credit rating

Submitted by: group 5 th

Roll no. 6144, 6145, 6136,6141,6104
 credit ratings

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.
A credit rating estimates the credit worthiness of an
individual, corporation, or even a country. It is an
evaluation made by credit bureaus of a borrower’s
overall credit history. A credit rating is also known as an
evaluation of a potential borrower's ability to repay
debt, prepared by a credit bureau at the request of the
lender .Credit ratings are calculated from financial
history and current assets and liabilities. However, in
recent years, credit ratings have also been used to
adjust insurance premiums, determine employment
eligibility, and establish the amount of a utility or leasing
deposit.
A poor credit rating indicates a high risk of defaulting on
a loan, and thus leads to high interest rates, or the
refusal of a loan by the creditor.
 Types of credit ratings

•1 Personal credit ratings

•2 Corporate credit ratings
•3 Sovereign credit ratings
•4 Short-term rating
 Personal credit rating

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 that may influence a person's credit rating are:
•ability to pay a loan
•interest
•amount of credit used
•saving patterns
•spending patterns
•debt
 corporate credit ratings

The credit rating of a corporation is a financial indicator to

potential investors of debt securities such as bonds. These are
assigned by credit rating agencies such as A.M. Best,
Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings
.All these CTRISKS grades are mapped to one-year probability of
default.
 Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign

entity, i.e. a national government. The sovereign credit

rating indicates the risk level of the investing environment

of a country and is used by investors looking to invest

abroad. It takes political risk into account.

 Short-term rating
A short-term rating is a probability factor of an individual going into d
efault within a year. This is in contrast to long-term rating which is eval
uated over a long timeframe. In the past institutional investors preferr
ed to consider long-term ratings. Nowadays, short-term ratings are co
mmonly used. First, Basel II agreement requires banks to report their
one-year probability if their apply internal-ratings-based approach for
capital requirements. Second, many institutional investors can easily
manage their credit/bond portfolios with derivatives on monthly or q
uarterly basis. Therefore, some rating agencies simply report short-ter
m ratings.
 Uses of ratings

Credit ratings are used by investors, issuers, investment banks,

broker-dealers, and governments. For investors, credit rating agencies
increase the range of investment alternatives and provide independent,
easy-to-use measurements of relative credit risk; this generally increases
the efficiency of the market, lowering costs for both borrowers and lenders
. This in turn increases the total supply of risk capital in the economy,
leading to stronger growth. It also opens the capital markets to categories
of borrower who might otherwise be shut out altogether: small
governments, start-up companies, hospitals, and universities.
 CREDIT RATING AGENCY
(CRA)
.

A credit rating agency (CRA) is a company that assigns credit ratings for issuers
of certain types of debt obligations as well as the debt instruments themselves.
In some cases, the servicers of the underlying debt are also given ratings.
In most cases, the issuers of securities are companies, special purpose entities,
state and local governments, non-profit organizations, or national governments
issuing debt-like securities bonds that can be traded on a secondary market. A
credit rating for an issuer takes into consideration the issuer's credit worthiness
loan, and affects the interest rate applied to the particular security being issued.
 Functions of Credit Rating
. Agencies
The primary function of the credit rating agencies is to provide credit
ratings to the service providers of various forms of debt products and
services. They are also meant to provide ratings to the debt instruments
being provided by these service providers. The clients of the credit
rating agencies are those entities that deal in the provision of debt
products and services. At times, it has been observed that the
companies that provide debt products and services are rating the debt
instruments by themselves.

The providers of securities like the companies, the governmental

organizations at the state and central level and special purpose entities
are the major clients of the credit rating agencies. The non-profit
seeking organizations and the national governments also avail the
services of the credit rating agencies.
 Functions of Credit rating
agencies in India
The credit rating agencies in India offer varied services like mutual consulting
services, which comprises of operation up gradation, risk management.

They have special sections to carry on research and development work of the
industries. They provide training to the employees and executives of the
companies for better management. They examine the risk involved in a new
project, chalk out plans to fight with the problem successfully and thus
ameliorate the percentage of risk to a great extent. For this they carry on
thorough research into the respective industry. They have started offering
services to the mutual fund sector through the application of fund utilization
services. The major industries currently graded by the credit rating agencies
include agriculture, health care industry, infrastructure, and maritime industry.
 Credit rating agencies in India

There are five credit rating agencies in India:

1.Credit rating information service ltd.(CRISIL0.
2.Investment information and Credit Rating Agency of
India(ICRA)
3.Credit Analysis and Research(CARE).
4.Duff Phelps Credit Rating pvt. ltd.(DCRI NDIA).
5.Onida Individual Credit Rating Agency.(ONCRA)
 Credit rating agencies in India
CRISIL:

CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field
of assessment service for the banks. Highly skilled members manage the agency. Ms.
Roopa Kudva who acts as the Managing Director and Chief Executive Officer of the
company heads it. The company has set up large number of committees to look after
dispersal of various services offered by the company for example, investor grievance
committee, investment committee, rating committee, allotment committee, compensation
committee and so on. The head office of the company is located at Mumbai and it has
established offices outside India also.
OBJECTIVES
To assist both individual and institutional investors in making investment decisions in fixed
income securities.
To enable corporates to raise large amounts at fair cost from a wide spectrum of investors.

