CREDIT RATING

 

–           CREDIT RATING
FINANCIAL SERVICES AND MARKETS
MEANING.FUNCTIONS,
FEATURES
MERITS

–           DR. SHASHI AGGARWAL

–           MEANING AND DEFINITION OF CREDIT RATING

–           CREDIT RATING IS AN ANALYSIS OF THE CREDIT RISK ASSOCIATED WITH A FINANCIAL INSTRUMENT OR A FINANCIAL ENTITY. IT IS RATING GIVEN TO PARTICULAR ENTITY BASED ON THE CREDENTIALS AND EXTENT TO WHICH THE FINANCIAL STATEMENTS OF THE ENTITY ARE SOUND IN TERMS OF BORROWING AND LENDING THAT HAS BEEN DONE IN THE PAST.

–           IS SIMPLY OPINION ON THE FUTURE ABILITY AND LEGAL OBLIGATION OF AN ISSUER TO MAKE TIMELY PAYMENTS OF PRINCIPAL AND INTEREST ON SPECIFIC FIXED INCOME SECURITY,

–           DEFINITION

–           CRISIL CREDIT RATING IS AN UNBAISED AND INDEPENDENT OPINION AS TO ISSUER’S CAPACITY TO MEET ITS FINANCIAL OBLIGATIONS.IT DOES NOT CONSTITUTE A RECOMMENDATION TO BUY R SELL OR HOLD A PARTICULAR SECURITY.

–           ICRA RATINGS ARE OPINIONS ON THE RELATIVE CAPABILITY OF TIMELY SERVICING OF CORPORATE DEBT AND OBLIGATIONS. THESE ARE NOT RECOMMENDATIONS TO BUY AND SELL NEITHER  THE ACCURACY NOR THE COMPLETENESS OF INFORMATION IS GUARANTEED.

–           FEATURES

1.       IS AN ASSESSMENT OF THE CAPACITY OF AN ISSUER OF DEBT SECURITY BY AN  INDEPENDENT AGENCY

2.       RATINGS ARE EXPRESSED IN THE CODE WHICH CAN BE EASILY UNDERSTOOD BY  LAY THE INVESTOR

3.       IN INDIA IT IS DONE FOR SPECIFIC DEBT SECURITY AND NOT FOR THE COMPANY AS WHOLE

4.       IT IS NOT ONE TIME EVALUATION OF CREDIT RISK. NOT VALID FOR ENTRE LIFE OF THE SECURITY

5.       NO FIDUCIARY RELATIONSHIP BETWEEN THE RATING AGENCY AND USERS

–           IMPORTANT CREDIT RATING AGENCIES IN INDIA

1.       CREDIT ANALYSIS AND RESEARCH LIMITED(CARE)

2.       INVESTMENT INFORMATION AND CREDIT RATING AGENCY OF INDIA LIMITED(ICRA)

3.       CREDIT RATING AND INFORMATION SERVICES( INDIA ) LIMITED

4.       FITCH CREDIT RATING INDIA PRIVATE LIMITED

5.       STANDARD AND POOR’S CORPORATION

 

–           REGISTRATION OF CRA

–           AS PER SECTION 12 OF THE SEBI ACT 1992 A PERSON HAS TO GET REGISTERED WITH SEBI UNDER SEBI( CREDIT RATING AGENCIES) 1999 REGULATIONS TO CARRY ON THE ACTIVITIES ON CREDIT RATING.

–           HAS TO  FOLLOW THE CODE OF CONDUCT IN THIRD SCHEDULE

–           SEBI ( CREDIT RATING AGENCIES REGULATIONS 1999 COVERS RATING OF  SECURITIES ONLY AND NOT RATING OF  FIXED DEPOSITS,FOREIGN EXCHANGE.COUNTRY RATING AND REAL ESTATE

 

–           PROMOTERS OF A CRA

1.       PUBLIC FINANCIAL INSTITUTION

2.       SCHEDULED COMMERCIAL BANK

3.       A FOREIGN BANK

4.       A FOREIGN CREDIT RATING AGENCY( MINIMUM FIVE YEARS EXPERIENCE)

5.       A BODY CORPORATE HAVING NET WORTH CRORES IN EACH OF THE IMMEDIATELY PRECEEDING 5 YEARS

 

