Credit rating final.ppt

8/10/2019 Credit rating final.ppt

1/32

Financial Services and System

Credit Rating


2/32

2

An act of assigning values by estimating worth orreputation of solvency and honesty so as to repose

trust in persons/institutions ability to repay

Rating is for instruments Institutions also are rated

Opinion about credit quality is expressed through

symbols

Not a recommendation to purchase, sell or hold

securities

Credit Rating


3/32

3

Increased

Default Rate

Assistance toInvestors to

Judge the

Issuers

Credibility

Need for Rating


4/32

4

1841 - Louis Tappan established the first credit

rating agency in New York

Robert Dun acquired the agency and published its

first rating guide in 1959

1849- John Bradstrreet another mercantile credit

rating agency and published a ratings book in 1957

1909 - John Moody started Moodys Rating Agency

Evolution


5/32

5

1916- Poors Publishing Company issued its first

ratings

1922 Standard Statistics Company and Fitch

Publishing Company published their ratings

1941- Standard Statistics Company and Poors

Publishing Company merged together and

Standard and Poor came into existence

Evolution


6/32

6

1982- Duff and Phelps began providing credit ratingservices from Chicago

1975 - McCarthy, Crisanty and Maffei was founded

1975 - Xerox Financial Services acquired Mcarthy,

Crisanty and Maffei

1991- Xerox Financial Services was merged with Duff

and Phelps

Evolution


7/327

1987 - Credit Rating Information Services of India Ltd..(CRISIL) was started

1991 - Information and Credit Rating Agency of India

Ltd.. (ICRA) was started

1993 - Credit Analysis and Research Ltd.. (CARE) was

established

Onida Individual Credit Rating Agency Ltd.. (Onicra)

was started in the private sector

1996- Duff and Phelps started rating in India

Credit Rating Services in India


8/328

Benefits of Rating to Investors

Safeguards against bankruptcy

Recognition of Risks

Credibility of issuer

Easy understandability of investment proposal

Saving of resources

Independence of investment decision


9/329

Benefits of Rating to Investors

Choice of investment

Promoters evaluation by the investor and avoid

influence by a group

Rating surveillance

Quick understanding of the rated instrument

Payment of a reasonable price vis--vis credit

worthinessDefault risk perception


10/3210

Lower cost of borrowing

Wider audience for borrowing

Better image

Self discipline by companies

Reduction of cost in public issues

Motivation for growth

Self assessment of own status

Benefits to Issuer


11/3211

Opportunity to understand credit worthiness

Savings of energy spent on analysis

Benefits to Brokers and Financial Intermediaries


12/3212

Grading debt instruments according to risk

preferences

Source of reliable information

Identification of strength and weaknesses

Liquidity and marketability of rated securities

Impact on capital market

General Advantages


13/3213

Request by the Company or at the instance of the

rating agency

Constitution of team of specialists for collecting

information and analysis of data collected by the

company

Visit to the client, site, collection of industry

information

Rating Process


14/3214

Presentation of the findings of the team to theinternal committee

Internal committee preview the data and findings are

forwarded to the Rating Committee

Rating Committee communicates provisional rating

to the client

Rating Process


15/3215

Rating Process

The client can request for revision by furnishing

additional information

If revision is requested, the Rating Committee

reviews the rating

If the rating is accepted by the client, the rating

will be published and notified to SEBI

Rating is an ongoing process and subject to

revision


16/32

16

Rating Methodology

Manufacturing Companies

Business Analysis

Industry Risk

Market Position

Operating Efficiency

Legal Position


17/32

17

Rating Methodology

Financial Analysis Accounting quality

Earnings protection

Adequacy of cash flow

Financial flexibility

Management Evaluation

Track record of the management, planning and control system,

depth of managerial talents and succession plans Evaluation of capacity to overcome adverse situations

