CREDIT RATING

PRESENTED BY:

Ashwani Kumar Singh A-22Atin Govil A-23Atish Bakhru A-24Bibek Bhandary A-25Chantelle Karen Mendonca A-26Debleena Ghosh A-27Deepak Malhan A-28:

INTRODUCTION

A credit rating is an evaluation of the credit worthiness of a debtor, especially a business or a government, but not individual consumers

The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default

It is based on financial history and Current Assets and Liabilities

Commercial Credit Risk is the largest and most elementary risk faced by many banks including financial institutions and corporations

“Ratings are opinions on the relative capability of timely servicing of corporate debt & obligations. These are not recommendations to buy or sell. Neither the accuracy nor the completeness of the information is guaranteed” -ICRA

The rating is based on whatever risk factors the rating agency believes are relevant to the likelihood that the issuer will honor the terms of a financial contract.

Credit ratings started in USA in the 19th century, when early rating agencies began publishing financial analyses on railroad companies.

Gradually they expanded their reach providing investors an obligation ranging from corporate debts to bank deposits.

TIME FRAME

Most of the items that can affect your credit rating remain on your credit reports for seven years, the TransUnion credit bureau states.

Certain bankruptcies can be reported for ten years, and debts owed to the government will stay on forever if they are never paid.

Items remaining on the report for a time frame is an advantage for people with a good history because it shows they can maintain financial responsibility for the long term. It is a

disadvantage for those who might have hit a temporary rough period.

Advantages of Credit Rating For the Financial System

Reduces information asymmetry in the market by providing quality credit information on debt instruments to all market players

Facilitates pricing of debt instruments

For Investors Facilitates comparative assessment of investment options, as ratings

are designed to be comparable across issuers in different businesses

Complements investors' own credit analysis

Facilitates asset monitoring, as ratings are kept under review until the rated instrument is repaid

For Issuers Provides independent credit information from a credible third party to

the community of potential investors

Enhances issuer's access to investor funds

Helps issuer differentiate itself in the market

DEMERITS OF CREDIT RATING•In the

absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that the reports impartial and judicious recommendations for rating committee.

Biased Rating & Misrepresentatio

ns

•Rating Company may conceal material information from the investigating team of the credit rating company. Quality of rating suffers and renders the rating unreliable.

Concealment Of Material

Information

•Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating

Human Bias

•Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management.

Rating Is No Guarantee For Soundness Of

Company

•Time factor affects’ rating, sometimes, misleading conclusions are derived. Eg: A company in a particular industry might be temporarily in an adverse condition but it is given a low rating.

Reflection Of Temporary Adverse

Conditions

•Rating is done on the present and the past historic data of the company . Prediction of the company’s health through rating is momentary and anything can happen after assignment of rating symbols to the company.

Static Study

•Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairiring the image of the company.

Down Grade

CREDIT SCORE

It is not limited to banks. Your credit score is the compact, simplified version of your entire

credit history It is a mathematical analysis of your :

- debt - payment history

- the existence of liens or other judgments

- public records - other statistical data collected by the credit bureaus.

“A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the

creditworthiness of that person.”

USES OF A CREDIT SCORE Lenders, such as banks and credit card companies,

use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.

Lenders use it to determine who qualifies for a loan, at what interest rate, and what credit limits.

Helps determine which customers are likely to bring in the most revenue.

The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

WHY DO YOU NEED A GOOD CREDIT SCORE

• From helping you get a loan, insurance or to qualify you for a great job

• Good credit simply makes life easier and less expensive• Your credit score represents how responsible and even how

ethical you are. Example : 1. Lenders look at your credit score to determine not only your

ability, but your willingness to repay a loan. 2. Insurance companies view an individual with a good credit

score as someone who is trustworthy and less likely to commit insurance fraud.

3. Employers look at credit scores as a way to determine whether a candidate will be a dependable new employee.

CREDIT SCORE RATINGS AND RANGES Three major credit agencies that provide consumer credit

information (including credit scores) are : 

1. Equifax

2. Experian

3. TransUnion Credit score is a three-digit number that is calculated

by these credit agencies based on your credit history

Rating Process The process begins with issue of rating request

letter by the issuer of the instrument and signing of the rating agreement.

CRA assigns an analytical team consisting of two or more analysts one of whom would be the lead analyst and serve as the primary contact.

Meeting with Management- The analytical team obtains and analyses information relating to its financial statements, cash flow projections and other relevant information.

Discussion with management on management philosophy, competitive position, financial policies and future plans.

Contd…. Discussions on financial projections based on

objectives and growth plan , risks and opportunities. Rating committee- after meeting with the

management the analysts present their report to a rating committee which then decides on the rating.

