CREDIT RATING

AND
TERM LOANS
Presented by:
Hemant Kumar Upadahyay
Pawan Kumar
Ravi Kumar
Sonika Sharma
 Introduction to Credit Rating

 A credit rating assesses the credit worthiness of an

individual, corporation, or even a country. Credit
ratings are calculated from financial history and
current assets and liabilities.
 A credit rating tells a lender or investor the
probability of the subject being able to pay back a
loan.
 A poor credit rating indicates a high risk of defaulting
on a loan, and thus leads to high interest rates.
 Contd…
 An assessment of the credit worthiness of
individuals and corporations. It is based upon
the history of borrowing and repayment, as well
as the availability of assets and extent of
liabilities.

 Credit is important since individuals and

corporations with poor credit will have difficulty
finding financing, and will most likely have to pay
more due to the risk of default.
 Contd…
 The ratings are expressed in code numbers
which can be easily comprehended by the lay
investors.
 Credit rating, as exists in India, is done for a
specific security and not for a company as a
whole.
 A debt rating is not one time evaluation of
credit risk, which can be regarded as valid for
the entire life of the security.
 Benefits of Credit Rating

 Quick investment decision

 Independent investment decision
 Investor protection
 Superior information
 Basis for proper risk, return & Trade off
 Benefits to rated companies
 Sources of additional certification
 Increase the investor population
 Encourages financial Discipline
 Merchant bankers job made easy
 Foreign collaborations made easy
 Benefits the industry as a whole
 Low cost of borrowing
 Rating as a marketing tool
 Credit Rating Of Debentures
 What is Debenture?
A Debenture is defined as a certificate of
agreement of loans which is given under the
company’s stamp.
A bond issued by a corporation which is
secured by the integrity of the borrowers.
A long-term loan usually repayable at a fixed
date with a fixed rate of interest.
 Process
CRAs appraise the financial health , especially
capacity to honour debt obligation of
companies and even govt.
People who invest in the debt instruments;
such as bonds, debentures, commercial papers,
etc. of these entities rely on the report of CRAs
and decide to invest.
 INDIAN SCENARIO
 In India SEBI has recognised only four CRA’s namely:
(1) Credit Rating Information Services Limited (CRISIL),

(2) Investment Information and Credit Rating Agency of

India (ICRA),
(3) Credit Analysis and research (CARE),

(4) FITCH.
 There is one more CRA in India named ONICRA. But
it doesn’t seem to have official recognition.
 Credit Rating Information Services Ltd.

The first credit agency floated on January 1,

1988.
It was jointly started by ICICI and UTI with an
equity capital of 4 crores.
CRISIL is India's leading rating agency, and is the
fourth largest in the world.

With over a 60% share of the Indian Ratings

market, CRISIL Ratings is the
agency of choice for issuers and investors.
 Credit Rating Symbols
Debenture Rating Symbols
High Investment Grades:
AAA (triple A) : Highest Safety
AA (double A) : High Safety

Investment Grades:
A : Adequate Safety
BBB (triple B) : Moderate Safety

Speculative Grades:
BB: Inadequate Safety B: High Risk
C: Substantial Risk D: Default
 Investment information and Credit Rating
Agency of India (ICRA)
 ICRA Limited (an Associate of Moody's
Investors Service) was incorporated in 1991 as
an independent and professional company.

 ICRA is a leading provider of investment

information and credit rating services in India.

 ICRA’s major shareholders include Moody's

Investors Service and leading Indian financial
institutions and banks.
 Investment information and Credit Rating
Agency of India (ICRA)
 ICRA was set up by Industrial Finance
Corporation of India on 16th January 1991.

 It is a public limited company with an

authorized share capital of 10 crores.

 The initial paid up capital of Rs. 3.50 crores

was subscribed by IFC, UTI, LIC, GIC SBI
and others.
 Investment information and Credit Rating
Agency of India (ICRA)
Long term Debentures Bonds and Preference
shares-Rating Symbols
LAAA : Highest Safety
LAA : High Safety
LA : Adequate Safety
LBBB : Moderate Safety
LBB : Inadequate Safety
LB : Risk prone
LC : Substantial Risk
LD : Default, Extremely speculative
 Credit Analysis and Research Limited
(CARE)
 The CARE was promoted in 1993 jointly
with investment companies, banks and
finance companies.

