Credit Rating

Concept of Credit Rating:

Credit rating is concerned with pre-estimating the repayment capacity and ability of a debtor for a particular debt planned to be raised.

It enables the investor to take investment decisions by relying upon the opinion of the expert agency symbolized in indicative ‘signs’.

It only indicates a representative’s character of the particular security which does not amount to any recommendation to purchase, sell or hold that security.

It is a process by which risk associated with a credit instrument is evaluated or it transpires the degree of credit risk associated with a debt instrument.

‘High’ rating indicates the firm is healthy and the reverse position is highlighted by ‘low’ rating.

Definition:

Moody’s : “Ratings are designed exclusively for the purpose of grading bonds according to their investment qualities”.

Standard and poor’s : “..rating is a current assessment of the credit worthiness of an obliger with respect to specific obligation”.

BESIDES RATIOS FACTORS TAKEN INTO CONSIDERATION WHILE RATING IS ASSIGNED

Position in the Economy

Life cycle of Industry

Competitive Nature

Supply Factor

Volatility

Market Share

Labour Situation

Production Efficiency

Financial Structure

CREDIT RATING PROCESS OF (ICRA)

1. Assign
2. Rating team
3. Receive initial information conduct basic research
4. Meetings and visits
5. Analysis and preparation of report
6. Preview meeting
7. Rating meeting
8. Assign rating
9. Communicate the rating and rational
10. Acceptance
11. Surveillance

SYMBOLS USED AND STAND FOR

Moody’s Investor Services

Aaa - Best Quality

Aa - High Quality

A - Upper medium grade

Baa - Medium grade

Ba - Posses speculative

elements

B - Lack characteristics of

Investment

Caa - Poor standing

Ca - High Speculative

C - Lowest Grade

CRISIL

AAA - Highest Safety

AA - High Safety

A - Adequate Safety

BBB - Moderate Safety

BB - Sub moderate

B - Inadequate Safety

C - Substantial Risk

D - In default

Users of Credit Rating:

Investors

Bond Issuers

Investment banks

Broker-dealers

Governments Regulators

CREDIT RATING – A CRITIQUE

Based on an opinion which depends upon who gives the opinion and at what point of time.

Credit quality is not static and changes with time.

Depends upon the agency’s perception regarding the future of the borrower.

Past is becoming less and less of an indicator of the future and rating agencies undertake very sensitive analysis of the past.

Low rating creates a vicious cycle, as not only interest rate for that company goes up it also affects the contracts with other FIIs adversely.

FOR HAVING A GOOD CREDIT RATING

Multiple ratings should be done which helps investors by providing them additional information and acts as a check on any possible excesses by any agency.

The existence of more than one rating agency and the competition among them would improve the quality of the service and lower its cost.

The rating agencies should enjoy maximum autonomy so that each agency develops and nurtures its distinct personality and methodology.

Original Article By:

Gagan Deep Singh

Batch-2008

Edited By : Kedar
IBS Chandigarh