 

–           PROCEDURES FOR CREDIT RATING

1.       TAKING REQUIRED INFORMATION FROM THE COMPANY

2.       DISCUSSION WITH MGMT AND VISITING THE COMPANY’S OPERATING LOCATIONS IF REQUIRED

3.       PREPARATION OF AN ANALYTICAL ASSESSMENT REPORT

4.       PRESENTING THE REPORT TO SENIOR EXECUTIVE OF CRA COMMITTEE

5.       DISCUSSION BY THE COMMITTEE  AND ASIGN RATING

6.       COMMUNICATING THE RATING

–           FUNCTIONS OF CREDIT RATING

1.       SUPERIOR INFORMATIION: UNBIASED OPINION,GREATER ABILITY TO ASSESS RISKS,HAS ACCESS TO LOTS OF INFORMATION

2.       LOW COST INFORMATION

3.       BASIS FOR A PROPER RISK RETURN TRADE OFF

4.       HEALTHY DISCIPLINE ON CORPORATE BORROWER

5.       FORMULATION OF PUBLIC POLICY GUIDELINES ON INSTITUTIONAL INVESTMENT

–           BENEFIT TO THE CREDIT RATING TO THE INVESTOR

1.       ASSESSMENT OF CREDIBILITY

2.       RISK INDICATOR

3.       PROTECT AGAINST BANKRUPTCY

4.       HELP IN TAKING QUICK DECISIONS

5.       INDEPENDENT DECISIONS

6.       RATING SURVEILLANCE

7.       OTHER SERVICES

–           BENEFITS TO THE ISSUERS

1.       LOWERS THE COST OF BORROWING

2.       WIDENS INVESTOR BASE

3.       FOSTERS A BETTER IMAGE

4.       INDUCES SELF DISCIPLINE

5.       LOWERS THE COST OF THE ISSUE

6.       MOTIVATES THE GROWTH

–           BENEFITS TO THE INTERMEDIARIES

–           RATING HELP THE MERCHANT BANKERS AND OTHER CAPITAL MARKET INTERMEDIARIES IN PROPER PLANNING,PRICING,UNDERWRITING ETC

–           MONITOR THE RISK EXPOSURE

–           IN SECURITIZATION OF ASSETS ETC

–           CREDIT RATING AGENCY

–           IS A COMPANY THAT RATES DEBTORS ON THE BASIS OF THEIR ABILITY TO PAY BACK THEIR INTEREST AND LOAN AMOUNT ON TIME AND THE PROBABILITY OF THEM DEFAULTING.

–           MAY ANALYSE THE CREDIT WORTHINESS OF DEBT ISSUERS AND PROVIDE RATINGS TO ONLY ORGANIZATIONS AND NOT INDIVIDUAL CONSUMERS.

–           THE ASSESSED ENTITIES MAY BE COMPANIES,STATE GOVTS,LOCAL GOVERNMENT,NON PROFIT ORGANIZATION EVEN COUNTRIES ALSO.

–           CREDIT RATING AGENCIES IN INDIA

1.       CRISIL

2.       ICRA

3.       CARE

4.       SMERA

5.       FITCH INDIA

BRICKWORK RATING

–           REGISTRATION OF CRA

–           AS PER SECTION 12 OF THE SEBI ACT 1992 A PERSON HAS TO GET REGISTERED WITH SEBI UNDER SEBI( CREDIT RATING AGENCIES) 1999 REGULATIONS TO CARRY ON THE ACTIVITIES ON CREDIT RATING.

