What is credit rating ?
 A credit rating is an opinion of a particular credit
agency regarding the ability and willingness of a
debtor (especially a business or a government) to
fulfill its financial obligations in completeness and
within the established due dates.
 A credit rating also signifies the likelihood a debtor
will default.
 It is also representative of the credit risk carried by a
debt instrument – whether a loan or a bond
issuance.
EARLY HISTORY
When the United States began to expand to the west and other parts of
the country, so did the distance of businesses to their customers. When
businesses were close to those who purchased goods or services from
them, it was easy for the merchants to extend credit to them, due to
their proximity and the fact that merchants knew their customers
personally and knew whether or not they would be able to pay them
back. As trading distances increased, merchants no longer personally
knew their customers and became wary of extending credit to people
who they did not know in fear of them not being able to pay them back.
Business owners' hesitation to extend credit to new customers led to
the birth of the credit reporting industry.
Mercantile credit agencies the precursors of today's rating agencies
were established in the wake of the financial crisis of 1837. These
agencies rated the ability of merchants to pay their debts and
consolidated these ratings in published guides. The first such agency
was established in 1841 by Lewis Tappan in New York City. It was
subsequently acquired by Robert Dun, who published its first ratings
guide in 1859.
History
Second agency, John Bradstreet, formed in 1849 and published a rating guide in
1857. Credit rating agencies originated in the United States in the early 1900s,when
rating began to be applied to securities, specifically those related to the railroad bond
market .
In India
CRISIL
1)
Credit rating information services of India limited is the first credit rating agency of the
country which was established in 1987 it calculates the credit worthiness of companies based
on their strengths makes share, market reputation and board. It’s also rates companies, banks
and organization, helping investors make a better decision before investing in companies ‘
bonds. It offers 8 types of credit rating which are as follows
 AAA,AA,A- good credit rating.
 BBB, BB- Average credit rating.
 B,C,D- Low credit rating.
(After CRISIL, many new rating agencies came into existence in India like ICRA Ltd in 1991,
CARE in 1993 and more)
Regulator of credit rating agencies in IndiaAll the credit rating agencies in India are regulated by securities and exchange
boards of India (SEBI) . The credit rating agencies are monitored and reviewed by
SEBI according to SEBI Regulations, 1999 of the SEBI Act, 1992.
USERS OF CREDIT RATING
 Credit rating are used by investors, intermediaries such
as investment banks issuers of debt and business and
corporations.
 Both institutions investors use credit ratings to assess the
risk related to investing in a specific issuance
 Intermediaries such as investment bankers utilize credit
ratings to evaluate credit risk and further derive pricing of
debt issues.
 Business and corporations that are looking to evaluate
the risk involved with a certain counterparts transaction
also use credit rating. They can help entities that are
looking to participate in partnership or ventures with other
businesses evaluate the visibility of the proposition.
Importance of Credit Rating.
 For Investors
1. Better Investment decision : No bank or money lender
would invest their money to a riskier customer. With the
credit rating, they can get an idea about the credit
worthiness of an individual or a company (Borrower) and
risk factors attached with the borrower . By evaluating this,
investors can make better investment decision.
2. Safety Assurance : Credit rating gives an idea to the
investors about degree of financial strength of the borrower
company which enables Investors to decide about the
investment. Highly rated instrument of a company gives an
assurance to the investors of safety of instrument and
minimum risk of bankruptcy.
3. Credibility of issuer : Rating gives a clue to the credibility of
the issuer company. The rating agency is quite
Independent of the issuer company and has no “Business
connections or otherwise any relationship with it or its Board
of Directors, etc. Absence of business links between the
rater and the rated firm establishes ground for credibility and
attract investors.
4. Easy understandability of investment proposal:
Rating symbol can be understood by an investor which
needs no analytical knowledge on his part. Investor can
take quick decisions about the investment to be made in
any particular rated security of a company.
5.Saving of resources : Investors rely upon credit rating. This
relieves investors from the botheration of knowing about the
fundamentals of a company, its actual strength, financial
standing, management details, etc. The quality of credit
rating done by professional experts of the credit rating
agency reposes confidence in them to rely upon the rating
for taking investment decisions.