To enable intermediaries in placing their debt instruments with investors by providing

them with an effective marketing tool.
CRISIL has five offices one each in Mumbai, Delhi, Kolkata, Chennai and Bangalore.
CREDIT RATING SYMBOLS
CRISIL uses the conventional rating symbols used in the USA and widely accepted in many
other countries.
The following table shows the investment wise rating symbols assigned by CRISIL and the
meaning of each rating from the angle of safety to the investors.
CRISIL 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 (Double B) : Inadequate Safety
B : High Risk
C : Substantial Risk
D : Default
Note:
CRISIL may apply ‘+’ (plus ) or (minus) sign for ratings from AA to C to reflect
comparative standing within the category.
CRISIL FIXED DEPOSIT RATING SYMBOLS

Investment Grades
FAAA : Highest Safety
FAA : High Safety
FA : Adequate Safety
Speculative Grades
FB : Inadequate Safety
FC : High Risk
FD : Default

Note: CRISIl may apply ‘+’ or ‘-’ for ratings from FAAA to FC to indicate the
relative position within the rating category.
Credit Ratings for Short Term Instruments

Rating Symbol Indication

P-1 Very strong
P-2 Strong
P-3 Adequate
P-4 Minimum
P-5 Defualt
 IICRA Rating Scale
Long term including Debentures Medium term including
Bonds and Preference Shares Deposits Fixed

LAAA : Highest Safety MAAA : Highest Safety

LAA : High Safety MAA : High Safety
LA : Adequate Safety MA : Adequate Safety
LBBB : Moderate Safety MB : Inadequate Safety
LBB : Inadequate Safety MC : Risk
LB : Risk MD : Defualt
LC : Substantial Risk
LD : Default
IICRA Fixed Deposit Rating IICRA Credit Assesment Symbols
MAAA Highest Safety Very strong capacity
MAA+
MAA High safety Strong Capacity
MAA-
MA+
MA Adequate Safety Adequate Capacity
MA-
MB+
MB Inadequate Safety Inadequate Capacity
MB-
MC+ High Risk Poor Capacity
MC
MC-
MD Defualt Defualt
Investment Grade Care
For long term debt instruments
1. Highest Safety CARE AAA
2. High Safety CARE AA
3. Adequate Safety CARE A
4. Inadequate Safety CARE BB
5. High Risk CARE B
For medium term debt instruments
6. Highest Safety CARE AAA
7. High Safety CARE AA
8. Adequate Safety CARE A
9. Inadequate Safety CARE BB
10. High Risk CARE C
For short term debt instruments
11. Highest Safety PR1
12. High Safety PR2
13. Adequate Safety PR3
14. Inadequate Safety PR4
15. High Risk
ICRA:
ICRA was established in the year 1991 by the collaboration of financial institutions,
investment companies, and banks. The company has formed the ICRA group
together with its subsidiaries. The company is headed by Mr. Piyush G. Mankad and
offers products like short-term debt schemes, Issue-specific long-term rating and
offers fund based as well as non-fund based facilities to its clients.
 Credit rating agencies in India
CARE
Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company
that offers a wide range of rating and grading services across sectors. CARE has
an unparalleled depth of expertise. CARE Ratings methodologies are in line
with the best international practices.  
CARE Ratings has completed over 7654 rating assignments having aggregate
value of about Rs.23121 bn (as at March 31, 2010), since its inception in April
1993. CARE is recognized by Securities and Exchange Board of India (Sebi),
Government of India (GoI) and Reserve Bank of India (RBI) etc. CARE has seven
offices in India located at - Mumbai, Delhi, Kolkata, Chennai, Hyderabad,
Bangalore and Ahmedabad.
 Credit rating agencies in India
DCR INDIA
Duff & Phelps Credit Rating India Private Ltd (DCR India) Overview
DCR India or Duff & Phelps Credit Rating India Private Ltd is one of the top
credit rating agencies in India. Over the years, DCR India has been providing
excellent services to its clients .Duff & Phelps Credit Rating India Private Ltd
(DCR India) has played an important role in rating India's forex debt
obligations.
Profile of Duff & Phelps Credit Rating India Private Ltd (DCR India)
Duff & Phelps Credit Rating India Private Ltd (DCR India) rated the forex debt
obligations of India as ' BBB-' or a Triple B Minus. This rating is of great
importance for the economy of India and the credibility of the national
government.
 Credit rating agencies in India
ONICRA
ONICRA Credit Rating Agency of India Ltd is recognized as the pioneers of the
concept of individual Credit rating in India. After being the first to introduce
the concept, ONICRA has been continuously conducting in-depth research into
all aspects of the behavior of credit seekers and has developed a
comprehensive rating system for various types of credit extensions. ONICRA
provides a platform to credit seekers and granters build long lasting
relationship.
 Criticism
Credit rating agencies have been subject to the following criticisms:
.
•Credit rating agencies do not downgrade companies promptly enough.
•Large corporate rating agencies have been criticized for having too familiar a
relationship with company management, possibly opening themselves to undue
influence or the vulnerability of being misled.
• The lowering of a credit score by a CRA can create a vicious cycle, as not only
interest rates for that company would go up, but other contracts with financial
institutions may be affected adversely, causing an increase in expenses and
ensuing decrease in credit worthiness.
•Agencies are sometimes accused of being oligopolists, because barriers to
market entry are high and rating agency business is itself reputation-based.
.Credit Rating Agencies have made errors of judgment in rating structured
products, particularly in assigning AAA ratings to structured debt, which in a
large number of cases has subsequently been downgraded or defaulted .
credit ratings