Financial Services and System

Credit Rating
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An act of assigning values by estimating worth or
reputation of solvency and honesty so as to repose
trust in persons/institutions ability to repay
Rating is for instruments
Institutions also are rated
Opinion about credit quality is expressed through
symbols
Not a recommendation to purchase, sell or hold
securities
Credit Rating
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Increased
Default Rate
Assistance to
Investors to
Judge the
Issuers
Credibility


Need for Rating
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1841 - Louis Tappan established the first credit
rating agency in New York
Robert Dun acquired the agency and published its
first rating guide in 1959
1849- John Bradstrreet another mercantile credit
rating agency and published a ratings book in 1957
1909 - John Moody started Moodys Rating Agency
Evolution
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1916- Poors Publishing Company issued its first
ratings

1922 Standard Statistics Company and Fitch
Publishing Company published their ratings

1941- Standard Statistics Company and Poors
Publishing Company merged together and
Standard and Poor came into existence
Evolution
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1982- Duff and Phelps began providing credit rating
services from Chicago

1975 - McCarthy, Crisanty and Maffei was founded

1975 - Xerox Financial Services acquired Mcarthy,
Crisanty and Maffei

1991- Xerox Financial Services was merged with Duff
and Phelps
Evolution
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1987 - Credit Rating Information Services of India Ltd..
(CRISIL) was started
1991 - Information and Credit Rating Agency of India
Ltd.. (ICRA) was started
1993 - Credit Analysis and Research Ltd.. (CARE) was
established
Onida Individual Credit Rating Agency Ltd.. (Onicra)
was started in the private sector
1996- Duff and Phelps started rating in India
Credit Rating Services in India
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Benefits of Rating to Investors
Safeguards against bankruptcy
Recognition of Risks
Credibility of issuer
Easy understandability of investment proposal
Saving of resources
Independence of investment decision
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Benefits of Rating to Investors
Choice of investment
Promoters evaluation by the investor and avoid
influence by a group
Rating surveillance
Quick understanding of the rated instrument
Payment of a reasonable price vis--vis credit
worthiness
Default risk perception
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Lower cost of borrowing
Wider audience for borrowing
Better image
Self discipline by companies
Reduction of cost in public issues
Motivation for growth
Self assessment of own status
Benefits to Issuer
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Opportunity to understand credit worthiness

Savings of energy spent on analysis
Benefits to Brokers and Financial Intermediaries
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Grading debt instruments according to risk
preferences
Source of reliable information
Identification of strength and weaknesses
Liquidity and marketability of rated securities
Impact on capital market
General Advantages
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Request by the Company or at the instance of the
rating agency
Constitution of team of specialists for collecting
information and analysis of data collected by the
company
Visit to the client, site, collection of industry
information


Rating Process
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Presentation of the findings of the team to the
internal committee

Internal committee preview the data and findings are
forwarded to the Rating Committee

Rating Committee communicates provisional rating
to the client


Rating Process
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Rating Process
The client can request for revision by furnishing
additional information

If revision is requested, the Rating Committee
reviews the rating

If the rating is accepted by the client, the rating
will be published and notified to SEBI

Rating is an ongoing process and subject to
revision
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Rating Methodology
Manufacturing Companies
Business Analysis
Industry Risk
Market Position
Operating Efficiency
Legal Position

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Rating Methodology
Financial Analysis
Accounting quality
Earnings protection
Adequacy of cash flow
Financial flexibility
Management Evaluation
Track record of the management, planning and control system,
depth of managerial talents and succession plans
Evaluation of capacity to overcome adverse situations
Targets, pholosphy and strategies
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Financial Companies
Regulatory Environment
Structure and regulatory frame work
Trends in regulation/deregulation and their impact on
the company
Fundamental Analysis
Liquidity Management
Asset Quality
Profitability and Financial Position
Interest and Tax Sensitivity
Rating Methodology
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Rating Methodology
Real Estate Developers/Builders
Project Risk Analysis
Legal Title of the Property
Quality of Construction
Timelines of Delivery
Indian States
Economic Risk
Political Risk
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Rating Methodology
Rating of Equity
Grading
Assessment
Industry and Business Environment
Competence and Effectiveness of Management
Promoters Profile
Marketing Strategies
Size and Growth of Revenue
State of Technology and Operational Efficiency
Liquidity and Asset Quality
Hedging of Risks etc.
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Rating of Banks
CRAMELS System of Rating
Capital Adequacy
Ability to maintain minimum capital adequacy ratio
Resource Raising Ability
Trends and diversity of deposit base
Trends in cost of funds
Funding policies, viz.. Tenure matching and interest rate
sensitivities
Future plans
Rating Methodology
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Rating Methodology
Asset Quality
Quality of appraisal system
Compliance of prudential norms prescribed by RBI
Exposure in loan portfolios
Recovery performance and overdue position
Level of Non-performing assets
Management Evaluation
Management style
Tenure of personnel
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Earning potential
Diversity of income profile
Trends in income profile
Trends in investment yields
Trends in fee-based income and
Expense level
Liquidity
Liquid assets
Dependence on volatile funds
Unutilized line of credit
Rating Methodology
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Rating Methodology
System and Procedures
Accounting Systems
Control Systems
Regulatory compliance
Control systems to prevent frauds
Systems to ensure compliance of rules and
regulations
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Rating Symbols
Rating is communicated through Rating Symbols
Various credit rating agencies have their own
rating symbols
Rating for various instruments differs.
Some agencies plus or minus to the symbol
Rating symbols shows highest safety to highest
chances default.
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Merits and Demerits
Merits
Investors get expert opinion
Investors get the financial analysis done by experts
Enables the company to ensure financial discipline
Enable the company to access low cost funds
Rating increases companys reputation
Demerits
Rating is expensive
Rating can bring adverse impact on the company
Downgrading of rating will affect the companys reputation
Investors cannot fully rely on the rating
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Regulatory Framework
Regulated by SEBI
Credit Rating Agencies are required to be registered
with SEBI
Registration has to be renewed periodically
SEBI has published code of conduct for Credit
Rating Agencies
Rating Agencies are expected to exhibit high
integrity and fairness in their dealings
Violation of code of conduct will invite penalty
including suspension/ cancellation of registration.
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Rating Symbols
Fixed Deposit
Short Term Instruments
Debentures
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Fixed Deposits
FAAA - Very strong degree of safety
FAA - Strong degree of safety
FA - Satisfactory degree of safety
FB - Inadequate safety
FC - Doubtful safety
FD - Issue is either in default or
likely to default
CRISIL may apply plus or minus signs for ratings from FAA to
FC to indicate the relative position
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P1 Very strong degree of safety
P2 Strong degree of safety
P3 Adequate degree of safety
P4 Minimal safety of payments and
likely to be affected by short term
adversities.
P5 Expected to be in default or is in
default
Short Term Instruments
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Debentures
AAA Highest safety of timely payment
of interest and principal.
AA High safety of timely payment
A Adequate safety
BBB Sufficient safety for the present
B Greater Susceptibility to default
C Vulnerability to default
D In default or likely to default on
maturity
CRISIL may apply plus or minus for ratings from AA to D to reflect comparative standing


"Hard Work is like a cup of milk. Luck is like
a spoon of sugar. God always gives sugar to
those who have a cup of milk."
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