CREDIT RATING AGENCIES

CREDIT RATING

 Assesses the credit worthiness of an individual,

corporation, or even a country
 Calculated from financial history and current assets and
liabilities
 Ratings are expressed in code numbers
 A poor credit rating indicates a high risk of defaulting on a
loan, and thus leads to high interest rates.
 Credit rating, as exists in India, is done for a specific
security and not for a company as a whole.
 NEED FOR CREDIT RATING

• It is necessary in view of the growing number of cases of

defaults in payment of interest and repayment of principal
sum borrowed by way of fixed deposits, issue of debentures
or preference shares or commercial papers.
• Maintenance of investors’ confidence, since defaults shatter
the confidence of investors in corporate instruments.
• Protect the interest of investors who can not into merits of
the debt instruments of a company.
• Motivate savers to invest in industry and trade.
 OBJECTIVES OF CREDIT RATING
The main objective is to provide superior and low cost information to
investors for taking a decision regarding risk- return trade off, but it also
helps to market participants in the following ways;

 Improves a healthy discipline on borrowers

 Lends greater credence to financial and other representations
 Facilitates formulation of public guidelines on institutional investment
 Helps merchant bankers, brokers, regulatory authorities, etc., in
discharging their functions related to debt issues
 Encourages greater information disclosure, better accounting standards,
and improved financial information (helps in investors protection)
 May reduce interest costs for highly rated companies
 Acts as a marketing tool
 FUNCTIONS

• Superior information

• Low cost information

• Basis for proper risk, return & Trade off

• Healthy discipline on corporate borrowers

• Formulation of public policy guidelines on Institutional

investment
 BENEFITS FOR INVESTORS

• Understandability of the investment proposal

• Low cost information
• Independence of investment and quick investment
decision
- Recognition of risk
- Credibility of the issuer
• Saving time ad money
• Safeguards against bankruptcy
 BENEFITS FOR BROKERS AND
FINANCIAL INTERMEDIARIES

 Saves time, money, energy, and manpower in

convincing their clients about investments.
 Less effort in studying company’s credit position to
convince their clients.
 Easy to select profitable investment security

 Helps to improve business

 BENEFITS FOR RATED COMPANIES

• Low cost of borrowing

• Wider audience for borrowing
• Encourages financial Discipline
• Merchant bankers job and foreign collaborations made
easy
• Attract investors with least efforts
- Rating as a marketing tool
• Caution risk
CRISIL
INTRODUCTION:
• Globally-diversified analytical company providing
ratings, research, and risk and policy advisory services.
• Our majority shareholder is  Standard & Poor's, a part of
The McGraw-Hill Companies, ( world's foremost
provider of credit ratings).
Vision:
• To be an institution that creates a huge impact in the
markets and continue to serve our customers to make a
difference.
Values:
• Integrity, Independence, Analytical Rigour, Commitment
and Innovation.
CRISIL'S CORE BUSINESSES:

Ratings
Global Research and analytics-Irevna
Research
Capital markets
Infrastructure Advisory.
CRISIL Risk Solution.
CRISIL AWARDS
• CRISIL Mutual Fund Awards
• CRISIL Real Estate Awards
• CRISIL Emerging India Awards
• CRISIL Young Thought Leader (CYTL) Award

CORPORATE SOCIAL RESPONSIBILITY (CSR)

• Financial Awareness
• Making and facilitating Donations
• Accreditation of NGOs
• Green initiatives
Credit Ratings - Scales
 Credit Ratings - Long Term Scale
 Credit Ratings - Short Term Scale
 Credit Ratings - Fixed Deposit Scale
 Credit Ratings - Corporate Credit Scale
 AAA(Triple A)   Highest Safety
 AA(Double A) High Safety
 A Adequate Safety
 BBB (Triple B)  Moderate Safety
 BB (Double B)  Inadequate Safety
 B High Risk
 C Substantial Risk
 D Default
 NM Not Meaningful
RATING CRITERIA FOR FINANCE
COMPANIES:

 Market position
 Management
 Asset quality
 Capital adequacy
 Resource raising ability
 Earnings
 Liquidity/asset liability management.
 INTRODUCTION

• Establishment
• Promoting Agencies
• Shareholding Pattern
• Program Profile
– Rating
– Information Services
– Advisory Services
– Grading Services
 OBJECTIVES

• To assist investors in making well informed investment

decision.
• To provide information & guidance to institutional &
individual investor.
• To assist the regulators in promoting the transparency in
the financial market.
• To assist issuers in raising funds from a wider investors
base
• To enable banks, investment bankers and brokers
• To provide regulators with a market driven system
 STRATEGIES OF ICRA

