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CREDIT RATING
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INTRODUCTION A credit rating assesses the credit worthiness
of an individual, corporation, or even acountry. Credit ratings are calculated fromf inancial history and current assets andliabilities.
A credit rating tells a lender or investor the
probability of the subject being able to pay
back a loan.
A poor credit rating indicates a high risk of
def aulting on a loan, and thus leads to high
interest rates
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Cont.
Credit rating agencies now undertake f inancial
analysis and assessment of f inancial product,
individuals, institutions, and governments.
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IMPORTANCE
Enhance the reputation of the lesser known
company
Promoting stability and eff iciency in the security market
Rating make more eff icient and transparent
Rating has assumed a much larger role in the global f inancial market
Sovereign rating aff ect the quantum inf lows
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Origin of CR
In us 1909,john moody rated rail bond
After depression it became more relevant
The biggest rating agencies are moodys and stander's & poors
First industrial country France has been rated
in 1959, 1977-venuzuela Moodys in 1988, and s & p in 1990
In India- CRISIL,ICRA,CARE,FITCH
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RATING METHODOLOGY
Business analysis Industry risk,
market position,
operating eff iciency
leagal position
Financial analysis Accounting quality
Earnings protection
Adequate of cash f low
Financial f lexibility
Management evaluation Track record of mgt,
how to cope up with adverse situation
goal ,philosophy, and strategies
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Cont
Fundamental analysis
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What can be Credit Rated ?
INDIVIDUAL
CORPORATE
SOVEREIGN (i.e. A Country)
FINANCIAL INSTRUMENTS
Bonds Bank Deposits
Commercial Paper
Term Loans
Pref erence Shares
Secured Debt Unsecured Debt
Securities
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PROCESS Rating request
Rating team
Information requirements
Secondary information- policy
Management meeting and plant visit
Preview meeting
Rating committee meeting Rating communication
Rating reviews
Surveillance
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RATING FEES
Rating agencies charge 0.1 percent of
instrument size
Annual surveillance f ees at rate of 0.03 percentto monitor the instrument monitoring its lif e.
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RATING SYMBOL
Highest investment grade
AAA- highest saf ety in term of timely payment of interest and principal, f undamentally strong and
any adverse changes are not going to aff ect it.
AA-diff er with marginally from above A-changes circumstances can adversely
aff ect(adequate)
BBB- moderate
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Cont..
Speculative grades
BB-inadequate saf ety , uncertain changes can
lead inadequate f inancial capacity to make timely payments in the f uture
B-denote high risk and adverse change could
lead to inability to make timely
C- vulnerable to def ault
D- def alult
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SEBI REGULATIONS
The SEBI issued for cr agencies in 1999 called
SEBI regulation 1999
CRA required to have net worth Rs 5cr
CRA can not assess f inancial instrument of
their promoters who have more than 10 per
stake
Only commercial bank ,public f inancial
institution ,foreign bank ,foreign credit rating
agencies with minimum net worth Ra 100cr
are eligible to promote rating agencies in India
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CONT
CRA have to carry out periodic review of the ratings given during the lif e time of the rated
instrument.
It has been made mandatory to obtain dual
rating from diff erent recognized agencies for
all public and debt issue of debt instruments
greater than 100cr.
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In india CRA
CRISIL : Credit rating information services of India
limited.
ICRE : Investment Information & credit rating agency
of India limited.
CARE : Credit analysis & research limited.
Fitch ratings India private limited.(earlier-Duff &Phelps credit rating )
Fitch is the only international agency with a presence
on the ground in INDIA
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CRISIL The f irst credit agency setup on January 1,
1988, jointly started by ICICI and UTI with an
equity capital of Rs. 4 crores, as public Ltd
company.
CRISIL is India's leading rating agency, and is
the fourth largest in the world.
With over a 60% share of the Indian Ratings
market, CRISIL Ratings is the agency of choice
for issuers and investors
CRISIL enters into strategic alliance with s & p
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Cont.
Crisil has provided technical assistance and
training to new rating agencies such as
training agencies Malaysia BERHAD and
MALLOT
Crisil has launched hospital grading
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ICRA IT is public limited company with an authorized
share capital of Rs.10 crores, Rs. 5 crores is paid up.
ICRA major shareholders IFCI (26%), and the
balance by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI) .
OBJECTIVE - to provide information & guidance toinvestors for determining the credit risk
associated with a debt instrument. In December moodys investors service and icra
limited announce their joint agreement tomoodys taking up minority stake in the equity
capital of ICRA
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CARE It was setup by IDBI in collaboration with
some banks & f inancial service companies in
NOV 1993.
CARE has tie up with f itch rating the word
third largest rating agency
It off ers services such as credit rating of
debentures/ pref erence shares / F.D / CP /
information services&
equity research- extensive study of the shares
listed on major stock exchanges through EIL
(economy, industry,company) analysis
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ONICRA
ONICRA stands for onida individual credit agencyof india and and is a private company set up byonida f inance. It has been set up to rate the
credit worthiness of non corporate consumers. C card
Hire and leasing
Housing f inance
Rental agreement
Bank f inance
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FITCH CREDIT RATING INDIA
IT is another rating agency allowed by RBI to
undertake rating of commercial paper.
Previously it was known as duff & phelps
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TYPES OF CR
Bond rating- more than 18 months
Equity rating
Commercial paper rating
Rating the borrowers
Sovereign rating
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Termilogy
Green rating
Standardized evaluation
IPO grading- not necessary for rating ,ICRA did the f irst ever grading of an equity.
CRISIL launched in 2005 rating service for
SME (1 to 8)