7ae9fcredit ratings
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Credit Ratings
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Credit rating and procedures:
• Business Analysis: industry risk, with competition from others,demand and supply position,govt. policies etc. Marketing risk withcompetitive advantages or disadvantages, market share, selling anddistribution network, quality of customer service, operating efficiencyinvolved in location advantages, labour cooperation, cost efficiency,and operating margins and legal position as reflected in security
offered, trust deed and trustee’s reputation etc. • Financial analysis: Examining the accounting quality under the
methods of depreciation, income recognition, treatment of baddebts, contingent liabilities etc. Earnings protection, under projectionof future earnings, EPS, profitability ratios, proportion of interest togross profit and net profit etc, adequacy of cash flows, reflected in
working capital management, current ratio, inventory to sales, etcand financial flexibility, examined in terms of capital financing plans,flexibility in financing through alternative methods, planning methodsand their flexibility
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• Management Evaluation: This is examined in relation totrack record of promoters, managers and top executives,their qualification and experience, planning and controlsystems, capacity to adjust with flexibility, foresight tomeet adverse situations, goal setting, monitoring and
evaluation with a view to achieve goals.• Regulatory and competitive environment : This is
assessed in terms of the structure and regulatoryframework of the financial system, the efficiency ofoperations and regulatory authorities, trends in
regulation and deregulation and the reaction of thecompetitors to regulation etc.
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• Fundamental analysis: Under this head ,the company’s liquiditymanagement, capital structure, debt leverage, long term solvency,short term solvency, matching of cash inflows to outflows and ratioanalysis of the company. The assets quality, in terms of credit riskmanagement, receivable to current assets, systems of monitoringthe sector credit, individual customer risk and management of
problem credits. The company’s profitability and financial position isalso analyzed through study of historic profits, spread on fundsdeployment, revenue on non-fund based services, accretion toreserves, profit margins etc. Besides, the impact of interest tax ratechanges on company’s net profit is analyzed. The interest as aproportion to cash inflows or of gross profits is also used to examinethe interest burden and potential for future earnings and the impactof debt burden on them is analyzed.
• These and many more such fundamental factors in a company arealso analyzed
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ICRA’s Rating Process (An Overview)
Assign Rating Team
Receive Initial Information & Conduct Research
Meetings and Visits
Analysis and Report Preparation
Preview Meeting
Rating Meeting
Assign Rating
Acceptance
Surveillance
Communicate Rating and Rationale
Mandate
Fresh Inputs
/Clarifications
Request for Review
Non Acceptance
InitialStage
FactsFindings
&Analysis
RatingFinalization
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STRUCTURE OF CREDIT RISK
RATING SYSTEM
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CREDIT RISK
1. Internal
a. Business risk
i. Current market shareii. Market standing
iii. Operating efficiency
iv. Growth perspective
v. SWOT analysis
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b) Financial Risk
i. Past financial record
ii. Quality of past financial records (performance)
iii. Projected financialsiv. Financial structure
v. Cash flow position
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c) Management Risk
i. Management Track Record
ii. Repayment history of previous loans
iii. Quality of management
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d) Credit Facility Risk
i. Availability of security
ii. Past payment record
iii. Directors/corporate guarantee
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e) Project Risk
i. DSCR Adequacy
ii. Tenure of loan
iii. Asset Coverage Rationiv. Future cash flows
v. Financial leverage
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2. External
a) Industry Risk
i. Nature of industry
ii. Competition and other players in the industryiii. Industry prospects
iv. Industry SWOT
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CREDIT DERIVATIVE (ISDA)
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Unfunded credit derivative products include the following
products:
Single name Credit Default Swap (CDS)
Total Return Swap First to Default Credit Default Swap
Portfolio Credit Default Swap
Secured Loan Credit Default Swap
Credit Default Swap on Asset Backed Securities Credit Default Swaption (CDS)
Recovery Lock Transaction
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Credit Spread Option
CDS index products
Constant Maturity Credit Default Swap (CMCDS)
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Funded credit derivative products include the following
products:
Credit Linked Note (CLN)
Synthetic collaboration debt obligation (CDO)
Constant Proportion Debt Obligation (CPDO)
Synthetic constant Proportion Portfolio Insurance(Synthetic CPPI)
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ORIGIN
CREDIT RATING IN INDIA
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BENEFITS OF CREDIT RATING
• Low cost information
• Quick investment decision• Independent Investment decision
• Investors Protection
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CREDIT RATING AGENCIES IN INDIA
• Credit Rating Information Service Ltd. (CRISIL)
• Investment Information and Credit Rating Agency of India
(ICRA)• Credit Analysis and Research (CARE)
• Duff Phelps Credit Rating Pvt. Ltd. (DCR India)
• Onida Individual Credit Rating Agency ltd. (ONICRA)
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RATING METHODOLOGY
• Credit Rating Symbols