CREDIT RATING

INTRODUCTION…..

Credit rating is the rating which gives the estimate of the

individual company, corporation of country's worth.

Credit bureau makes an evaluation of borrower's credit history

and then according to that the actions on it take place.

Credit rating shows the ability of the borrower to pay the debt
to the lender on request to the credit bureau.

The calculation of it depends on the financial history, current

assets and liabilities.

The probability of a borrower to pay back of its loan can be

seen by this which tells a lender or investor about it
 MEANING …..

 An independent company that evaluates the financial

condition of issuers of debt instruments and then assigns a
rating that reflects its assessment of the issuer's ability to
make the debt payments.
 Potential investors, customers, employees and business
partners rely upon the data and objective analysis of credit
rating agencies in determining the overall strength and
stability of a company.
 THE MAIN FEATURES WHICH ARE INVOLVED
WITH THE CREDIT RATINGS ARE AS FOLLOWS:-

1.It is used to estimate the worthiness of the

credit for the company, country or any individual
company.

2) Credit rating is been done after considering

various factors such as financial, non-financial
parameters, and past credit history.

3) The rating which gets done is simple and it

facilitates universal understanding. Credit rating
also makes it widely accepted as the symbols
which are used are generalized and made
common for all.
4) The process of credit rating
is very detailed and it involves
lots of information such as
financial information, client's
office and works information
and other management
information. It involves in-
depth study.
FUNCTIONS OF CREDIT RATING
AGENCIES
1. Business Analysis:
A credit rating company will analyze the
business condition of the borrowing company
not merely by the profits the borrowing
concern has made, but by the use of capital in
a more productive purpose. The return on
capital and the cost of capital will be
analyzed.
2. Evaluation of industrial risks:
Every industry will have its risks which are
due to natural or market conditions such as
competition or due to the substitutes that
have arrived in the market. The extent of risks
and measures to overcome them will be taken
into account while judging the credit rating of
the company.
3. Market position of the company within the
industry:
What is the share of the market of the
company seeking credit rating? A higher
percentage of market share will involve more
risks as the company has to be vigilant to
maintain its share. So, a credit rating agency
will give due weightage for the market share
of the borrowing concern.
4. Operating efficiency:
This is judged from the point of view of
utilization of the capacity. When full capacity
is utilized, the company has an advantage
over others. This may be possible due to
location advantage or better labor relations.
These will be looked into by the credit rating
agency.
5. Legal position in terms of prospectus:
The statements made in the prospectus,
should be true and factual. If tall claims are
made, they will hamper the growth of the
company and the credit rating agency will not
rely on the prospectus of the company. It may
also be construed as a willful fraud for
attracting more funds. So, the contents of
prospectus will also be a factor for credit
rating considerations.
7. Statement of profits:
There may be over statement or under
statement of profits depending upon the
purpose for which the statement is prepared.
Here, again the credit rating agency has to
scrutinize the realistic position of the
company.
8. Earnings protection:
To what extent, the earnings of the companies
are consistent? Does it show any growth?
What is the extent of profitability? All these
will be judged under this criteria.
9. Adequacy of cash flow:
Is the cash flow sufficient to meet its current
commitments as well as any other
contingencies? This factor is taken into
consideration by the rating agencies.
10. Financial flexibility:
How far the company is in a position to
arrange for alternative financial plans for
raising its funds, if its existing idea does not
work out successfully? Rating agencies
adjudge the financial flexibility of companies.
BENEFITS OF CREDIT RATING TO
INVESTORS

Helps in Investment Decision : Credit rating gives an

idea to the investors about the credibility of the issuer
company, and the risk factor attached to a particular
instrument. So the investors can decide whether to
invest in such companies or not. Higher the rating, the
more will be the willingness to invest in these
instruments and vise-versa.

· Benefits of Rating Reviews : The rating agency

regularly reviews the rating given to a particular
instrument. So, the present investors can decide
whether to keep the instrument or to sell it. For e.g. if
the instrument is downgraded, then the investor may
decide to sell it and if the rating is maintained or
upgraded, he may decide to keep the instrument until
the next rating or maturity.
 Assurance of Safety : High credit rating gives
assurance to the investors about the safety of the
instrument and minimum risk of bankruptcy. The
companies which get a high rating for their
instruments, will try to maintain healthy financial
discipline. This will protect them from bankruptcy. So
the investors will be safe.

· Easy Understandability of Investment Proposal : The

rating agencies gives rating symbols to the
instrument, which can be easily understood by
investors. This helps them to understand the
investment proposal of an issuer company. For e.g.
AAA (Triple A), given by CRISIL for debentures ensures
highest safety, whereas debentures rated D are in
default or expect to default on maturity.
Choice of Instruments : Credit rating enables an investor
to select a particular instrument from many alternatives
available. This choice depends upon the safety or risk of
the instrument.

