Credit Rating

Credit Rating Chandra Prakash Upadhyay(3013 Kalandi pradhan (3079)

Definition Moodys:- rating is designed exclusively for

the purpose of grading bonds according to their investment qualities. According to ICRA, “Credit ratings are opinions on the relative capability of timely servicing of corporate debt and obligations. These are not recommendations to buy or sell…….neither the accuracy nor the completeness of the information is guaranteed.

-:Function of credit rating:1. 2. 3. 4. 5.

Superior Information Low cost information Basis for proper risk- return trade off Healthy discipline on corporate borrowers Formulation of public policy guidelines on institutional investment

Origin vOriginated in USA vIn 1860, Henry Vannum started publishing for railroad companies. vIn 1990, moody’s investment agency started vIn 1993, US gov. make rule

Credit Rating in India Credit Rating Information Service of India

was set up in 1987. Investment Information and Credit Rating Agency of India was promoted in 1991. Credit Analysis and Research Limited was floated in in 1993.

Benefits of Credit Rating Ø Low Cost Information Ø Quick Investment Decision Ø Independent Investment Decision Ø Investment Protection

Benefits to Rated Companies I. Sources of additional certification II. Increase the investor population III. Forewarns risk IV. Encourage financial discipline V. Merchant bankers job made easy VI. Foreign collaboration made easy VII. Low cost of borrowing VIII.Rating as a marketing tool

CREDIT RATING INFORMATIONSERVICE LTD.(CRISIL)

CRISIL, the first credit agency was floated on jan-11998.It was started jointly by ICICI & UTI with an equity capital of Rs-4 cr. Each of them holds 18% of the capital. The promoters are ADB(15%),LIC(5%), SBI(5%),HDFC(6.2%), nine public sector banks(19.25%)& 10 foreign banks(7.55%). OBJECTIVE’S: To assist both individual & institutional investors in making investment decisions in fixed income securities. To enable corporate to raise large amounts at fair cost from a wide spectrum of investors. To enable intermediaries in placing their debt instruments with investors by providing them with

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(ONICRA)

RATING METHODOLOGY The first analysis relates to the past performance

of the company. The past performance of the company & assessment of its prospects. The industry is studied by analysingdemand & supply growth, nature & basis of competition, govt. policy for the company & the effect of change in govt. policy on the future of the company. The position of the company within the industry is studied to understand how the company would fare in the future. In evaluating the ratings, crisil employs both qualitative & quantitative criteria. CREDIT RATING SYMBOLS:

Investment info. And credit rating agency of India(IICRA)

The iicra was set up by industrial finance corporation

of india on 16th jan 1991.it is a public ltd company with an authorised share capital of Rs 101 cr. The initial paid up capital of rs 3.50 cr. Is subscribed by IFC, UTI,LIC,GIC,SBI & 17 other bank. IICRA started its operation from 15thmar. 1991.during 94-95 IICRA rated 212 debt instruments covering a debt volume of Rs. 5343 crores. Cumulative number of instruments covering a debt volume of Rs 17,638 crores. IICRA RATING SCALE:

CREDIT ANALYSIS & RESEARCH Ltd.(CARE)  The CARE was promoted in1993 jointly with

investment companies, banks & finance companies. Services offered by CARE are – (1).credit rating (ii) information service(iii)Equity research (iv)rating & paralled market of LPG & kerosene. Since its inception till the end of march 1995, CARE has rated 249 debt instruments covering a total debt volume of Rs 9729 crores. CARE Rating Services: CARE provides rating services to the following debt instruments. Debentures Certificate of deposits Commercial paper Fixed deposits.

SEBI GUIDELINES(1999) No credit rating agencies shall rate a security

issued by its promoters. Dual rating is compulsory for public & rights issue of debt instrument of Rs 100 crore or more. The networth of rating agencies has been fixed at Rs 5cr. Rating agencies can choose theire methodology of operation but self regulatory mechanism will give a better maturity status for agencies. Period of validity of registration shall be 3 years. Sebihas decided to incorporate a clause in the listing agreement of stock exchanges requiring companies to corporate with agencies by providing correct information. Refusal to do so many lead to breach of contract between rating agency & client. It is also suggested that a penal clause be

PRACTICAL PROBLEMS The widespread of branch net work of the rating

agency may limit skills in rating. Inexperienced, unskilled or overloaded staff may not do justice to their job & the resulting ratings may not be perfect. The rating is not permanent but subject to changes & moreover the agencies can not give any guarantee for the investors. The time factor greatly affects rating & gives misleading conclusions. a company which adverse conditions temporarily will be given a low rating judged on the basis of temporary phenomenon. Since the rating agencies receive a sizable fee from the companies for awarding ratings, a tendency to inflate the ratings may develop. Investment which have the same rating may not

Future of credit rating in india At present, commercial paper, k bonds and debentures with maturities exceeding 18 months & fixed deposits of large non-banking companies registered with RBI are required to be compulsorily rated. these are moves to make rating compulsorily for other types of borrowings such as fixed deposit programme of manufacturing companies. In addition,therating agencies are expected to be called upon to enlarge volumes of securitization of debt & structuring of customised instruments to meet the needs of issuers or different class of investors. there are number of areas where rating agencies will have to cover new grounds in the coming years. The rating of municipal bonds,state govt. borrowings ,commercial banks & public sector