6. Independence of investment decisions:
For making investment decisions, investors have to seek
advice of financial intermediaries, the stock brokers,
merchant bankers, the portfolio managers etc. But for rated
instruments, investors need not depend upon their advice
as the rating symbol assigned to a particular instrument
suggests the credit worthiness of the instrument and
indicates the degree of risk involved in it.
 For company
1. Lower cost of borrowing: A company with highly rated
instrument has the opportunity to reduce the cost of borrowing
from the public by quoting lesser interest on fixed deposits or
debentures or bonds as the investors with low risk preference
would come forward to invest in safe securities though yielding
lower rate of return.
2. Rating as marketing tool:
Companies with rated instrument improve their own image and
avail of the rating as a marketing tool to create better image in
dealing with its customers and feel confident in the utility
products manufactured by the companies carrying higher rating
for their credit instruments.
3.Motivation for growth: Rating provides motivation to the
company for growth as the promoters feel confident in their
own efforts and are encouraged to undertake expansion of
their operations or new projects.
4. Unknown issuer: Credit rating provides recognition to a
relatively unknown issuer while entering into the market
through wider investor base who rely on rating grade rather
than on ‘name recognition’.
5. Benefits to brokers and financial intermediaries:
Highly rated instruments put the brokers at an advantage
to make less efforts in studying the company’s credit
position to convince their clients to select an investment
proposal.
Significance of Credit Rating
For Investors
Better investment
decision
Safety Assurance
Credibility of Issuer
Easy understandability of
investment proposal
Saving of resources
Independence of
investment decision
For company
Lower cost of capital
Rating act as a marketing
tool
Motivation for growth
Good for Non Popular
companies
Benefits to brokers and
financial intermediaries
Types Of Credit Rating
1. Rating of bonds and debentures: Rating is popular in certain cases for
bonds and debentures. Practically, all credit rating agencies are doing rating
for debentures and bonds.
2. Rating of equity shares: Rating of equity shares is not mandatory in
India but credit rating agency ICRA has formulated a system for equity
rating. Even SEBI has no immediate plans for compulsory credit rating of
initial public offerings (IPOs).
3. Rating of preference shares: In India preference shares are not being
rated, however Moody's Investor Service has been rating preference shares
since 1973 and ICRA has provision for it.
5. Rating of medium term loans (Public deposits, CDs etc.): Fixed
deposits taken by companies are rated on regular scale in India.
6. Rating of borrowers: Rating of borrowers, may be an individual or a
company is known as borrower’s rating.
7. Rating of short-term instruments [Commercial Papers (CPs):
Credit rating of short term instruments like commercial papers has been started
from 1990. Credit rating for CPs is mandatory which is being done by CRISIL,
ICRA and CARE.
8. Ratings of insurance companies: With the entry of private sector
insurance companies, credit rating of insurance companies is also gaining
ground. Insurance companies are rated on the basis of their claim paying ability
(whether it has high, adequate, moderate or weak claim-paying capacity). ICRA
is doing the work of rating insurance companies.
8. Rating of real estate builders and developers:
A lot of private colonizers and flat builders are operating in big cities.
Rating about them is done to ensure that they will properly develop a
colony or build flats. CRISIL has started rating of builders and developers
9. Rating of chit funds: Chit funds collect monthly contributions from savers
and give loans to those participants who offer highest rate of interest. Chit
funds are rated on the basis of their ability to make timely payment of prize
money to subscribers. CRISIL does credit rating of chit funds.
10. Rating of collective investment schemes: When funds of a large
number of investors are collectively invested in schemes, these are called
collective investment schemes. Credit rating about them means (assessing)
whether the scheme will be successful or not. ICRA is doing credit rating of
such schemes.
•
These are the Nine steps in the credit rating process:-
1. Issuing formal request: The credit rating process begins when the issuer
( who wants to get a credit rating ) issues the formal request for credit rating to
credit rating agencies. i.e. CRISIL. When a credit rating agency accepts the
request. An agreement is made between the issuer company and rating
agency.
2. Assigning Analytical Team: In the second step, the Credit Rating Agency
(CRA) assigns the job and duties of credit rating to an analytical team. The
analytical team is responsible for rating projects/assignments. The team
usually has two members/analysts who have expertise in the relevant business
area.
