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7/29/2019 Credit-Rating - 12 SLIDES
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What is credit rating?
A credit rating estimates the credit worthiness of an individual, corporation,
or even a country.
It is an evaluation made by credit bureaus of a borrowers overall credit
history.
It is also known as an evaluation of a potential borrower's ability to repay
debt, prepared by a credit bureau at the request of the lender.
Credit ratings are calculated from financial history and current assets and
liabilities.
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Objectives
It provides guidance to investors or creditors in determining a credit risk
associated with debt instrument or credit obligation.
Establishes a link between risk and return.
Helps investors in making investment decisions.
Credit rating shows the exact worth of the organization.
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Credit rating Agencies In India
Credit Rating Information Services of India Ltd.(CRISIL) (1988)
Investment Information and Credit Rating Agency ofIndia (ICRA) (1991)
Credit Analysis & Research Ltd. (CARE) (1993)
ONICRA Credit Rating Agency of India Ltd.(1993)
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CRISIL :
CRISIL was set up by financial institution on January 19,1988.
CRISIL Ratings plays a leading role in the development of the debt markets
in India.
CRISIL has a capital base of Rs.4 crore.
FUNCTIONS:
Independent &unbiased report
Reliable financialinformation
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PROGRESS:
Its inception till march 2,2005,crisil has so far completed rating of issues824 companies consisting of various types of debt instruments of companies
both in public & the private sectors.
Credit rating analysis is relatively a new development in india. It is expected
that establishment of crisil will provide a strong impetus to the systematic
risk evaluation of specified corporate instruments as well as the companiesissuing them.
WORKING: 1. QUALITATIVE CRIETERIA
2. QUANTITATIVE CRIETERIA
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ICRA
ICRA formally known as the investment information & credit rating agency of india
was promoted by the industrial finance corporation of india(IFCI).
It was incorporated on jan 16 ,1991 as public limited company and started
functioning with effect from September 1,1991.
ICRA also performs credit rating functions & finalies its rating norms & standards in
consultation with credit rating information & servicies of india ltd.(CRISIL) ICRA has an authorized capital of rs.10 crores IFCI,UTI,LIC,GIC,HDFC,ILFS,SBI
& 17 commercial banks are its shareholders.
PROGRESS:
Its inception till end of march 3,2005 ICRA has rated debt instruments of 597companies.
ICRA has carried out several studies for financial sector intermediaries and has been
appointed as a consultant by the disinvestment commission,ministery of finance.
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CARE
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.
CAREs Ratings are recognized by Govt. of India and all regulatoryauthorities like RBI and SEBI.
CARE is a founder member of Association of Credit Rating Agencies inAsia (ACRAA).
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ONICRA(ONIDA INDIVIDUAL CREDIT RATING
AGENCY)
ONICRA is the first individual credit agency in India promoted by famous
ONIDA group. ONIDA covers approximately 75 million households
owning three popular items colour TVs, refrigerators & washing machines.
RATING SCALE ONICRA has been pioneer introduce the concept of individual credit rating.
It has develop a rating system for various types of credit extension by
conducting in debt study of all aspect the behaviour of credit seekers.
The creditworthiness of the individual is measured on various Parameters
such as age, qualification, occupation, savings, stability of works andhistory of repayment etc.
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Who uses Credit Rating?
Investors-
In absence of credit rating system, risk evaluation depends on
namerecognition.
Credit rating helps investors in selecting appropriate instrument
from broad spectrum of investment options. Banks use ratings of other banks for decisions regarding interbank
lending, swap agreements, etc.
Credit rating agencies also provides services like industry reports,
corporate reports, seminars and open access to the analysts of the
agencies.Regulators-
Restrict entry to market of new issues rated bellow a particular
grade.
Prohibit investors from purchasing or holding of instruments rated
bellow a particular level.
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Issuers- Compared to unrated securities, issuers of rated securities have
access to much wider investor base & more faith is placed.
Investor confidence enables issuers of highly rated instruments to
access market even under adverse market conditions.
Intermediaries-
Merchant bankers use rating for planning, pricing, underwriting,
placement.
Brokers and dealers in securities use rating as an input for their
monitoring of risk exposures.
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DISADVANTAGES OF CREDIT RATING
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.