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ACKNOWLEDGEMENT
It gives me great pleasure to express my gratitude towards all the individuals who have directly or indirectly helped me in completing this project. I would like to express my sincere gratitude to my faculty of my college for their valuable guidance during the project period which helped me in completing the project successfully. I wish to express my sincere thanks to our Dean Prof. Sujata Mangraj for providing me valuable guidance & inputs which helped me to complete this project in true sense.

Snata Mohapatra Regd no-1106247201

CONTENTS

INTRODUCTION3 DEFINATION..3 HISTORY.4 CREDIT SCORE..4 CREDIT RATING AGENCY..4 CREDIT RATING IN INDIA..5 RATING METHODOLOGY...5 BENEFITS OF CREDIT RATING..7 NEED AND IMPORTANCE OF CREDIT RATING.8 PRACTICAL PROBLEMS WITH CREDIT RATING.11 CONCLUSION...12

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INTRODUCTION: A credit rating is a measure used by creditors to determine how much they can trust a certain borrower, whether the borrower is an individual, a corporation, or a country. The credit rating is derived using past financial data or the borrowers credit history. There are several factors that can affect the credit rating of an individual including: The persons ability to pay a loan Reflected by the persons salary and other assets The amount of credit in existence This is what credit limits are for. If the person is near his credit limit or has reached it is harder to get a loan. This also reflects whether the person is in the habit of going into debt Credit history Shows whether the person makes payments on time. This also reflects the persons spending and saving patterns.

DEFINATION: The process of assigning a symbol with specific reference to the instrument being rated, that acts as an indicator of the Current opinion on relative capability on the issuer to service its debt obligation in a timely fashion, is known as credit rating. According to the Moodys, A rating on the future ability and legal obligation of the issuer to make timely payments of Principal and interest on a specific fixed income security. The rating measures the probability that the issuer will default on the security over its life, which depending on the instrument of the expected monetary loss, should a default occur. Acc to Standard & poors, it helps investors by providing An easily recognizable, simple tool that couples a possibly Unknown issuer with an informative and meaningful symbol of credit quality.

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 are completeness of the information guaranteed.

HISTORY OF CREDIT RATING:

The initial rating exercise was started by Henry Poor who published financial statistics of Railroad companies in 1860. In addition to his publishing business, John Moody (Moodys Investors Services) started publishing ratings for railroad bonds from the year1909. The rating activity got a boost post Great Depression of 1933 when US Government Controller of Currency directed the banks in USA to purchase bonds rated BBB/Baa and above and the rest came to be known as junk bonds. At present in US markets all commercial bonds are invariably rated.The credit rating system originated in the USA in seventies. CREDIT SCORE: Credit score is a number which lenders use to assess the risk of extending credit to you. In other words, credit score is an estimate of the risk that a bank will take to lend you money. It is also a snapshot of your credit file at a certain point in time. Credit score is a mathematical formula which takes into account many different pieces of information and compares it with hundreds of thousands of other credit reports from the past, to create patterns, which identify statistical possibility of future credit risk.

CREDIT RATING AGENCY: A credit ratings agency is a company that assigns credit ratings to institutions that issue debt obligations i.e. assets backed by receivables on loans, such as mortgage-backed securities.

These institutions can be companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market. A credit rating measures credit worthiness, or the ability to pay back a loan. It affects the interest rate applied to loans - interest rates vary depending on the risk of the investment. A low-rated security has a high interest rate, in order to attract buyers to this high-risk investment. Conversely, a highly-rated security (carrying a AAA rating, like a municipal bond which is backed by stable government agencies) has a lower interest rate, because it is a low-risk investment. These low-risk bonds are available to a wide range of investors, whereas high-risk bonds cater to a narrow investing demographic. The top three credit ratings agencies in the United States are: Moody's Standard & Poor's Fitch Ratings 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 1993.

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 analyzing demand & 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 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 SYMBOLS FOR LONG-TERM INSTRUMENTS

S.L NO.

CRISIL

ICRA

CARE

SIGNIFICANCE

1 2 3 4 5 6 7 8

AAA AA A BBB BB B C D

LAAA LAA LA LBBB LBB LB LC LD

CARE AAA CARE AA CARE A CARE BBB CARE BB CARE B CARE C CARE D

Highest safe High safe Adequate safe Mod safe Inadq safe Risk prone Sub risk Default

BENEFITS OF CREDIT RATING: Low Cost Information Quick Investment Decision Independent Investment Decision Investment Protection Spending too much on credit risk research diminishes the return on investment. In addition, unlike underwriters and main banks, credit rating agencies are valued for their neutral viewpoint and expertise in credit risk analysis. For these reasons, investors rely heavily on credit rating data. Benefits to Rated Companies: Sources of additional certification Attracting higher number of investors Forewarns risk Encourages financial discipline amongst the corporates and better financial planning Merchant bankers job made easy Foreign collaboration made easy Low cost of borrowing Rating as a marketing tool

Competitive rates of interest Added investors confidence Ability to raise money from foreign markets at cheaper rates Helps to build reputation in the market.