–           HAS TO  FOLLOW THE CODE OF CONDUCT IN THIRD SCHEDULE

–           SEBI ( CREDIT RATING AGENCIES REGULATIONS 1999 COVERS RATING OF  SECURITIES ONLY AND NOT RATING OF  FIXED DEPOSITS,FOREIGN EXCHANGE.COUNTRY RATING AND REAL ESTATE

 

–           PROMOTERS OF A CRA

•                       PUBLIC FINANCIAL INSTITUTION

•                       SCHEDULED COMMERCIAL BANK

•                       A FOREIGN BANK

•                       A FOREIGN CREDIT RATING AGENCY( MINIMUM FIVE YEARS EXPERIENCE)

•                       A BODY CORPORATE HAVING NET WORTH 100 CRORES IN EACH OF THE IMMEDIATELY PRECEDING 5 YEARS

 

 

–           GENERAL OBLIGATIONS

1.       EVERY CREDIT RATING AGENCY HAS TO ENTER INTO WRITTEN AGREEMENT WITH THE CLIENT AND ALL TERMS AND CONDITIONS SHOULD BE SPECIFIED IN THE AGREEMENT

2.       CONTINUOUSLY MONITOR THE RATING

3.       CHANGES SHOULD BE NOTIFIED THROUGH PRESS RELEASE AND WEBSITES

4.       EVERY CREDIT RATING SHOULD FRAME APPROPRIATE PROCEDURES AND SYSTEMS FOR MONITORING THE TRADING SECURITIES BY ITS EMPLOYEES IN THE SECURITIES OF ITS CLIENTS IN ORDER TO PREVENT CONTRAVENES( SEBI INSIDER TRADING REGULATIONS 1992)

5.       SHOULD GIVE THE DEFINITIONS OF IITS SYMBOLS AND SHOULD STATE THAT THE RATINGDOES NOT CONSTITUTE RECOMMENDATION TO BUY OR HOLD OR SELL ANY SECURITIES

6.       EVERY CREDIT RATING AGENCY SHOULD ABIDE BY THE CODE OF CONDUCT

7.       SHOULD NOT RATE A SECURITY ISSUED BY ITS PROMOTER

8.       INFORMATION SUPPLIED BY THE CLIENT SHOULD BE KEPT CONFIDENTIAL

9.       EVERY CREDIT RATING AGENCY SHOULD SUPPLY ANY INFORMATION/REPORT DEMANDED BY THE BOARD

10.   SHOULD COMPLY ALL THE RULES AND REGULATIONS SPECIFIED BY SEBI TIME TO TIME’

11.   KEEP AND MAINTAIN THE BOOKS AND ACCOUNT AND DOCUMENTS RELATING TO CREIDT RATING FOR MINIMUM FIVE YEARS.

12.   IN CASE OF FAILURE OR CONTRAVENTION OF CONDITIONS SUBJECT TO WHICH CERTIFICATE HAS BEEN GRANTED OR CONTRAVENTIONS OF THE PROVISIONS IS LIABLE TO EITHER OF THE PENALTIES– SUSPENSION OR CANCELLATION OF REGISTRATION

–           CREDIT RATING INFORMATION SERVICES LIMITED(CRISIL)

–           FIRST CREDIT RATING AGENCY FLOATED ON 1 ST JANUARY 1988

–           STARTED JOINTLY BY ICICI AND UTI WITH  AN EQUITY CAPITAL OF RS 4 CRORE

–           EACH OF THEM HOLD 18%

–           THE OTHER PROMOTERS ARE:ASIAN DEVELOPMENT BANK OF INDIA,LIC AND GIC,HOUSING FINANCE DEVELOPMENT CORPORATION AND NINE PUBLIC SECTOR BANK AND PRIVATE AND FOREIGN SECTOR BANK.

–           EXPANDED ITS BUSINESS IN USA,UK,HONGKONG,CHINA ETC AND NOW THE MAJORITY SHAREHOLDER OF CRISIL IS STANDARD AND POOR’S

–           MAIN OBJECTIVE OF CRISIL IS TO RATE THE DEBT OBLIGATIONS OF INDIAN COMPANIES.