3. Obtaining Financial Information: In this, the analytical team will collect all
the required information from the client or issuer company. The analytical team
provides a list of the required information and plans for discussions to issuer
company.
4. Research and Meeting with management:In this step, analytical team research client’s operations by visiting the
company’s plant or factory, and makes meeting with the company’s executives
for better understanding. This includes an understanding, collecting of the key
factors that influence production level, quality, and cost of production.
5. Discussion Meeting:When all the analysis has been done, the team will discuss the findings at
length with the internal committee, comprising senior analysts of the credit rating
agencies. All the issues having an effect on the company are identified. An
opinion on the rating is also formed. The results of the team’s analysis are finally
presented to the top authority of the rating committee.
6. Final Rating Meeting:Now final authority will check facts, findings, and factors like political, social, and
other factors.. After considering all the results, facts, and other information the
credit rating agency will assign the actual Credit Rating.
This rating committee meeting is the only process in which the issuer does not
participate directly.
7. Informing Assigned Rating:
After assigning the rating grade, CRA will inform the issuer company about the
rating along with reasons supporting the credit rating. Now, the issuer company
can accept, reject, or can provide additional facts to review it again. The credit
rating rejected by the issuer company should be kept confidential and not
disclosed to the public.
8. Announcing to the Public:
Once the issuer accepts the rating, the credit rating agencies circulate ratings
through printed reports, newspaper, etc. to the public.
9. Monitoring the company:
Once the company has decided to accept the rating, CRAs are obliged to
monitor the accepted ratings over the life of the instrument or based on time
written at contract. The CRA needs to constantly monitor all ratings with
reference to new political, economic, and financial developments and industry
trends.
Process Of Credit Rating:
Issuing
formal
request
Final Rating
Meeting
Informing
Assigned
Rating
Assigning
analytical
team
Discussion
meeting
Announcing
Rating to the
public
Obtaining
financial
information
Research and
Meeting
management
Monitoring
the company
How do Credit Ratings Work in India?
As a matter of fact, every credit rating agency has their algorithm to
evaluate the credit rating. However, the major factors are credit
history, credit type and duration, credit utilization, credit exposure, etc.
Every month, these credit rating agencies collect credit information
from partner banks and other financial institutions. Once the request
for credit rating has been made, these agencies dig out the
information and prepare a report based on such factors. Based on that
report, they grade every individual or company and give them a credit
rating. This rating is used by banks, financial institutions and investors
to make a decision of investing money, buying bonds or giving loan or
credit card. The better is the rating, more are the chances of getting
money at payable interest rates.
Different credit rating scales
Rating Scale
India
Ratings &
Research
CRISIL
Brickwork
Ratings
CARE
ICRA
Highest safety: Lowest risk
of turning into a defaulter
IND AAA
CRISIL AAA
BWR AAA
CARE AAA
ICRA AAA
High safety: Very low credit
IND AA
risk
CRISIL AA
BWR AA
CARE AA
ICRA AA
Low risk
IND A
CRISIL A
BWR A
CARE A
ICRA A
Moderate safety: moderate
credit risk
IND BBB
CRISIL BBB BWR BBB
CARE BBB
ICRA BBB
Moderate risk: moderate
risk of default
IND BB
CRISIL BB
BWR BB
CARE BB
ICRA BB
High risk: high risk of
default
IND B
CRISIL B
BWR B
CARE B
ICRA B
Very high risk: Very high
risk of default
IND C
CRISIL C
BWR C
CARE C
ICRA C
Default: Instruments are
already in default or on the
verge of default
IND D
CRISIL D
BWR D
CARE D
ICRA D
Source: http://surl.li/afqop
Present Status
•
"India's rating remains stable on a 'BBB-' rating. We do not
expect there to be a change in the rating level over the next 2
years...Of course, there are going to be some near term
ramification on India's economy stemming from the severe
second wave of COVID-19 and that may peep through into our
sovereign credit metrics.
S&P Global Ratings Director- Andrew Wood said.
This presentation is prepared by ;
Sejal Shinde 2724
Rachit Arora 2708
Aditya Kumar 2657