CREDIT

RATING

MEANING & DEFINITION

DEFINITION:
Credit rating is an easily recognizable simple tool,
couples a possibly unknown issuer with an
informative and meaningful symbol of credit quality
-Standard & Poors
Credit rating is unbiased, objective and
independent opinion as to an issuers capacity to
meet financial obligations
-CRISIL, INDIA
MEANING:
Credit rating is the process of assessing the
creditworthiness of an individual (debtor),
corporation (business or company), Government or
even a country.

ACROYNM
C Credit
Worthiness
R Risk
Analysis
E Equity
Assessment
D Dividend
and Earnings
I Intentions of
promoters
T

R Relative Strength
A Authentic
Information
T Technical Analysis
I Industrial Climate of
Profile
N Network Assessment
G Guidance to
investors, companies
and government

Statistics Bureau was

founded
to
provide
previously unavailable
financial
information
on
USA's
industrial
companies
1916
Standard
Statistics
Bureau
assigned debt rating to
corporate bonds and
also started rating of
the sovereign debts
1941

Poors
Publishing
merged
with
Standard
Statistics
to
form
Standard
&
Poor's
Corporation( Sap)
1966 McGraw Hill

GROWTH IN CREDIT
RATING
1975 - McCarthy
Crisanti & Maffei
1978 IBCA Limited
1980 - Duff &Phelps
Credit Rating Company
1985 Japan Credit
Rating Agency
1987 - CRISIL
1991 - ICRA
1994 - CARE
1996 - Duff &Phelps
Credit Rating India(P)
Limited

IMPORTANCE OF CREDIT
RATING
Credit ratings establish
a link between risk and return.
It is of great assistance to the investors in making
investment decisions.
It also helps the issuers of the debt instruments to price
their issues correctly and to reach out to new investors.
Regulators like Reserve Bank of India (RBI) and Securities
and Exchange Board of India (SEBI) use credit rating to
determine eligibility criteria for some instruments.
Investors usually follow security ratings while making
investments.
iv. The trend
There is other factors to be consider
is,
towards
i. The growth of information technology.
privatization.
ii. Globalization of financial markets.
v. Lack of
iii. Increasing role of capital and government
money markets.
safety

measures.

INDICATIONS OF THE
ASSIGNED
RATINGS
i. The nature and terms of the particular security being
issued;
ii. The ability and the willingness of the issuer of a security
to make payments in time;
iii. The probability that the issuer will make a default in
payments; and
iv. The degree of protection available to the investors if the
security issuer company is liquidated, re-organized or
declared bankrupt.
6.Rating of rating
NATURE OF CREDIT RATING
agencies
1.Rating based on information
7. Rating is for
2.Many factors affect rating
instrument and not
3.Rating by more than onefor
agency
the issuer
4.Publication of ratings
company
5.Monitoring the already rated issues

8. Right of appeal
against assigned
rating

INSTRUMENTS FOR
RATING
i. Equity shares issued
by a company.
ii. Preference shares issued by a company.
iii. Bonds/debentures issued by corporate,
government etc.
iv. Commercial papers issued by manufacturing
companies, finance companies, banks and
financial institutions for raising sh0rt-term loans.
v. Fixed deposits raised for medium-term ranking
as unsecured borrowings.
vi. Borrowers who have borrowed money.
vii. Individuals.
viii. Asset backed securities are assessed to
determine the risk associated with them.

OTHER THAN DEBT

INSTRUMENT

Country rating
Rating of real
estate builders
and developers
Chit funds
Rating of states
Rating of banks
Rating for
equities

FUNCTIONS OF CREDIT
RATING
Provides unbiased
opinion
Provides quality and
dependable information
Information at low cost
Formation of public
policy
Provide basis for
investment
Provide easy to
understand information
Healthy discipline on
corporate borrowers

ADVANTAGES
FOR INVESTORS
1.Safety of investment
2.Recognition of risk
and reward
3.Freedom of
investment decision
4.Wider choice of
investment
5.Easy understanding
of proposal
6.Advantages of
continuous monitoring

FOR COMPANY
1.Ease to raise
source
2.Reduced cost of
borrowing
3.Reduced cost of
public issues
4.Rating builds up
the image
5.Recognition to
unknown
companies

DISADVANTAGE
Rating may be biased
Rating has no certificate of
soundness
Non disclosure information
Static study

CREDIT RATING IN INDIA

1. CRISIL Limited, CRISIL House, Mumbai
2. Fitch Ratings India Private Ltd.,Mumbai
3. ICRA Limited, New Delhi110 001
4. Credit Analysis & Research Ltd. (CARE), Mumbai
5. Brickwork Ratings India Private Ltd, Bangalore
6. SME Rating Agency of India Ltd. (SMERA), Mumbai

CRISIL PROCESS