 Services offered by CARE are

Credit rating
Information Service
Equity Research etc
 Credit Analysis and Research Limited
(CARE)
Long term debt instruments-Rating Symbols
CARE AAA : Highest Safety
CARE AA : High Safety
CARE A : Adequate Safety
CARE BB : Inadequate Safety
CARE B : High Risk
For medium term debt instruments
CARE AAA : Highest Safety
CARE AA : High Safety
CARE A : Adequate Safety
CARE BB : Inadequate Safety
CARE C : High Risk
FITCH Rating Agency
 ONICRA Credit Rating Agency of
India
 ONICRA, being the first to introduce the
concept of individual credit rating, has
conducted in-depth, research into all aspects of
the behaviour of credit seekers and has
developed comprehensive rating systems for
various types of credit extension. These
systems take into account and analyse a vast
range of parameters, which have been found to
influence an individual's credit behaviour.
 Methodology
 The basic methodology followed while
formulating the mathematical framework for
rating of individuals and small businesses is the
same.
 A top-down approach of parameter
decomposition has been followed. This entails
decomposing parameters into their sub-
parameters, upon which they are dependent,
through several levels, until independent,
quantifiable parameters are arrived at.
Bank term loans
 INTRODUCTION
 Term Loans are extended for the purpose of acquisition of fixed
assets. viz., land, building, plant and machinery for setting up of
new industrial units or expansion/modernisation of
existing units Financing for the purchase of second hand
machinery (both indigenous as well as imported) can also be
considered subject to certain conditions . 

 Term loans are repaid from the long-term earnings of the business.
 Therefore, projected profitability and cash flow from operations
are two key factors lenders consider when making term loans.
 Contd…
 Generally, interest rates on long- term loans are higher than for short-
term loans.
 Margin: 
Bank will normally finance upto  75% of the value of fixed assets and
the balance amount should be brought by the applicant as margin.
However depending upon the activity and quantum of advance the
bank may either increase the margin or decrease the margin.   
 Security / Third Party Guarantee: 
Bank will not insist for collateral security / Third Party Guarantee for
total credit limits upto Rs.5 lakhs for SME borrowers.  In respect of
credit limits above Rs.5 lakhs and upto Rs.25 lakhs Collateral
Security / Third Party Guarantee may be waived for deserving cases
and those limits will be covered under Credit Guarantee Trust for
Micro and Small Enterprises (CGTMSE). 
Contd….
 Supply:Abundant but highly differentiated. The degree of
financial strength required to receive loan approval can vary
tremendously from bank to bank, depending on the level of
risk the bank is willing to take on.

 Range of Funds Typically Available: Rs1,25000 and greater.

 TYPES OF TERM LOANS
 Intermediate-term loans: Usually running less than three
years, these loans are generally repaid in monthly installments
(sometimes with balloon payments) from a business's cash
flow.

 Long-term loans: These loans are commonly set for more

than three years. Most are between three and 10 years, and
some run for as long as 20 years. Long-term loans are
collateralized by a business's assets and typically require
quarterly or monthly payments derived from profits or cash
flow.
 What do banks look for when making
decisions about term loans (5 c’s)
 Character

 Credit capacity

 Collateral

 Capital

 Comfort/confidence with the business plan

 Character: How have you managed other loans (business and
personal)? What is your business experience? "If a corporate
executive wants to open a restaurant, then he'd better have
restaurant experience," says Rob Fazzini, senior vice president
at Busey Bank in Illinois.

 Credit capacity: The bank will conduct a full credit analysis,

including a detailed review of financial statements and personal
finances to assess your ability to repay.

 Collateral: This is the primary source of repayment. Expect the

bank to want this source to be larger than the amount you're
borrowing.
 Capital: What assets do you own that can be quickly
turned into cash if necessary? The bank wants to know
what you own outside of the business-bonds, stocks,
apartment buildings-that might be an alternate
repayment source. If there is a loss, your assets are
tapped first, not the bank's. Or, as one astute
businessman puts it, "Banks like to lend to people who
already have money." You will most likely have to add
a personal guarantee to all of that, too.
 Comfort/confidence with the business plan: How
accurate are the revenue and expense projections?
Expect the bank to make a detailed judgment. What is
the condition of the economy and the industry: "Are
you selling buggy whips or computers?" Fazzini asks.
 ?
QUERIES
PLEASE