CREDIT RATING

-Gunjan Jain (07916603913)

-Aastha Kawatra
(08716603913)

Credit Rating Meaning

Acredit
ratingevaluates
thecredit
worthinessof
adebtor,
especially
abusiness(company)oragovernment.Itisan
evaluation made by acredit rating agencyof
thedebtor'sabilitytopaybackthedebtandthe
likelihoodofdefault.

Credit Rating Agency

A Credit Rating Agency (CRA) is a
company that assigns credit ratings
for issuers of certain types of debt
obligations as well as the debt
instruments themselves.
The independence and professional
approach of the agency ensure
reliable, consistent and unbiased
ratings.

Objectives of Credit Rating

improvesahealthydisciplineonborrowers,
Lendsgreatercredencetofinancialandotherrepresentations,
Facilitates formulation of public guidelines on institutional
investments,
Helps merchant bankers, brokers, regulatory authorities, etc., in
dischargingtheirfunctionsrelatedtodebtissues,
Encourages greater information disclosure, better accounting
standardsandimprovedfinancialinformation(helpsininvestors
protection),
Mayreduceinterestcostsforhighlyratedcompanies,
Actsasamarketingtool

Need For Credit Rating

Maintenance of investors confidence;sincedefaultsshatter
theconfidenceofinvestorsincorporateinstruments.
Protect the interest of investors; investorsmaynotknowthe
meritsofthedebtinstrumentsofacompany.
Motivate savers to invest in industry and trade; improves
thehabitofinvestinginthecapitalmarketsratherthanholding
itinbanks.

Beneficiaries of Credit
Rating
INVESTOR
S

BENEFICIARIES OF
CREDIT RATING

BANKS
AND
FINANCIAL
INSTITUTE
S

BORROWE
R
COMPANY

Benefits to the Investor

Safeguardagainstbankruptcy
Recognitionofrisk
Credibilityoftheissuer
Easyunderstandability(ratings)oftheinvestment
proposal
Savingsofresources(timeormoney)
Independenceofinvestmentandquickinvestment
decision.
Choiceofinvestments
Goodbyetothumbrules
Benefitsofratingsurveillance
LowcostInformation

Benefits to the Borrower

Company
Low cost of borrowing
Wider audience for borrowing (Increase the investor
population)
Rating as a marketing tool
Self discipline by companies (Encourages financial
discipline)
Reduction of cost in public issues (attract investors
with least effort)
Motivation for growth
Sources of additional certification
Forewarns (caution) risk
Merchant bankers job made easy
Foreign collaboration s made easy

Benefits to Banks and Financial

Institutions
Save time, money, energy and
manpower in convincing their clients
about investments.
Less effort in studying companys
credit position to convince their
clients
Easy to select profitable investment
security
Helps to improve business

Demerits of Credit Rating

PossibilityofBiasExist
ImproperDisclosureMayHappen
ImpactofChangingEnvironment
ProblemsforNewCompanies
DowngradingbyRatingAgency
DifferenceinRating

Credit Rating Process

Credit rating methodology

Consistof4areas:
Business analysis- coversananalysisofindustryrisk,marketpositioninthe
country,operatingefficiencyofthecompanyandlegalposition.
Financial Analysis- analysisofaccountingquality,earningsprotection,cash
flowadequacyandfinancialflexibility.
Management Evaluation- study of track record of the managements
capacitytoovercomeadversesituations,goals,philosophyandstrategies.
Fundamental analysis- analysis of liquidity management, asset quality,
profitabilityandinterestandtaxsensitivity.

Contd..

Steps:-

informationiscollectedandthenanalysedbyateamofprofessionalsinan
agency.
If necessary, meetings with top management suppliers and dealers and a
visittotheplantofproposedsitesarearrangedtocollectadditionaldata.
This team of professionals submit their recommendations to the rating
committee.
Committeediscussesthisreportandthenassignsrating.
Rating assigned is then notified to the issuer and only on his acceptance,
ratingispublished.
Assuresconfidentialityofinformation.
Once the issuer decides to use and publish the rating, agency has to
continuously monitor it over the entire life of instrument, called
surveillance.