• Create awareness
• Win the credibility, confidence and trust
• Aggressively focus on business development
 RATING METHODOLOGY OF
• Marketing strategies,
• Competitive edge,
• Level of technological development
• Operational efficiency
• Competence and effectiveness of management,
• HRD policies and practices,
• Hedging of risks,
• Cash flow trends and potential,
• Liquidity,
• Financial flexibility,
• Asset quality and past record of servicing debts and obligations, and
• Government policies and status affecting the industry.
 SYMBOLS OF ICRA

Long term Debentures Bonds and Preference shares-

Rating Symbols
LAAA: Highest Safety
LAA: High Safety
LA: Adequate Safety
LBBB: Moderate Safety
LBB: Inadequate Safety
LB: Risk prone
LC: Substantial Risk
LD: Default, Extremely speculative
SYMBOLS OF…
 Credit Analysis & REsearch Ltd.
• A full service rating company that offers a wide range of
rating and grading services across sectors.
• Incorporated in 1993 by consortium of Banks/financial
institutions in India. The three largest shareholders of
CARE are IDBI Bank, Canara Bank and State Bank of India.
• Registered with SEBI under the Securities & Exchange
Board of India (Credit Rating Agencies) Regulations, 1999
• CARE’s Ratings are recognised by Govt. of India and all
regulatory authorities like RBI and SEBI
• CARE is a founder member of Association of Credit Rating
Agencies in Asia (ACRAA).
 Services

• Rating
• Research & Information Services
 Range of Rating & Grading Services
Banks and FI ratings
IPO Grading SME/SSI ratings

Structured Finance Ratings Corporate ratings

Sub-sovereign ratings Infrastructure ratings

Services
Issuer Rating
Insurance/ CPA ratings Corporate Governance ratings

Construction Grading
Grading of MTI
Fund credit Quality rating
 EXPERIENCE

Total Assignments Completed : 5846

Total Instruments Rated : 5452

Total Volume of Debt Rated : Rs. 16,594 Bn

Total Issuers Rated : 2033

Ratings – Process
 Credit Rating of Debt instruments
CARE AAA - best credit quality, offering highest safety for
timely servicing of debt obligations.
CARE AA- high safety for timely servicing of debt obligations.
CARE A - adequate safety for timely servicing of debt
obligations.
CARE BBB- moderate safety for timely servicing of debt
obligations.
CARE BB - inadequate safety for timely servicing of debt
obligations
CARE B - low safety for timely servicing of debt obligations
CARE C - very high likelihood of default in the payment of
interest and principal.
CARE D - Instruments with this rating are of the lowest
category. They are either in default or are likely to be in default
soon.
CARE IPO grade Evaluation

5 Strong fundamentals

4 Above average fundamentals

3 Average fundamentals

2 Below average fundamentals

1 Poor fundamentals
 IPO Grading Criteria
CARE would assess the fundamentals of an issue based on the
following factors:

•Quantitative – growth prospects of the industry, financial strength

& operating performance of the issuer

•Qualitative - business fundamentals & prospects, management

quality, promoter evaluation, accounting policies, corporate
governance practices, project risk, and compliance and litigation
history.

CARE would consider a time horizon of around 3 years for its

assessment.
 LIMITATIONS OF CRDIT RATING
AGENCIES

 Institutions whose instruments were given highest rating didn’t perform well. For eg. CARE gave the highest rating to CRB capital, which failed, it created
a panic among investors & credit agencies.
 Frequent revision of grading creates confusion questioning credibility of the expertise of rating agencies.
 No audit, only rely on information provided by the issuer which may be inaccurate & incomplete.
 Biasing investors lose their investments.
 Rating agencies often fail to correctly predict a borrower’s financial health in the short term. The latest case is NCD issue of BPL which was downgraded
by CRISIL from A to D. Investors who depends on these ratings is not given any warning by rating agencies to wind down his investment in time.
 DISADVANTAGES OF CREDIT RATING
AGENCIES

• Biased rating and misrepresentation,

• Static study,
• Concealment of material information,
• No guarantee for soundness of the company,
• Human bias,
• Reflection of temporary and adverse conditions,
• Present rating may change (down grade),
• Differences in rating of two agencies.
 THANK YOU
• Soumya Samarpitha Mishra
• Nimi [Link]
• Mushthafiz
• Nishad v k
• Srinivas Taneeru
• Venkata Anudeep
• Bibuthi Bhushan Sarangi
• Kumari Priyanka
• Shashwat Anand