Credit Rating By- Rahul Jain

What is a credit rating? A credit rating is an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. A simple alphanumeric symbol is normally used to convey a credit rating. 4/17/2017

Credit rating is an input for decision making A credit rating is not a recommendation to buy, hold or sell a debt instrument. A rating is one of the inputs that is used by investors to make an investment decision. Investors also look at the returns being offered on the debt instrument. Normally investors expect higher returns for lower rated instruments to compensate for the increased risk profile. Rating agencies do not comment on the return being offered on a debt instrument. Also, investors use several other factors like level of portfolio diversification and liquidity levels of the instrument etc. in making investment decisions. 4/17/2017

Need of Credit rating Bank Bank provides liquidity SOURCE OF FUNDS USE OF FUNDS Depositors Borrowers Bank Bank provides liquidity Bank assumes credit risk Bank undertakes credit assessments 4/17/2017

Need of Credit rating SOURCE OF FUNDS USE OF FUNDS Investors Issuers MARKET Market provides liquidity Investors assume credit risk Credit rating service provides measure of credit risk 4/17/2017

Source Thomson Financial Asian Debt Market Activity - 2002 Aggregate of Cross-Border Bond, Domestic Bond and Loan Market Source Thomson Financial 4/17/2017

Issues Transparency and disclosure Protection of creditor rights Global scale vs National scale 4/17/2017

SEBI-Regulator The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. SEBI laid down an extensive set of regulations for rating agencies in 1999. 4/17/2017

Why do ratings change? Ratings are assigned based on certain expectations and assumptions about variables that impact the issuer’s performance. These variables are either company-specific factors or factors relating to the business environment. Rating agencies use their best professional judgment on these factors while assigning the rating. However, these variables can change significantly over a relatively short time-frame, especially in emerging markets, causing the rated entities’ performance to deviate materially from expectations. This changes their future debt repayment capabilities and is reflected in their changed ratings. 4/17/2017

Rating Process http://www.crisil.com/credit-ratings-risk-assessment/rating-process.htm 4/17/2017

Global Vs. National Rating Scales Global Scale Include relevant sovereign and country risk considerations Creditworthiness based on a global comparative analysis Both foreign and local currency credit options National Scale Exclude direct sovereign risks of other country risk factors that affect all local obligators Relative creditstanding within a given country Local currency credit opinions 4/17/2017

Standard & Poor’s Asia-Pacific Network – 2003 Hong Kong Melbourne Seoul Singapore Sydney Tokyo * Staff - 320 Affiliates CRISIL (Mumbai) PEFINDO (Jakarta) PhilRatings (Manila) TRC (Taipei) 4/17/2017

Average Cumulative15-Year Default Rates (%) Source: Standard & Poor’s