Credit Rating

Credit Rating

Nitin kumar Banka (PUMBA) [email protected]

Agenda Definition of Credit Rating  Personal credit ratings  RBI and Basel II Norms  Risk Weights for Long-term and Short-term Exposure  Methodology for Rating of Corporates  Credit rating agencies 

Definition A credit rating assesses the credit worthiness of an individual, corporation, or even a country  Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. 

Personal credit ratings An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.  The factors which may influence a person's credit rating are: § ability to pay a loan § interest § amount of credit used § saving patterns § spending patterns § debt 

RBI and Basel II Norms Under Basel II norms, RBI has prescribed risk weights for different levels of ratings.  As per RBIs guidelines, all fresh sanctioned and renewals of unrated exposures in excess of Rs 50 crore will attract a risk weighting of 150% from 31 March 2008. 

Risk Weights for Long-term and Short-term Exposure

Methodology for Rating of Corporates 

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Qualitative Analysis – Industry risk; Operating environment; Market position; Management, Accounting and Corporate governance Quantitative Analysis – Earnings and cash flow, Capital structure and Financial flexibility Earning Measures – Analysis of EBITDA, EBITDAR, After tax cash flows, Net free cash flows, Coverage ratios, EBITDA/Gross interest expense, EBITDA/Cash interest expense Leverage Measures – Debt/EBITDA (Cash leverage) and Net debt/Equity (Gearing) Profitability Analysis – Analysis of EBITDA/Operating income and Return on equity/ Return on capital employed

Credit rating agencies Credit scores for individuals are assigned by credit bureaus . Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.  In India, the main credit bureaus are CRISIL, ICRA and Credit Registration Office (CRO).  The credit rating agency for individuals in India is CIBIL(Credit Information Bureau (India) Limited).  The largest credit rating agencies are Moody's, Standard and Poor's and Fitch Ratings. 

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