CREDIT RATING-Group 5

8/7/2019 CREDIT RATING-Group 5

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CREDIT RATING AGENCIES


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CREDIT RATING

Assesses the credit worthiness of an individual,

corporation, or even a country

Calculated from financial history and current assets and

liabilities Ratings are expressed in code numbers

A poor credit rating indicates a high risk of defaulting on a

loan, and thus leads to high interest rates.

Credit rating, as exists in India, is done for a specificsecurity and not for a company as a whole.


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NEED FOR CREDIT RATING

It is necessary in view of the growing number of cases of

defaults in payment of interest and repayment of principal

sum borrowed by way of fixed deposits, issue of debentures

or preference shares or commercial papers. Maintenance of investors confidence, since defaults shatter

the confidence of investors in corporate instruments.

Protect the interest of investors who can not into merits of

the debt instruments of a company. Motivate savers to invest in industry and trade.


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OBJECTIVES OF CREDIT RATING

The main objective is to provide superior and low cost information to

investors for taking a decision regarding risk- return trade off, but it also

helps to market participants in the following ways;

Improves a healthy discipline on borrowers

Lends greater credence to financial and other representations

Facilitates formulation of public guidelines on institutional investment

Helps merchant bankers, brokers, regulatory authorities, etc., in discharging

their functions related to debt issues

Encourages greater information disclosure, better accounting standards, andimproved financial information (helps in investors protection)

May reduce interest costs for highly rated companies

Acts as a marketing tool


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FUNCTIONS

Superior information

Low cost information

Basis for proper risk, return & Trade off

Healthy discipline on corporate borrowers

Formulation of public policy guidelines on Institutional

investment


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BENEFITS FOR INVESTORS

Understandability of the investment proposal

Low cost information

Independence of investment and quick investment

decision

- Recognition of risk

- Credibility of the issuer

Saving time ad money

Safeguards against bankruptcy


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BENEFITS FOR BROKERS AND

FINANCIAL INTERMEDIARIES

Saves time, money, energy, and manpower in

convincing their clients about investments.

Less effort in studying companys credit position to

convince their clients.

Easy to select profitable investment security

Helps to improve business


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BENEFITS FOR RATED COMPANIES

Low cost of borrowing

Wider audience for borrowing

Encourages financial Discipline

Merchant bankers job and foreign collaborations made

easy

Attract investors with least efforts

- Rating as a marketing tool Caution risk


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CRISIL


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INTRODUCTION:

Globally-diversified analytical company providing

ratings, research, and risk and policy advisory services.

Our majority shareholder is Standard & Poor's, a part of

The McGraw-Hill Companies, ( world's foremost

provider of credit ratings).

Vision:

To be an institution that creates a huge impact in the

markets and continue to serve our customers to make a

difference.

Values:

Integrity, Independence, Analytical Rigour, Commitment

and Innovation.


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CRISIL'S CORE BUSINESSES:

Ratings

Global Research and analytics-Irevna

Research

Capital markets

Infrastructure Advisory.

CRISIL RiskSolution.


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CRISIL AWARDS

CRISIL Mutual Fund Awards

CRISIL Real Estate Awards CRISIL Emerging India Awards

CRISIL Young Thought Leader (CYTL) Award

CORPORATE SOCIAL RESPONSIBILITY

(CSR)

Financial Awareness

Making and facilitating Donations

Accreditation of NGOs

Green initiatives


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Credit Ratings - Scales

Credit Ratings - Long Term Scale

Credit

R

atings - ShortT

erm Scale Credit Ratings - Fixed Deposit Scale

Credit Ratings - Corporate Credit Scale

AAA(Triple A) Highest Safety

AA(Double A) High Safety

A Adequate Safety

BBB (Triple B) Moderate Safety

BB(Double B) Inadequate Safety B High Risk

C Substantial Risk

D Default

NM Not Meaningful


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RATING CRITERIA FOR FINANCE

COMPANIES:

Market position

Management

Asset quality

Capital adequacy

Resource raising ability

Earnings

Liquidity/asset liability management.


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INTRODUCTION

Establishment

Promoting Agencies

Shareholding Pattern

Program Profile

Rating

Information Services

Advisory Services

Grading Services


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OBJECTIVES

To assist investors in making well informed investment

decision.

To provide information & guidance to institutional &

individual investor. To assist the regulators in promoting the transparency in

the financial market.