Targets, pholosphy and strategies


18/32

18

Financial Companies

Regu latory Environment

Structure and regulatory frame work

Trends in regulation/deregulation and their impact on

the company

Fundamental Analysis

Liquidity Management

Asset Quality Profitability and Financial Position

Interest and Tax Sensitivity

Rating Methodology


19/32

19

Rating Methodology

Real Estate Developers/Builders

Project Risk Analysis

Legal Title of the Property

Quality of Construction

Timelines of Delivery

Indian States

Economic Risk

Political Risk


20/32

20

Rating Methodology

Rating of Equity Grading

Assessment

Industry and Business Environment

Competence and Effectiveness of Management

Promoters Profile

Marketing Strategies

Size and Growth of Revenue

State of Technology and Operational Efficiency

Liquidity and Asset Quality

Hedging of Risks etc.
http://localhost/var/www/apps/conversion/tmp/scratch_3/Grade.ppthttp://localhost/var/www/apps/conversion/tmp/scratch_3/Gradechp5.ppthttp://localhost/var/www/apps/conversion/tmp/scratch_3/Gradechp5.ppthttp://localhost/var/www/apps/conversion/tmp/scratch_3/Grade.ppt


21/32

21

Rating of Banks

CRAMELS System of Rating

Capital Adequacy

Ability to maintain minimum capital adequacy ratio

Resource Raising Ability Trends and diversity of deposit base

Trends in cost of funds

Funding policies, viz.. Tenure matching and interest rate

sensitivities Future plans

Rating Methodology

R i M h d l


22/32

22

Rating Methodology

Asset Quality Quality of appraisal system

Compliance of prudential norms prescribed by RBI

Exposure in loan portfolios

Recovery performance and overdue position

Level of Non-performing assets

Management Evaluation

Management style

Tenure of personnel

R ti M th d l


23/32

23

Earning potential

Diversity of income profile

Trends in income profile

Trends in investment yields

Trends in fee-based income and

Expense level

Liquidity

Liquid assets

Dependence on volatile funds

Unutilized line of credit

Rating Methodology

R ti M th d l


24/32

24

Rating Methodology

System and Procedures

Accounting Systems

Control Systems

Regulatory compliance

Control systems to prevent frauds

Systems to ensure compliance of rules and

regulations

R ti S b l


25/32

25

Rating Symbols

Rating is communicated through Rating Symbols

Various credit rating agencies have their own

rating symbols

Rating for various instruments differs.

Some agencies plus or minus to the symbol

Rating symbols shows highest safety to highest

chances default.

M it d D it


26/32

26

Merits and Demerits

Merits

Investors get expert opinion

Investors get the financial analysis done by experts

Enables the company to ensure financial discipline

Enable the company to access low cost funds

Rating increases companys reputation

Demerits

Rating is expensive

Rating can bring adverse impact on the company

Downgrading of rating will affect the companys reputation

Investors cannot fully rely on the rating

R l t F k


27/32

27

Regulatory Framework

Regulated by SEBI

Credit Rating Agencies are required to be registered

with SEBI

Registration has to be renewed periodicallySEBI has published code of conduct for Credit

Rating Agencies

Rating Agencies are expected to exhibit high

integrity and fairness in their dealings

Violation of code of conduct will invite penalty

including suspension/ cancellation of registration.

R ti S b l


28/32

28

Rating Symbols

Fixed Deposit

Short Term Instruments

Debentures

Fi d D it


29/32

29

Fixed Deposits

FAAA - Very strong degree of safety

FAA - Strong degree of safety

FA - Satisfactory degree of safety

FB - Inadequate safety

FC - Doubtful safety

FD - Issue is either in default or

likely to defaultCRISIL may apply plus or minus signs for ratings from FAA to

FC to indicate the relative position

Sh t T I t t


30/32

30

P1 Very strong degree of safety

P2 Strong degree of safety

P3 Adequate degree of safety

P4 Minimal safety of payments andlikely to be affected by short term

adversities.

P5 Expected to be in default or is in

default

Short Term Instruments

Debent res


31/32

31

Debentures

AAA Highest safety of timely payment

of interest and principal.

AA High safety of timely payment

A Adequate safety

BBB Sufficient safety for the present

B Greater Susceptibility to default

C Vulnerability to default

D In default or likely to default on

maturityCRISIL may apply plus or minus for ratings from AA to D to reflect comparative standing


32/32

"Hard Work is like a cup of milk. Luck is like

a spoon of sugar. God always gives sugar tothose who have a cup of milk."

32

Documents

Credit rating final.ppt