CREDIT RATING

Prepared By: Ghanshyam Gondaliya MBA SEM.-III Sub.: MFS

Overview of credit rating • A credit rating agency is a potential source of information for market

participants (Landers and investors)who are trying to ascertain the creditworthiness of borrowers.

• Credit rating agencies provide investors with objective analyses and independent assessments of companies and countries (e.g., in 2011 S&P cut down Spain’s long-term credit rating from AA to

AA- ) that issue such securities.

• Globalization in the investment market, coupled with diversification in the types and quantities of securities issued, presents a challenge to institutional and individual investors who must analyze risks associated with both foreign and domestic investments.

Overview of credit rating

• Essentially, rating agencies offer judgments (they prefer the word “opinions”) about the quality of bonds issued by corporations, governments (including U.S. state and local governments, as well as “sovereign” issuers abroad).

• These judgments come in the form of letter grades. The best-known scale is that used by Standard & Poor’s (S&P) and some other rating agencies: AAA, AA, A, BBB, BB, etc., with pluses (+) and minuses (-)

as well.

History of credit rating service

• The concept of credit rating service was started with the establishment

of railroad corporation in U.S.A. (1820) and further it was the world’s

first big business in the sense of multi-divisional enterprises.

• By 1832, the journal “The American Railroad” came into its own

publication when Henry Varnum Poor became its editor in 1849.

History of credit rating service Contd.

• Poor gathered and published information on the property of railroad,

assets, liabilities and earning during 1849-1862. He died in 1905.

• In 1909, John Moody began with his rating of railroad bonds.

• Further, poor’s co. merged with standard statistics, another information

and rating co., in 1941 and became S&P.

What is credit rating?

► A credit rating is an assessment of an entity’s ability to pay its financial obligations. the ability to pay financial obligations is referred to as “creditworthiness.”

• Credit ratings apply to debt securities like bonds, preference share and other debt instruments.

• Credit ratings also are assigned to governments (e.g., ICRA comments on union budget 2015-16 of Government of India).

Participants

Landers

and

investors

Issuers

• The entity whose creditworthiness is being assessed

Issuers includes

• Corporation

• Local govt. authority

• Financial institutions

Who provides Credit Rating?

MOODY’S

CRISIL – started in 1987

ICRA – started in 1991

ONICRA

CARE – started in 1993

FITCH India

Brickworks Ratings

Instruments for Rating

Bond/debentures issued by corporate and government.

Bond issued by local authority

Preference & Equity shares

(new development) issued by a co.

Rating other than debt instruments

Rating other than

debt instrument

Country rating

Rating to the states

Rating to real estate

builders

Rating of banks

CAMELS

ICRA &

CRISIL-2007

S&P

Guidelines for Credit rating agencies in India

The SEBI (Credit Rating Agencies) Regulations, 1999 offers various guidelines

with regard to the registration and functioning of the credit rating agencies in

India.

The registration procedure includes application for the establishment of a

credit rating agency, matching the eligibility criteria and providing all the

details required. They have to undergo the strict examination procedure with

regard to the details furnished by them.

They are required to prepare internal procedures, abidance with circulars.

They are offered guidelines regarding the credit rating procedure, by the Act.

The credit rating agencies are provided with compliance officers.

They are required to show their accounting records.

Regulation of credit rating service

• This service is Regulated by SEBI.

• Following the guidelines of SEBI, published in 1999.

• Registration with SEBI with an application fees of Rs.25,000.

• Need to pay Rs.5,00,000 for granting of registration certificate from SEBI.

• Renewal of certificate with Rs.3,00,000.

CRISIL- Credit Rating & Information Service of India Pvt. Ltd.

• CRISIL is India's first credit rating agency, incorporated in 1987 and

was promoted by the erstwhile ICICI Ltd, along with UTI and other

financial institutions.

• It commenced operations from 1988 onwards. In 1995, in partnership

with National Stock Exchange of India Ltd.(NSEIL), CRISIL developed

CRISIL 500 Equity Index.

• S&P acquired the majority stake in the company in 2005 and so today

CRISIL is a S&P company. ( 9.68 % stake of S&P in 1997)

Board committee of CRISIL

• Director- Mr. M. Damodaran

• Chairman- Mr. Douglas L. Peterson

• M.D. & C.E.O. :-

Mr. Ravimohan ( 1994-2006)

Ms. Roopa Kudva (2007-2014)

Ms. Ashu Suyash (1 June, 2015)

• Other directors and alternate director

Ms. Roopa Kudva

Ms. Ashu Suyash

CRISIL’S RATING PROCESS

CRISIL ISSUER

Request for rating

Signs rating agreement Provides information

Rating fees

Management interaction with Rating team

Rating team assigned. Team obtain information,

Conduct preliminary analysis

Team conduct site visit and perform analysis

Accept or appeal to the rating

Analysis presented to rating committee

Rating assigned & communicated to the issuer

Continuous surveillance on ratings

(Change Or Stable)

INTRODUCTION:

• As a global entity, and India's leading Ratings, Research, Risk and Policy Advisory Company, CRISIL delivers opinions and solutions that:

Make markets function better

Help clients mitigate and manage their business & financial risks

Help shape public policy

• CRISIL inspires trust and confidence the world over. It redefines industry standards constantly, and sets new benchmarks year after year.

• At the core of CRISIL's credibility, built up assiduously over the years, are its values: Integrity, Commitment, Innovation, Independence, and Analytical Rigour.

