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Understanding Credit Ratings Explained

Credit rating measures an individual or business's ability to repay financial obligations based on income and repayment history, informing lenders about default risks. It can be classified as internal, conducted by banks following Basel 2 guidelines, or external, performed by agencies like Moody's and S&P. A poor credit rating indicates higher default risk, leading to increased interest rates and affecting investment decisions.

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12 views12 pages

Understanding Credit Ratings Explained

Credit rating measures an individual or business's ability to repay financial obligations based on income and repayment history, informing lenders about default risks. It can be classified as internal, conducted by banks following Basel 2 guidelines, or external, performed by agencies like Moody's and S&P. A poor credit rating indicates higher default risk, leading to increased interest rates and affecting investment decisions.

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© All Rights Reserved
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TOPIC: CREDIT RATING

CREDIT RATING:

 A measurement of a person or business entity's

ability to repay financial obligations, based on

income and past repayment histories.

CONTINU
E
CREDIT RATING:

Evaluating the credibility of individuals and

companies.

Informs lenders or investors whether individuals

or companies can repay loans.

CONTINU
E
CREDIT RATING:

A poor credit rating indicates a high risk of

defaulting on loans, which may result in increased

interest rates.

Ratings are denoted using alphabetical and

alphanumerical symbols.

CONTINU
E
CREDIT RATING:

Facilitates investors to differentiate between

various instruments based on underlying credit

quality.

Credit Rating can be:

1) Internal

2) External
INTERNAL CREDIT RATING:

Done internally by a bank's staff (Risk Management

Department).

Follows Basel 2 guidelines for internal credit risk

rating of borrowers to move towards an advanced

approach.

CONTINU
E
INTERNAL CREDIT RATING:

• Basel 2 guidelines: International banking standard

that requires banks to access credit risk using

internal credit ratings.

• Goal: To ensure that banks have enough capital to

cover all the potential losses


INTERNAL CREDIT RATING:

It Covers all borrowers, based on bank policy,


including:
Retail
SME (Small and Medium Enterprises)
Mid-Corporate
Corporate
Agriculture
EXTERNAL CREDIT RATING:

Conducted by external agencies (Credit Rating

Agencies) employing professional analysts.

Primarily done for companies with publicly traded

debt.

CONTINU
E
EXTERNAL CREDIT RATING:

• Agencies predict default probabilities and

estimate credit quality for all debt issuers.

Global Rating Agencies:

• Moody's

• S&P (Standard & Poor's)

CONTINU
E
EXTERNAL CREDIT RATING:

Approved Credit Rating Agencies in Pakistan:

• Pakistan Credit Rating Agency (PACRA)

• JCR-VIS Credit Rating Company Limited.


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THANK YOU! 

TOPIC: CREDIT RATING

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