Credit Rating
➢ Credit rating evaluates the debtor’s ability to
pay back the debt and the likelihood of
default.
➢ Credit ratings are determined by credit ratings
agencies like CRISIL, CARE and S&P.
➢ It is the rating agency’s opinion on the
likelihood of rated debt obligation being repaid
in full and on time.
➢ A simple alphanumeric symbol is normally
used to convey a credit rating.
Credit Rating
➢ Credit rating is a score given to a borrower ( any Individual,
Country or Company bonds) which is an expression of credit
risk that is the capacity of the borrower to repay a loan.
Definition
• According to CRISIL :
“Credit rating is an unbiased, objective and independent opinion
as to an issuer’s capacity to meet financial obligation.”
• Credit rating are not based on Mathematical formulas.
Instead, credit rating agencies use their judgment and experience
in determining what public and private information should be
considered in giving a rating to a particular company or
government.
• Poor credit rating indicates – high risk of defaulting
• [Link]
Importance
• It establish a link between risk and return.
• Motivates savers to invest in Industry & Trade.
• Protect the interest of investors
• They provide a yardstick against which to measure the risk
inherent in any instrument.
• An investor uses the rating to asses the risk level and compares
the offered rate of return with his expected rate of return.
• [Link] - Rating Agencies
Benefits
Benefits to company:
• Improved corporate image
• Good for non popular companies
• Act as a marketing tool
• Reduced costs of borrowings
• Easy to raise resource
• Helps in growth and expansion
Benefits to investors:
• Easy understandability of investment proposal
• Helps in investment decision
• Choice of instruments
• Dependable credibility of issuer
• Advantages of continuous monitoring
Demerits of Credit Rating
➢ Possibility of Biasness
➢ Improper disclosure may happen, non disclosure
agreement signed
➢ Rating shopping
➢ Downgrading by Rating Agencies
➢ Lack of dedicated regulator
➢ Impact of changing environment
➢ Difference in Ratings
7 C’s of Credit Analysis
➢Character
➢Capacity To Pay
➢Capital/Cash
➢Collateral
➢Condition
➢Credit History
➢Common Sense
[Link] - Rating Process
Credit Rating Methodology
a) Business Analysis.
b) Financial Analysis.
c) Management Evaluation.
d) Geographical Analysis.
e) Regulatory & Competitive Environment.
f) Fundamental Analysis.
Business Analysis:
a) Industry Risk
b) Market Position
c) Operating efficiency
d) Legal position
e) Size of business
Financial Analysis:
a) Accounting quality
b) Earning profitability
c) Cash flow analysis
d) Financial Flexibility
Management Evaluation:
The effects on company’s performance by-
a) Management goals
b) Plans and strategies.
c) Capacity to overcome unfavorable conditions.
d) Planning and controlling system
Geographical Analysis:
a) Multinational Presence
b) Geographical advantages enjoyed by the company.
c) Regional subsidies.
Regulatory and Competitive Environment:
a) Structure of the Financial System
b) Regulatory framework of the
financial system
Fundamental Analysis:
a) Liquidity management
b) Asset quality
c) Profitability and financial position
d) Interest and tax sensitivity
Credit Rating Agencies
In India:
➢ Credit Rating and Information Services of India Ltd.
(CRISIL)
➢ Investment information and Credit Rating Agency Ltd.
(ICRA)
➢ Credit Analysis and Research Ltd. (CARE)
➢ Credit Information Bureau India Ltd. (CIBIL)
➢ SME Rating Agency of India Ltd. (SMERA)
➢ Onida Individual Credit Rating Agency of India (ONICRA)
Globally:
➢ Moody’s
➢ Standard & Poor
➢ Fitch Ratings
CRISIL
ICRA
CARE
Symbols
CRISIL’S LONG TERM RATING SCALE:-
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
BB Moderate Risk
B High Risk
C Very High Risk
D Default