Financial Market Credit Rating

and Instruments Agencies

Submitted to:
Prof. Vinay Kumar Dutta
 Introduction
● A credit rating is an assessment of the creditworthiness of a borrower in general terms or with
respect to a particular debt or financial obligation

● Credit assessment and evaluation for companies and governments is generally done by a credit
rating agency. These rating agencies are paid by the entity that is seeking a credit rating for
itself or for one of its debt issues

● Globally there are majorly three credit rating agencies S&P, Moody’s, and Fitch

● In India the major credit rating agencies are Credit Rating Information Services of India Limited
(CRISIL), ICRA Limited, Credit Analysis and Research limited (CARE), Small and Medium
Enterprises Rating Agency of India (SMERA), ONICRA Credit Rating Agency. CRISIL is the
largest credit rating agency in India, with a market share of greater than 60%.

● Credit Rating is only assigned to Debt Instruments like bonds and debentures, Loans, Future
Receivables, Real Estate Developers, Individuals and even a Country
Process/Rating Mechanism
Organizational Structure
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Methodology Of Rating
Business Risk Analysis
Financial Risk Analysis
Management Risk Analysis

Project Risk Analysis

• There is a Conflict of Interest while assigning the ratings as Credit Rating Agencies do not want
to assign a lower rating to the big paying clients

• Multiple Ratings at issuance of debt instruments and also during the subsequent monitoring
phase, the results provide empirical evidence that rating agencies put more effort in rating. The
research demonstrates that in the case of multiple ratings, agencies do a better job in
discriminating tranches with respect to default risk

• Credit ratings play an important role in stock pricing, firm valuation, contracts, and regulations.
The accuracy of credit ratings also affects the reputation of rating agencies

• There are majority of investors who are not aware of Credit Rating Agencies. They do not
consider the ratings and majorly believe on market sources for information

• All the rated companies uses consistent methodology for rating the same type of instrument in
the same industry

• CRAs play a central role in the capital markets which has far-reaching consequences, both for
the corporations as well as the investors. It face a lot of conflicts when a particular service is
downgraded since the overall consequence effects all the structured products held by the client
Example : Credit Rating of Apollo & MRF
and their comparison
 CREDIT RATING OF APOLLO
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CREDIT RATING OF MRF
Serial Risk Risk Parameters Comparison Remarks
No. Apollo MRF

1. Financial Risk ● Current Ratio 28 31 High current ratio indicates that MRF is more
● Debt to equity Ratio likely to pay the creditor back
● Interest Service Coverage Ratio
● Debt Service Coverage Ratio
● Operating Profit Margin

2. Business Risk ● Production Issues 33 32 Both the companies have scored similar in
● Industry Perspective production and market issues, industry
● Market Issues perspectives. But MRF scores less in Other
● Other Risk Risk because of some labour issues

3. Management Risk ● Integrity 19 19 Both the company’s strong presence in the

● Experience and Competence market and have a robust management
● Delegation/Succession system
● Track records
● Past commitments
● Value of relationship

4 Overall Risk ● Financial Risk 79% 82% Apollo is rated A

● Business Risk MRF is rated A+
● Management Risk
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Structured Obligation
●

● Structured Obligation (SO) Instruments: Structured finance products usually include derivatives
and securitized and collateralized debt instruments like
○ syndicated loans
○ collateralized mortgage obligation
○ collateralized bond obligations (CBOs)
○ collateralized debt obligations (CDOs)
○ credit default swaps (CDSs)
○ hybrid securities.
 Structured Finance of CRISIL
KEY POINTS
Pass through Structured Obligation ● Good Rating Agencies plays a significant role in
certificate (PTC) Transactions securitization
● CRISIL enjoys a leadership position in the Indian
● ● Securitization rating market and has the

● experience of assessing securitization transactions

since 1992.
● ●
● It has evaluated over 150 originators, with a
●
strong understanding of over 15 asset classes
● ● across economic cycles.
● CRISIL is the first rating agency in India to assign
ratings on asset-backed securities in 1991 and
●
mortgage-backed securities in 2000.
Key Learnings
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Recent News
RBI may bar dual functions of rating agencies - 10 March 2019
Source -
https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-may-bar-dual-func
tions-of-rating-agencies/articleshow/68342935.cms

2. Credit rating agencies are real threat to financial markets - 20 Feb 2019
Source -
https://www.financialexpress.com/market/cafeinvest/why-credit-rating-agencies-are-real-threat
-to-financial-markets/1490838/
Thank You