1. Credit Rating
By- Rahul Jain

2. 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.
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3. 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.
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4. 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
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5. 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
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6. Source Thomson Financial
Asian Debt Market Activity
Aggregate of Cross-Border Bond, Domestic Bond and Loan Market
Source Thomson Financial
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7. Issues Transparency and disclosure Protection of creditor rights
Global scale vs National scale
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8. 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.
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9. 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.
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10. Rating Process
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11. 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
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12. 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)
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13. Average Cumulative15-Year Default Rates (%)
Source: Standard & Poor’s