After the committee has assigned the rating, the rating decision is communicated to the issuer, with reasons or rationale supporting the rating.

Dissemination to the Public: Once the issuer accepts the rating, the CRAs disseminate it, along with the rationale, to the print media.

Rating Methodology

The rating methodology involves an analysis of industry risk, issuer’s business and financial risk. A rating is assigned after assessing all factors that could affect the credit worthiness of the entity. The industry analysis is done first followed by the company analysis.

CRISIL’s Rating Process

CRISIL 1st Rating Agency- Credit Rating Information Services of India Ltd.

Jointly promoted by ICICI and UTI in 1987 It pioneered the concept of Credit Rating in the country and since

then introduced new concepts in Credit Rating services and has diversified into related areas of information and advisory activities

It became public in 1993 In 1996 it formed a strategic alliance with S&P Rating Group

Services offered by CRISIL

CREDIT RATING SERVICES

CREDIBILITY FORST RATING AND EVALUATION

SERVICES

TRAINING SERVICES

ADVISORY SERVICES

THE BIG THREE

S&P and Moody's are based in the US, while Fitch is dual-headquartered in New York City & London, and is controlled by the France-based FIMALAC. As of 2013 they hold a collective global market share of "roughly 95 percent“ with Moody's and Standard & Poor's having approximately 40% each, and Fitch around 15%.  Their special status has been cemented by law — at first only in the United States, but then in Europe as well."[From the mid-1990s until early 2003, the Big Three were the only “Nationally Recognized Statistical Rating Organizations (NRSROs)" in the United States — a designation meaning they were used by the US government in several regulatory areas. (Four other NRSROs merged with Fitch in the 1990s.)

Credit Rating Agencies In India CIBIL headquartered at Mumbai is an Credit Information Company

which maintains records of an individual‘s payments related to credit cards and loans. The information about users credit cards and loans is later used by the CBIL to generate Credit information reports which are used to approve loan applications.

Fitch Ratings, a Fitch Group company is a among the top credit rating agencies in India incorporated in 1913 in New York, USA. Fitch Ratings provides financial information services in more than 30 countries and has over 2000 employees working at 50+ offices worldwide.

ICRA limited is a joint venture between Moody’s Investors and various financial services companies is a part of ICRA group which was founded in 1991. It is a Credit rating agency listed on the National Stock Exchange and Bombay Stock Exchange.

Onicra Credit Rating Agency is a Credit and Performance Rating company based in Gurgaon and founded in 1993. Onicra is among the top 10 credit rating agencies in India offering smart and innovative solutions like risk assessment, analytical solutions and ratings to MSMEs, corporate and individuals.

CIBIL

FITCH RATING GROUP

ICRA

ONICRA

Risk Analysis

Business RiskIndustry Risk

New Project Risk

Financial Risk

Ratios

Credit Rating Methods

Risk Analysis

Business RiskIndustry Risk

New Project Risk

Financial Risk

Ratios

Risk Analysis

Business RiskIndustry Risk

New Project Risk

Financial Risk

Ratios

Risk Analysis

Business RiskIndustry Risk

New Project Risk

Financial Risk

Ratios

CREDIT RATING SYMBOLS CRISIL AAA(Highest Safety)Instruments with this rating are considered to have the highest

degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

CRISIL AA(High Safety)Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

CRISIL A(Adequate Safety)Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.

CRISIL BBB(Moderate Safety)Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

CRISIL BB(Moderate Risk)Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.

CRISIL B(High Risk)Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.

CRISIL C(Very High Risk)Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.

CRISIL D(Default)Instruments with this rating are in default or are expected to be in default soon.

Credit Rating of Indian Banks By S&P

Standard & Poor's Ratings Services (S&P) affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on Axis Bank. The outlook on the long-term rating is negative.

Standard & Poor's (S&P) Ratings Services today assigned 'BBB-' rating to a proposed issue of senior unsecured notes by HDFC Bank (BBB-/Negative/A-3). The rating on the notes reflects the long-term issuer credit rating on the bank.

Global ratings firm Standard & Poor's (S&P) downgraded IDBI Bank on its foreign currency issuer credit rating on the back of weak asset quality of the bank. Lowered foreign currency issuer credit rating on India-based IDBI Bank to 'BB+/B' from 'BBB-/A-3'. The outlook on the long-term rating is negative

Standard & Poor's Ratings Services rates Senior Debt & Deposit Ratings of ICICI Bank Limited as BBB- for Long term and A-3 for Short term.

AXIS BANK

HDFC BANK

IDBI BANK

ICICI BANK

THANK YOU