To assist issuers in raising funds from a wider investors

base

To enable banks, investment bankers and brokers

To provide regulators with a market driven system


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STRATEGIES OF ICRA

Create awareness

Win the credibility, confidence and trust

Aggressively focus on business development


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RATING METHODOLOGY OF

Marketing strategies,

Competitive edge,

Level of technological development

Operational efficiency

Competence and effectiveness of management, HRD policies and practices,

Hedging of risks,

Cash flow trends and potential,

Liquidity, Financial flexibility,

Asset quality and past record of servicing debts and obligations, and

Government policies and status affecting the industry.


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SYMBOLS OF ICRA

Long term Debentures Bonds and Preference shares-Rating Symbols

LAAA: Highest Safety

LAA:High

SafetyLA:Adequate Safety

LBBB: Moderate SafetyLBB: Inadequate SafetyLB: Risk prone

LC:Substantial RiskLD: Default, Extremely speculative


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SYMBOLS OF


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Credit Analysis & REsearch Ltd.

A full service rating company that offers a wide range of ratingand grading services across sectors.

Incorporated in 1993 by consortium of Banks/financial

institutions in India. The three largest shareholders of CARE are

IDBI Bank, Canara Bank and State Bank of India.

Registered with SEBI under the Securities & Exchange Board of

India (Credit Rating Agencies) Regulations, 1999

CAREs Ratings are recognised by

Govt. of India and all

regulatory authorities like RBI and SEBI

CARE is a founder member of Association of Credit Rating

Agencies in Asia (ACRAA).


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Services

Rating

Research & Information Services


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Range of Rating & Grading Services

Banks and FI ratings

Sub-sovereign ratings

Structured Finance Ratings

Insurance/ CPA ratings

Infrastructure ratings

Corporate Governance ratings

Corporate ratings

Services

Construction GradingGrading of MTI

Fund credit Quality rating

SME/SSI ratingsIPO Grading

Issuer Rating


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EXPERIENCE

Total Assignments Completed : 5846

Total Instruments Rated : 5452

Total Volume of Debt Rated : Rs. 16,594 Bn

Total Issuers Rated : 2033


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Ratings Process


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Credit Rating of Debt instruments

CAREAAA - best credit quality, offering highest safety for timely

servicing of debt obligations.

CAREAA- high safety for timely servicing of debt obligations.

CAREA - adequate safety for timely servicing of debt obligations.

CAREBBB- moderate safety for timely servicing of debt obligations.

CAREBB - inadequate safety for timely servicing of debt obligations

CAREB - low safety for timely servicing of debt obligations

CAREC - very high likelihood of default in the payment of interest

and principal.

CARED - Instruments with this rating are of the lowest category.

They are either in default or are likely to be in default soon.


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CAREIPO grade Evaluation

5 Strong fundamentals

4 Above average fundamentals

3 Average fundamentals

2 Below average fundamentals

1 Poor fundamentals


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IPO Grading Criteria

CAREwould assess the fundamentals of an issue based on the followingfactors:

Quantitative growth prospects of the industry, financial strength &

operating performance of the issuer

Qualitative - business fundamentals & prospects, management

quality, promoter evaluation, accounting policies, corporate

governance practices, project risk, and compliance and litigation history.

CARE would consider a time horizon of around 3 years for its

assessment.


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LIMITATIONS OF CRDIT RATING

AGENCIES

Institutions whose instruments were given highest rating didnt

perform well. For eg. CARE gave the highest rating to CRB capital,

which failed, it created a panic among investors & credit agencies.

Frequent revision of grading creates confusion questioning credibility

of the expertise of rating agencies.

No audit, only rely on information provided by the issuer which may

be inaccurate & incomplete.

Biasing investors lose their investments.

Rating agencies often fail to correctly predict a borrowers financial

health in the short term. The latest case is NCD issue of BPL which was

downgraded by CRISIL from A to D. Investors who depends on these

ratings is not given any warning by rating agencies to wind down his

investment in time.


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Biased rating and misrepresentation,

Static study,

Concealment of material information,

No guarantee for soundness of the company,

Human bias,

Reflection of temporary and adverse conditions,

Present rating may change (down grade), Differences in rating of two agencies.

DISADVANTAGES OF CREDIT RATING

AGENCIES


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THANK YOU

Soumya Samarpitha Mishra

Nimi K.Parvathy

Mushthafiz

Nishad v k Srinivas Taneeru

Venkata Anudeep

Bibuthi Bhushan Sarangi

Kumari Priyanka

Shashwat Anand

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CREDIT RATING-Group 5