e.g.) Efficiency
2.Industry Characteristics (e.g.) Regulation
3. Management 8. Profitability
4. Financial Risk 9. Capital Structure
5.Financial Characteristics 10. Cash Flow Protection
6. Financial Policy 11. Financial Flexibility

Credit Rating Agencies
• Standard and Poor’s, (in US in 1860s) Pioneer
• Moody’s (in US in 1909, assess the creditworthiness of

US banks)
• CRISIL Ltd.(Credit Rating Information Service of India
Ltd ) in India in 1987, SEBI registration is required for
all, abide by the SEBI credit rating regulations, 1999.
• ICRA Ltd. (Investment information and Credit Rating
Agency) Limited, in India, started in 1991.
• CARE Ltd. (Credit Analysis & Research Ltd.)
• FITCH Ratings India Ltd. (JV between international

credit rating agency Duff and Phelps and JM
financial and Alliance group) rates companies and
counties on request.
• SMERA (Small and Medium Enterprises Rating
Agency) recent opening, launched by SIDBI with
association of several banks, focus on rating of small
and medium enterprises.
CRISIL Ltd. (S&P COMPANY)
• Credit Rating Information Service of India Ltd.
• CRISIL was set up by the UTI, ICICI, LIC, GIC and

ADB, and others
• Rating is issue specific and not issuer specific, i.e. if
a company which got AAA rating for it’s previous
issue may not get the same rating if it comes up
with a new big issue, for that re-rating will be done.
• Assigns ratings to only rupee denominated debt
instruments.
Broad Functions of CRISIL:

• Credit rating services
- Bond fund ratings
- Bank loan ratings
- Collective investment schemes rating
- Ratings for Health care sector

• Advisory services
• Credibility first rating and evaluation services
• Training services
Other services offered by CRISIL:
– Rating of Preference shares and fixed
deposits
– Rating of Short-term instruments such as
commercial paper and short-term deposits.
– CRISIL undertakes credit assessments of
state governments of India
– It has rated state governments including those
of Maharashtra, Gujarat, Karnataka and
Andhra Pradesh.
– CRISIL was the first rating agency in India to
rate banks, governments and urban local
bodies
– Credit rating of real estate developers and
projects , in association with the National Real
Estate Development Council,
– Credit rating of parallel marketers of liquefied
petroleum gas.
– CRISIL Fund Services provides a range of
rating, ranking, risk analytics and valuation tools
to the mutual fund industry.
ICRA Ltd.
• Investment information and Credit Rating Agency
• Company was promoted by IFCI Ltd., secure 26%

shareholding in agency, other shareholders are UTI,
LIC,GIC, Exim bank, HDFC, and other banks.
• MoU with Moody’s, (the US credit rating agency),

get support from Moody’s regarding credit
education, risk mgt. software, consulting services
and many more matters.
Services offered by ICRA:
• Rating services
- Corporate governance rating
- Rating of Municipal Corporation
- Credit assessment for small and medium scale

industries
• Information services
• Advisory services
CARE LTD.
• Credit Analysis & Research Ltd., promoted by IDBI
jointly with FIs, public/private sector banks and
private finance companies, started on oct, 1993
• Services offered:
- Credit rating
- Advisory services
- Information services
- Equity research
CRISIL RATING SYMBOLS
• Debentures-rating of debentures is mandatory
Categories for rating debentures:
Category 1- High investment grade: further divided
> AAA - Highest security
> AA – Highest safety
Continue…..
Category 2 - investment grades: further divided into
> A – Adequate safety
> BBB – Moderate safety
Category 3 – Speculative grades: further divided
> BB – inadequate safety
> B – High risk
> C – Substantial Risk
> D – Default
• Grading for Fixed Deposits:
> FAAA – Highest safety
> FAA – High safety
> FA – Adequate safety
> FB – Inadequate safety
> FC – High risk
> FD – Default
• Grading for Short term instruments:
> P – 1 - Highest safety
> P – 2 - High safety
> P – 3 - Adequate safety
> P – 4 - Inadequate safety
> P – 5 - Default
THANK YOU !!

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Presentation

Meaning of Credit Rating:

• A judgment made by a bank, etc. about

• Minimises the role of “name recognition” for

1. Business Risk (e.g.) Efficiency

2.Industry Characteristics (e.g.) Regulation

4. Financial Risk 9. Capital Structure

5.Financial Characteristics 10. Cash Flow Protection

6. Financial Policy 11. Financial Flexibility

• Moody’s (in US in 1909, assess the creditworthiness of

• FITCH Ratings India Ltd. (JV between international

• CRISIL was set up by the UTI, ICICI, LIC, GIC and

Broad Functions of CRISIL:

- Bond fund ratings

- Bank loan ratings

- Collective investment schemes rating

- Ratings for Health care sector

• Credibility first rating and evaluation services

• Company was promoted by IFCI Ltd., secure 26%

• MoU with Moody’s, (the US credit rating agency),

- Corporate governance rating

- Rating of Municipal Corporation

- Credit assessment for small and medium scale

Category 1- High investment grade: further divided

> AAA - Highest security

> AA – Highest safety

> A – Adequate safety

> BBB – Moderate safety

Category 3 – Speculative grades: further divided

> BB – inadequate safety

> B – High risk

> C – Substantial Risk

> FAAA – Highest safety

> FAA – High safety

> FA – Adequate safety

> FB – Inadequate safety

> FC – High risk

> P – 2 - High safety

> P – 3 - Adequate safety

> P – 4 - Inadequate safety

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