Benefits for the investors: Saves the time and energy in studying companys financials, Strong indicator of companys financial capacity, Ratings represent the informed opinion of a neutral third party. Identification of the risk involved in the debt instrument. Guidance in making an investment decision by being presented with a wide variety of safe choices. Constant monitoring and surveillance by the agency on the debt instrument leading to effective risk management strategies. Periodical evaluation of companys financial capacity by rating agency helps the investor to exit the investment, in case rating is downgraded subsequently.

Benefits for the issuer Expanded access to capital markets. Lower financing cost. Recognition to a first time and unknown issuer in order to establish his market credibility. Enhancement of goodwill. Motivation for better performance.

NE E D AND IM PO RT ANCE O F C RE DIT RAT ING : A wide range of industries take advantage of credit scores to improve fairness, effectiveness and efficiency. Financial companies use credit scores to predict the risk of delinquencies and losses, which enables them to better allocate costs. Insurance

companies use specialized credit scores to make fairer underwriting decisions. Credit scores even provide benefits at the macroeconomic level by helping small enterprises attain the funds they need and by facilitating the securitization and sale of financial products in the secondary markets, substantially increasing the influx of capital into a country. Importance of credit score : Credit rating is an indicator that reflects how well or badly you manage your financial matters. By having a look at your credit rating, one can get much information regarding your business organization and particularly the payments made by your organization. There are several credit bureaus that compile this kind of information and later on sale it to their clients. It's very important to know your credit score and understand it completely, as it helps you to get loans, mortgage and even a job. Credit report list personal information such as name, address, date of birth, social security number, number of family member, your employer etc. Financial situations like bankruptcies, tax liens, foreclosure, late payment of your bill etc, will also be listed in the report. Your credit score list plenty of information about your financial actions. Your loan or credit account, and how you pay them, your current debts, type of debts...etc. All these information are listed in the report. The creditors, lending agencies and other companies will consider your credit score to determine if they can finance you without a risk. Any doubtful record creates a negative impact and can affect you in many ways. It's not only in case of sanctioning a loan but also determine the rate of interest. Lower the score, higher will be the interest. According to the data of Jean Chatzky (the financial editor for NBC's The Today Show), in May 2006, to qualify for the best rates on a mortgage loan, home buyer

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needed a credit score of 620 or higher. Just 2 year later in May 2008, you would have asked for a credit score of 750 to qualify for those same rates. So it's important to review your report once in a year, so that you are aware of your report and know what the creditors say about you and also can work on improving your score. Knowing your credit report will help you make important financial decisions. In the competitive market, rating gives an edge to the company when they place their bond/debenture or other debt instruments in the market for subscription. The investor relies on the independent rating agency since he does not have the time, expertise, analytical skills and the past data on the companys performance available with him. Comparison between 2 similar types of instruments is made easier if rating of the issues is available. The investor who knows the risk he has bargained for when he decides to take a decision to invest vis-a-vis his own risk appetite and the rewards he could expect. Rating helps the issuing companies to place their issues at competitive rates of interest and reduce the cost of funds to a reasonable level keeping with their credit standing, reputation and ability to repay the debts in time. Importance of Credit Rating India: Establish a link between risk and return To investors in making investment decisions credit rating shows the exact worth of the organization In the Indian context its a sudden down gradation of ratings of an organization, by three or more notches within a few months in spite of no visible fluctuations in the market. The rating agencies justify it on the ground that they suffer from a lack of adequate information, different agencies give different weightage to different factors on account of there being no market regulatory body as such to lay down yardsticks or monitor their ratings. Thus, it is

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evident that the system is still in its nascent stage in India and the SEBI guidelines indicate a step forward in institutionalizing the process. The merit of the guidelines per se is of course, a different issue that will be dealt with in a different chapter. As of now the issue is merely concerned with ascertaining whether CRAs are here to stay and the answer quite definitely seems to be in the affirmative. PRACTICAL PROBLEMS WITH CREDIT RATING 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 have identical investment quality

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CONCLUSION:

Credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.

More importantly, a credit crisis has transformed into a much wider and deeper crisis of confidence in the global markets. Credit rating agencies have an opportunity to help restore confidence in markets by restoring confidence in our industry.

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