Credit Rating

Meaning Credit Rating is the opinion of the rating agency on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. Rating is usually expressed in alphabetical or alphanumeric symbols. Symbols are simple and easily understood tool which help the investor to differentiate between debt instruments on the basis of their underlying credit quality.

Nature of Credit Rating Rating is based on information Many factors affect rating Rating by more than one agency Monitoring the already rated issues Publication of ratings Right of appeal against assigned ratings Rating of rating agencies Rating is for instrument and not for the issuer company Rating not applicable to equity shares

Advantages of Credit Rating to Investors Safety of Investments Recognition of risk and returns Freedom of investment decisions Wider choice of investments Dependable credibility of issuer Easy understanding of Investment Proposals Relief from botheration to know comapany Advantages of continuous monitoring

Benefits of Rating to the Company Easy to raise resources Reduced cost of borrowing Reduced cost of public issues Rating builds up image Rating facilities growth Recognition to unknown companies

Benefits to Intermediaries Stock brokers have to make less efforts in persuading their clients to select an investment proposal of making investment in highly rated instruments. Thus rating enables brokers and other financial intermediaries to save time, energy costs and manpower in convincing their clients.

Disadvantages Non disclosure of significant information Static Study Rating is no certificate of soundness Rating may be biased

Credit Rating Process Contract Between Rater and Client Sending Expert Team to Client’s Place Data Analysis Data Collection Discussion Submission to ‘Grading Committee’ Credit Report Preparation Grade Communication to Client

Credit Rating Process 1. Receipt of the request It begins with the receipt of formal request for rating from a company desirous of having its issue obligations under proposed instrument rating by credit rating agencies. An agreement is entered into between the rating agency and the issuer company. 2. Assignment to analytical team On receipt of the above request, CRR assigns the job to an analytical team. The team usually comprises of two members who have expertise in the relevant business area and are responsible for carrying out the rating assignments. 3. Obtaining Information The analytical team obtains the requisite information from the client company. The team analyse

4. Plant visits and meeting with management To understand client’s operations the team visits and inetracts with the company’s executives. 5. Presentation of findings After completing the analysis, the findings are discussed at length in the Internal Committee, including senior analysts of the credit rating agency. 6. Rating Committee Meeting This is the final authority for assigning ratings. The rating is arrived at after composite assessment of all the factors concerning the issuer. 7.Communication of decisions The assigned rating grade is communicated finally to the issuer along with reasons or rationale supporting the rating. The ratings which are not accepted are either rejected or reviewed in the light of additional facts provided by the issuer.

8.Dissemination to the public Once the issuer accepts the rating, the credit rating agencies disseminate it through printed reports to the public. 9.Monitoring for possible change. Once the company has decided to use the rating, CRA’s are obliged to monitor the accepted ratings over the life of the instrument. The CRA constantly monitors all ratings with reference to new political, economic and financial developments and industry trends.

Credit Rating Agencies CRISIL – Credit Rating and Information Services of India Ltd ICRA – Investment Information & Credit Rating Agency of India Ltd Care – Credit Analysis and Research in Equities

CRISIL It is the first credit rating agency in India. It was incorporated in It was the first one to develop the methodology to rate debt instruments in the light of India’s financial, monetary, economic and regulatory environment. CRISIL has rated over 800 debt instruments issued by 580 companies. It has also rated public and private sector banks.. It has been extended to debentures, fixed deposits and commercial papers.

ICRA ICRA Ltd has been promoted by IFCI as its main promoter with its headquarter s at New Delhi. Objectives 1.To provide information and guidance to institutional and individual investors and creditors. 2. To enhance the ability of the borrower /isuer to access the money market and capital market for tapping a larger volume of resources from a wider range of investing public. 3. To assist the regulators in promoting the transparency in the financial markets.

CARE CARE Ltd is a credit rating and information services company promoted by IDBI jointly with investment institutions, banks and finance companies. The company started its operation in October 1993 and announced its first rating in It offers wide range of products and services in the field of credit rating and equity research.