CRISIL India – Short Note

• CRISIL offers domestic and international customers a unique

combination of local insights and global perspectives.

• Its independence in information, opinion, and solutions helps clients

make well-informed business and investment decisions, enhances

efficiency in markets and market participants, and helps shape

infrastructure policy and projects.

• CRISIL's majority shareholder, Standard and Poor's, is the world's

foremost provider of independent credit ratings, indices, risk evaluation,

investment research and data.

CRISIL Overview

• CRISIL is one of the top credit rating agencies of India. CRISIL has been

affiliated by Standard & Poor’s. It was established in the year 1987.

CRISIL offers a wide variety of services to its clients in a variety of fields.

CRISIL Services

CRISIL offers its clients the following services:

Ratings

Fund Services

Research

Advisory

CRISIL Ratings

CRISIL is the sole Indian credit rating agency that focuses on Sectoral specialization.

The Rating Criteria & Product Development Centre executes the following activities:

Policy Research

Ratings’ Quality Assurance

New Product Development

Following are the various credit rating agencies that CRISIL has set up in offshore

locations:

RAM (Malaysia)

Caribbean

MAALOT (Israel)

CRISIL Fund Services

CRISIL Fund Services provides the following services to its clients:

1. Market Benchmarks

2. Fund Evaluation Services

3. Valuation Tools

4. Risk Solutions to the Mutual Fund Industry

CRISIL Research

CRISIL research wing provides its services to more than five hundred consumers in India and all over the world. CRISIL Research offers the following services:

Research

Analysis

Forecasts

CRISIL Research offers its services on the following areas: (E.I.C.)

Indian Economy

Indian Companies

Indian Industries

The services of CRISIL Research cater to the clients of the following sectors:

Public

Financial

Consulting

Corporate

CRISIL - The Centre for Economic Research

The Centre for Economic Research is an important part of CRISIL. The Centre for

Economic Research provides its services to the clients who take decisions on the

business policies.

It provides the following services:

Creating Conceptual and Contextual Linkages

Providing Benchmarks

Applying Economic Principles to Live Business Applications

Providing Analyses

CRISIL Global Equity Research

CRISIL offers its Global Equity Research services through Irevna, which

is a prominent organization in this field. Irevna offers the following

services:

Knowledge Process Outsourcing

High-End Customized Equity Research and Analytics

The services of Irevna are provided to the following clients:

Consulting Companies

Financial Institutions

Private Equity Firms

Investment Banks

CRISIL Advisory

CRISIL offers its Advisory services through the following bodies:

CRISIL Infrastructure Advisory

CRISIL Risk Solutions

Gas Strategies Group Limited of Gas Information & Solutions

Typical credit rating scale

• AAA

• AA

• A

• BBB

• BB

• B

• CCC

• CC

• C

• D (Default)

– For further refinement ,some of the rating above may be modified with a “+” and “-” , or a number.

CRISIL long term Rating

Rating scale

AAA Highest safety

AA High safety

A Adequate safety

BBB Moderate safety

BB Moderate risk

B High risk

C Very high risk

D Default

Investment Grade

Non-investment Grade

ICRA was established in the year 1991 by the collaboration of financial

institutions, investment companies, and banks.

The company has formed the ICRA group together with its subsidiaries.

The company is headed by Mr. Piyush G. Mankad and offers products like short-

term debt schemes, Issue-specific long-term rating and offers fund based as

well as non-fund based facilities to its clients.

ICRA - Investment Information and Credit Rating Agency of India

ICRA’s Long-Term Rating Scale

Long-Term rating Scale: All Bonds, NCDs, and other debt instruments

(excluding Public Deposits) with original maturity exceeding one year.

LAAA The highest-credit-quality rating

LAA The high-credit-quality rating

LA The adequate-credit-quality rating

LBBB The moderate-credit-quality rating

LBB The inadequate-credit-quality rating

LB The risk-prone-credit-quality rating

LC The poor-credit-quality rating

LD The lowest-credit-quality rating

ICRA’s Medium & Short -Term Rating Scale (only for Public Deposits)

Medium-Term Rating Scale CC= Credit Quality

Short-Term Rating Scale CC= Credit Quality

MAAA-Highest CC A1- Highest CC

MAA- High CC A2- Above average CC

MA- Adequate CC A3- Moderate CC

MB- Inadequate CC A4- Risk-prone CC

MC- The risk-prone CC A5- Lowest CC

MD- Lowest CC

Abbreviations used

• CRISIL- Credit Rating & Information Service of India Pvt. Ltd.

• ICRA- Investment Information & Credit rating agency of India Ltd.

• ONICRA- Onicra credit rating agency of India Ltd.

• CARE- Credit Analysis & Research Ltd.

• DCR- Duff and Phelps Credit Rating India Pvt. Ltd.

• S&P- Standard & Poor’s rating group

• ICICI- Industrial credit and investment corporation of India

• UTI- Unit trust of India

Bibliography

• A Brief History of Credit Rating Agencies: How Financial Regulation

Entrenched this Industry’s Role in the Subprime Mortgage Debacle of

2007–2008, Lawrence J. White, George Mason University

• Working of credit rating agencies in India, IUP Journal of behavioural

Finance, vol. 7, nos. 1&2

• Financial services and system by Sasidharan and Mathews, McGraw Hill

Education, chapter-5,pg. no. 193

• http://www.moneycrashers.com/credit-rating-agencies-history/

• http://www.crisil.com

• http://investor.gov (US,SEC)