· Saves Investor's Time and Effort : Credit ratings enable

an investor to his save time and effort in analyzing the
financial strength of an issuer company. This is because
the investor can depend on the rating done by
professional rating agency, in order to take an investment
decision. He need not waste his time and effort to collect
and analyse the financial information about the credit
standing of the issuer company.
 BENEFITS OF CREDIT RATING TO
COMPANY

 Improves Corporate Image : Credit rating helps to improve the

corporate image of a company. High credit rating creates
confidence and trust in the minds of the investors about the
company. Therefore, the company enjoys a good corporate
image in the market.
 Lowers Cost of Borrowing :
 Companies that have high credit rating for their debt
instruments will get funds at lower costs from the market.
High rating will enable the company to offer low interest rates
on fixed deposits, debentures and other debt securities. The
investors will accept low interest rates because they prefer
low risk instruments. A company with high rating for its
instruments can reduce the cost of public issue to raise funds,
because it need not spend heavily on advertising for
attracting investors.
 Wider Audience for Borrowing : A company with high rating for
its instruments can get a wider audience for borrowing. It can
approach financial institutions, banks, investing companies.
This is because the credit ratings are easily understood not
only by the financial institutions and banks, but also by the
general public.

 Helps in Growth and Expansion : Credit rating enables a

company to grow and expand. This is because better credit
rating will enable a company to get finance easily for growth
and expansion.
 Good for Non-Popular Companies : Credit rating is beneficial
to the non-popular companies, such as closely-held
companies. If the credit rating is good, the public will invest
in these companies, even if they do not know these
companies.
 Act as a Marketing Tool : Credit rating not only helps to
develop a good image of the company among the investors,
but also among the customers, dealers, suppliers, etc. High
credit rating can act as a marketing tool to develop
confidence in the minds of customers, dealer, suppliers, etc.
DISADVANTAGES OF
CREDIT AGENCIES

Possibility of Bias Exist : The information collected

by the rating agency may be subject to personal bias
of the rating team. However, rating agencies try their
best to provide an unbiased opinion of the credit
quality of the company and/or instrument. If not,
they will not be trusted.

Improper Disclosure May Happen : The company

being rated may not disclose certain material facts
to the investigating team of the rating agency. This
can affect the quality of credit rating.
Impact of Changing Environment : Rating is done based
on present and past data of the company. So, it will be
difficult to predict the future financial position of the
company. Many changes take place due to changes in
economic, political, social, technological, legal and other
environments. All this will affect the working of the
company being rated. Therefore, rating is not a guarantee
for financial soundness of the company.
Problems for New Companies : There may be problems for
new companies to collect funds from the market. This is
because, a new company may not be in a position to
prove its financial soundness. Therefore, it may receive
lower credit ratings. This will make it difficult to collect
funds from the market.
Downgrading by Rating Agency : The credit-rating
agencies periodically review the ratings given to a
particular instrument. If the performance of a
company is not as expected, then the rating agency
will downgrade the instrument. This will affect the
image of the company.
Difference in Rating : There are cases, where
different ratings are provided by various rating
agencies for the same instrument. These differences
may be due to many reasons. This will create
confusion in the minds of the investor
THERE ARE MAINLY 4 CREDIT RATING
AGENCIES IN INDIA WHICH ARE
 CREDIT RATING AND INFORMATION
SERVICES OF INDIA LIMITED (CRISIL)

It is India’s first credit rating agency which was

incorporated and promoted by the erstwhile ICICI
Ltd, along with UTI and other financial institutions
in 1987.
After 1 year, i.e. in 1988 it commenced its
operations.
It has its head office in Mumbai.
It is India’s foremost provider of ratings, data and
research, analytics and solutions, with a strong track
record of growth and innovation.
It delivers independent opinions and efficient
solutions.
CRISIL’s businesses operate from 8 countries
including USA, Argentina, Poland, UK, India,
China, Hong Kong and Singapore.
CRISIL’s majority shareholder is Standard &
Poor’s.
It also works with governments and policy-
makers in India and other emerging markets
in the infrastructure domain.
INVESTMENT INFORMATION AND CREDIT
RATING AGENCY (ICRA)

The second credit rating agency incorporated

in India was ICRA in 1991.
It was set up by leading financial/investment
institutions, commercial banks and financial
services companies as an independent and
professional investment Information and
Credit Rating Agency.
It is a public limited company.
It has its head office in New Delhi.
ICRA’s majority shareholder is Moody’s.
 CREDIT ANALYSIS & RESEARCH LTD.
(CARE)

The next credit rating agency to be set up was

CARE in 1993.
It is the second-largest credit rating agency in
India.
It has its head office in Mumbai.
CARE Ratings is one of the 5 partners of an
international rating agency called ARC
Ratings.
 ONICRA

It is a private sector agency set up by Onida Finance.

It has its head office in Gurgaon.
It provides ratings, risk assessment and analytical
solutions to Individuals, MSMEs and Corporates.
It is one of only 7 agencies licensed by
NSIC (National Small Industries Corporation) to rate
SMEs.
They have Pan India Presence with offices over 125
locations.