–           OBJECTIVES OF CRISIL

•                       TO ASSIST BOTH INDIVIDUAL AND INSTITUTIONAL INVESTORS IN MAKING INVESTMENT DECISIONS IN FIXED INCOME SECURITIES

•                       TO ENABLE CORPORATE TO RAISE FUNDS AT FAIR COST

•                       HELP TO INTERMEDIARIES IN PACING THE DEBT INSTRUMENTS

–           RATING METHODOLOGY

1.       RATING AT THE REQUEST OF THE COMPANY

2.       FIRST ANALYSIS RELATES TO PAST PERFORMANCE OF THE COMPANY

3.       ASSESSMENT OF THE FUTURE PROSPECT

4.       ANALYSIS OF THE INDUSTRY

5.       ANALYSIS OF COMPANY AND RELATED ENVIRONMENT

6.       EVALUATION OF THE MGMT WITH REFERENCE TO TRACK RECORD,RECRUITMENT AND TRAINING SYSTEM,PLANNING,CONTROL SYSTEM AND PHILOSOPHY ETC

7.       OWN ASSESSMENT OF CASH FlOWS

8.       IDENTIFICATION OF THE KEY ISSUE CONCERNING THE COMPANY

–           MECHANISM OF RATING BY CRISIL

1.       EMPLOYS BOTH QUALITATIVE AND QUANTITATIVE CRITERIA

2.       EMPLOYS A MULTI LAYERED DECISION MAKING PROCESS IN ASSIGNING RATINGS

3.       TWO TEAMS ARE ASSIGNED ON GETTING RATING REQUEST FROM CLIENT

4.       FIRST TEAM MEETS THE OFFICALS OF THE COMPANY AND MAKE AN ASSESSMENT OF THE INDUSTRY

5.       SECOND TEAM STUDIES THE INDUSTRY ON THEIR OWN

6.       BOTH THE TEAM DISCUSS AND SUBMIT THEIR REPORT TO BRANCH INTERNAL COMMITTEE( MINIMUM THREE SENIOR ANALYSTS OF CRISIL AND SIX SENIOR EXECUTIVES)

7.       RATING ARE RECOMMENDED TO RATING COMMITTEE( SIX DIRECTORS)

–           DEBENTURE RATING SYMBOLS

–           HIGH INVESTMENT GRADES

–           TRIPLE (AAA)----HIGHEST SAFETY

–           AA—HIGH SAFETY

–           INVESTMENT GRADE

–           A ---ADEQUATE SAFETY

–           BBB---MODERATE SAFETY

–           SPECUALITVE GRADES-----

–           BB---INADEQUATE SAFETY

–           B----HIGH RISK

–           C----SUBSTANTIAL RISK

–           D---DEFAULT

 

 

–           INVESTMENT INFORAMTION AND CREDIT RATING AGENCY OF INDIA(ICRA)

–           SET UP BY INDUSTRIAL FINANCE CORPORATION OF INDIA ON 16 JAN,1991

–           PUBLIC LIMITED COMPANY WITH AN AUTHORISED CAPITAL OF 101 CRORE

–           RATING SCALE OF LONG TERM INCLUDING DEBENTURES,BONDS AND PREFERENCE SHARES

–           LAAA---HIGHEST SAFETY

–           LAA------HIGH SAFETY

–           LA----ADEQUATE SAFETY

–           LBBB---MODERATE SAFETY

–           LBB----INADEQUATE SAFETY

–           LB   RISK PRONE, LC---- SUBSTANTIAL RISK

–           LD DEFAULT

–           CARE ( CREDIT ANALYSIS AND RESEARCH LIMITED)

–           SET UP IN 1993

–           SERVICES OFFERED :_

1.       CREDIT RATING

2.       INFORMATION SERVICE

3.       EQUITY RESEARCH

4.       RATING OF PARALLED MARKET OF KEROSENE AND LPG

RATES DEBENTURES,CERTIFICATE OF DEPOSIT,COMMERCIAL PAPER AND FIXED DEPOSITS

–           CARE RATING SYMBOLS

–           LONG TERM DEBT INSTRUMENTS

–            CAREAAA)----HIGHEST SAFETY

–           CARE AA—HIGH SAFETY

–           CARE A ---ADEQUATE SAFETY

–            CARE BB---INADEQUATE SAFETY

–           CARE B----HIGH RISK

–           MEDIUM TERM DEBT INSTRUMENTS

–            CAREAAA---HIGHEST SAFETY

–           CARE AA—HIGH SAFETY

–           CARE A ---ADEQUATE SAFETY

–            CARE B---INADEQUATE SAFETY