CREDIT RATING & CREDIT RATING AGENCIES

1. CREDIT RATING & CREDIT RATING AGENCIES

2. INTRODUCTION • Credit rating is defined ‘…as a process by which a statistical service prepares various ratings identified by symbols which are indicators of the investment quality of the credit rated’. • Credit rating is also known as SECURITY RATING in India. • Credit ratings are calculated from financial history and current assets and liabilities.

3. OBJECTIVES OF CREDIT RATING • It provides guidance to investors or creditors in determining a credit risk associated with debt instrument or credit obligation. • Establishes a link between risk and return. • Helps investors in making investment decisions. • Acts as a marketing tool • To assist the regulators in promoting the transparency in the financial market.

4. FEATURES OF CREDIT RATING • Specificity to debt instrument • Guidance to Investors • Not a Recommendation to buy ,hold or sell • Broad parameter of Information • Quantitative and Qualitative

5. INSTRUMENTS FOR RATING • Equity shares issued by a company. • Preference shares issued by a company. • Bonds/debentures issued by corporate, government etc. • Commercial papers • Fixed deposits • Borrowers who have borrowed money. • SEBI, the regulator of Indian Capital Market, has decided to enforce mandatory rating of all debt instruments irrespective of their maturity .

6. CREDIT RATING PROCESS • Receipt of the request • Assignment to analytical team • Obtaining information • Plant visits and meeting with management • Presentation of findings • Rating committee meeting • Communication of decision • Dissemination to the public • Monitoring for possible change

7. Credit Rating Agency • CRA play a key role in the infrastructure of the modern financial system. • For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers & lenders. • This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether.

8. BENEFITS OF CREDIT RATING • For Investors -Safeguards against bankruptcy -Independence of investment and quick investment decision -Low cost information -Easy understandability (ratings) of the investment proposal • Issuers of Debt Instruments- A company whose instruments are highly rated has the opportunity to have a wider access to capital, at lower cost of borrowing.

9. Contd. • For Rated Companies: - Wider audience for borrowing  - Reduction of cost in public issues • For Brokers and financial intermediaries: - Saves time, money, energy, and manpower in convincing their clients about investments. - Easy to select profitable investment security

10. Indian Credit Rating Agencies • CRISIL : Credit rating information services of India limited. • ICRA : 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. • Onicra Credit Rating Agency of India Limited

11. CRISIL • The first 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 Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL Ratings provides the most reliable opinions on risk by combining its understanding of risk and the science of building risk frameworks, with a contextual understanding of business. • It offers a comprehensive range of integrated product & service offerings-real time news, analysed data , incisive insights & opinions &expert advice-to enable investors , issuers , policy makers de-risk their business & financial decision making , take informed investment decisions& develop workable solutions.

12. ICRA • ICRA was set up by IFCI on 16th January 1991. • It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up. • ICRA’s 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 to investors for determining the credit risk associated with a debt instrument.

13. CARE • It was setup by IDBI in collaboration with some banks & financial service companies in NOV 1993. • It offers services such as credit rating of debentures/ preference shares / F.D / CP / information services & equity research –extensive study of the shares listed on major stock exchanges through EIL (economy,industry,company) analysis.

14. RATING METHODOLOGY Consists of four areas : - • Business analysis - covers an analysis of industry risk, market position in the country, operating efficiency of the company & legal position. • Financial analysis – analysis of accounting quality, earnings protection, cash flow adequacy & financial flexibility. • Management evaluation – study of track record of the management’s capacity to overcome adverse situations, goals, philosophy & strategies. • Fundamental analysis – analysis of liquidity management, asset quality, profitability & interest & tax sensitivity.

15. Rating Symbols High investment grades: – • AAA & AA – Highest safety • A – Adequate safety • BBB – moderate safety Speculative grades :- • BB - inadequate safety • B – high risk • C – substantial risk • D - default

16. Limitations • Institutions whose instruments were given highest rating didn’t perform well. For eg. CARE gave the highest rating to CRB capital, which failed, it created a panic among investors & credit agencies. • Frequent revision of grading creates confusion questioning credibility of the expertise of rating agencies. • No audit, only rely on information provided by the issuer which may be inaccurate & incomplete. • Biasing investors lose their investments. • Rating agencies often fail to correctly predict a borrower’s financial health in the short term. The latest case is NCD issue of BPL which was downgraded by CRISIL from A to D. Investors who depends on these ratings is not given any warning by rating agencies to wind down his investment in time.

17. Objective Questions of Development Financial Institutions

18. Which of the following statements are true and which are false ? (i) Specialised financial institutions provide medium and long-term financial assistance to industry. (ii) Small scale industries are not financed by any SFI. (iii)IFCI can underwrite issue of shares but cannot subscribe to share issues. (iv) Among other functions, IFCI also guarantees foreign currency loans. (v) The maximum limit of credit which IFCI can sanction to a single concern is Rs 1 crore but it can be exceeded if permitted by Government.

19. Which of the following statements are true and which are false ? (vi) IFCI can grant long-term loans to industries in the co-operative sector. (vii)To set up a transport undertaking a businessman can get financial assistance from the SFC of the concerned state. (viii)SFCs can guarantee loans of industrial concerns which are repayable within not more than 10 years. (ix)Loans granted by SFCs can be converted into shares of the industrial concern. (x)Financial assistance cannot be granted by SFCs to any proprietary concern.

20. Fill in the blanks with suitable words: IDBI serves as the _____________ institution for term finance to industries. One of the functions of IDBI is to assist other financial institutions by ______________ of loans granted for exports. The primary objective of IDBI is to __________, _________and ___________ the working of other financial institutions like IFCI, SFCs, UTI. The IDBI can grant a _____________ or loans and advances to other financial institutions. The IDBI __________ and ____________ the shares and debentures of industrial concerns.

21. Answers (i), (iv), (v), (vi), (vii), (ix), - True (ii), (iii), (viii), (x), - False (i) apex (ii) refinancing (iii) co-ordinate, regulate, supervise (iv) line of credit (v) underwrites, subscribes to