CREDIT RATING AND CREDIT RATING AGENCIES OF INDIA

OBJECTIVES

To assess how CR acts as a measuring scale for investors.

To understand the platform/boon given by CR to various companies.

To study the process of CR through various agencies.

HISTORY

The concept of credit rating started in 1840. Louis Tappan established the first mercantile credit agency in New York in 1841. The agency was used to assess the abiIity of merchants to pay their financial obligations. Later on, it was acquired by Robert Dun, and its first

rating guide was published in 1859. In 1849, John Bradstreet set up similar

agency, and it established a rating book in 1857. In 1933, these two agencies

were merged together to Dun and Bradstreet, which finally became the

owner of Moody's Investors services in 1962.

MEANING A credit rating defines the financial strength of a

borrower and helps the investor determine the likelihood that the bond issuer will pay coupon payments in a timely fashion and more importantly the initial investment at maturity.

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. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

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. 

FACTORS DETERMING ASSIGNED RATINGS

TYPES OF CREDIT RATING

CORPORATE

SOVEREIGN

SHORT TERM

CORPORATE CREDIT RATING

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 Standard & Poor's, Moody's or Fitch Ratings

and have letter designations such as AAA, B, CC. The Standard & Poor's rating scale is as follows: AAA, AA, A, BBB, BB, B, CCC, CC, C,

D. Anything lower than a BBB rating is considered a speculative or junk bond. The Moody's rating system is similar in concept but the verbage is a little different. It is as follows: AAA, Aa1, Aa2, Aa3, A1, A2, A3,

Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.

SOVEREIGN CREDIT RATING

A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country. 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.

Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index "Country risk survey" monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).

SHORT TERM CREDIT RATING

A short term rating is a probability factor of an

individual going into default within a year. This is in contrast to long-term rating which

is evaluated over a long timeframe. 

CREDIT RATING AGENCIES

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 that can be traded on a secondary

market.

A credit rating for an issuer takes into consideration the

issuer's credit worthiness and

affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues

credit scores for individual credit-

worthiness is generally called a credit bureau or consumer credit reporting agency

.)

CRITICISMCredit 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 (and the finance industry pays little attention to a rating that is not widely recognized).

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. This has led to problems for several banks whose capital requirements depend on the rating of the structured assets they hold, as well as large losses in the banking industry

CRISIL

CRISIL was incorporated in 1987. It is promoted by ICICI and UTI as a public limited company with its headquarters at Mumbai.

CRISIL is a Standard & Poor’s company. Its majority shareholder is Standard & Poor’s, the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.

CRISIL’S PROCESS

ICRA

ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency.

The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. The participation of Moody’s is supported by a Technical Services Agreement, which entails Moody’s providing certain high-value technical services to ICRA

ONICRA

Onicara Credit Rating Agency of India Limited: (Incorporated in 1993) is an established player in the individual credit assessment and scoring services space in the Indian market.  It is the first in India to launch commercial services and provide individual credit rating and reporting services to the Indian financial market.

ONICRA has been acknowledged as pioneers of Individual Credit Rating in the Economic Survey of India 1993-94 issued by Ministry of Finance, Government of India and its services have been hailed by the financial sector and in the media.

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 unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices.

CARE Ratings has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April 1993. CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc

CREDIT RATING AND SUBPRIME Trading in many bonds backed by subprime

mortgages reveals a widening gap between investors' perception of their risk and the opinions of large ratings providers like Moody's Investors Service, Standard & Poor's and Fitch Ratings. Some subprime-mortgage bonds that were assigned investment-grade ratings as recently as 2006 are even trading at prices that imply they could be as risky as junk bonds. Yet most of their ratings haven't changed.

Many of the ratings are being called into question as market prices of some subprime bonds suggest investors expect them to lose some of their principal.

CONCLUSION

A credit rating

assesses the

credit worthiness

of an individual,

corporation, or even a country.

They are calculated

from financial history

and current

assets and liabilities.

The credit rating of a

corporation is a financial indicator to potential

investors of debt

securities such as bonds.

Credit ratings are used by investors, issuers,

investment banks, broker-

dealers, and governments

.

Credit Rating

Agencies are not a secure

approach to have they also make

errors.

ISHWAR LOHIA

Presented By-

B.B.A. 3RD YEARROLL NUMBER-65

ST. XAVIER’S COLLEGE