INTRODUCTION TO CREDIT RATING: CREDIT RATING: A FINANCIAL INSTRUMENT TO POTENTIAL INVESTORS OF DEBT SECURITIES

 A credit rating assesses the credit worthiness of an individual, corporation or even a country.  Credit ratings are calculated from financial history i.e. it is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.  A credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

GOOD CREDIT RATING:

 A good credit rating can be determined through a variety of factors. Your proven credit history , your current debt to income ratio, and your amount of bad debt (unsecured credit card debt, auto loans, etc) versus your amount of good debt (home loans).  People with a good credit rating generally qualify for prime rates in loans, essentially the standard rate. People with an excellent credit rating can qualify for loans with a lower than prime interest rate.

POOR CREDIT RATING:

 A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.  Companies rated with poor credit ratings will have difficulty finding finance, and will most likely will have to pay more due to risk of default.

DIFFERENT TYPES OF CREDIT RATING:

Credit ratings are given by both international and national credit rating agencies. Some of the International credit rating agencies are: y y y y A.M. BEST STANDARD AND POORS FITCH RATINGS MOODY S

We are required to understand the credit rating scale given by STANDARD AND POOR S(S&P s).The S&P s rate their companies or country in the scale ranging from excellent to poor in an ascending order as follows:

SCALE
AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C D

GRADES GIVEN
PRIME HIGH GRADE

DEGREE OF SAFETY TO INVEST

HIGHEST SAFETY HIGH SAFETY

UPPER MEDIUM GRADE LOWER MEDIUM GRADE

ADEQUATE SAFETY

MODERATE SAFETY

NON- INVESTMENT GRADESPECULATIVE HIGHLY SPECULATIVE SUBSTANTIAL RISKS EXTREMELY SPECULATIVE

INADEQUATE SAFETY RISK

HIGH RISK

SUBSTANTIAL RISK IN DEFAULT WITH LITTLE PROSPECT FOR RECOVERY IN DEFAULT

DEFAULT(DON T INVEST)

CREDIT RATING AGENCIES IN INDIA:

     CRISIL -- Credit Rating Information Services Of India Limited ICRA --Investment Information and Credit Rating Agency Of India CARE -- Credit Analysis & Research Limited DCR INDIA -- Duff & Phelps Credit Rating India Private Ltd. ONICRA Credit Rating Agency of India Ltd.

Now let us understand the profile of these agencies and process of credit rating undertaken by each of these agencies.

CRISIL -- Credit Rating Information Services Of India Limited

y y y y CRISIL is India's leading ratings agency and 4th largest in the world - that floated on January 1, 1988. Jointly started by ICICI and UTI with an equity capital of 4 crores. CRISIL s ratings is the agency of choice for issuers and investors A global analytical company providing ratings, research, and risk and policy advisory services.

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The foremost provider of high-end research to the world's largest banks and leading corporations Defining trait is their ability to convert data and information into expert judgements and forecasts across a wide range of domains, with deep expertise and complete objectivity.

CRISIL S PROCESS OF CREDIT RATING:

BORROWER/ISSUER CRISIL

REQUEST FOR RATING

ASSIGNS ANALYTICAL TEAM , CONDUCTS BASIC RESEARCH

DOCUMENT PREPARATION

COLLECTION OF INFORMATION

PLANT VISIT FOLLOWED BY MANAGEMENT MEETINGS

APPEAL
RATING COMMITTEE ASSIGNS

COMMUNICATION OF RATING TO ISSUERS DISSEMINATION OF RATING / PUBLICATION

SURVEILLANCE AND ANNUAL REVIEW

ICRA --Investment Information and Credit Rating Agency Of India

y y y y ICRA LTD. Was set up on 16th january 1991 as an independent and professional company. It was set up by Industrial Finance Corporation of India. The initial paid up capital for the company was Rs. 3.50 crores which was subscribed by IFC, UTI,LIC, GIC, SBI & OTHERS. ICRA has broad based its services for the corporate and financial sectors , both in India na d overseas, and currently offers services like: Rating services Information

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Grading and Research Services Advisory Services Economic Research Outsourcing

CARE -- Credit Analysis & Research Limited

y y y y y y Its inception happened in April 1993. CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc. Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. It has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. CARE has seven offices in India located at - Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmedabad.

CARE S PROCESS OF CREDIT RATING:

DCR INDIA -- Duff & Phelps Credit Rating India Private Ltd.
y DCR India or Duff & Phelps Credit Rating India Private Ltd is one of the top credit rating agencies in India. Over the years, DCR India has been providing excellent services to its clients. Duff & Phelps Credit Rating India Private Ltd (DCR India) has played an important role in rating India's forex debt obligations. DUFF & Phelps Credit Rating India Pvt. Ltd (DCR India) is now officially Fitch Ratings India Pvt. Ltd following approval by the Registrar of Companies.

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ONICRA Credit Rating Agency of India Ltd.

y y y y Onicra Credit Rating Agency is an individual rating agency in India based in Gurgaon. It is affiliated to the National Small Industries Corporation Ltd. (NSIC), and the National Association of Professional Background Screening (NAPBS) ONICRA operates as a financial services organization. Its products and services include Individual Credit Rating, SME rating, Employee Background Screening, Customer Profiling & Rating (CPR), Associate Rating and IT solutions, across the y telecom, banking, health, insurance, education and auto sectors. The company has been acknowledged as pioneers in this field by the Ministry of Finance in the Economic Survey (1993 1994).

ONICRA S CREDIT RATING PROCESS:

Customer and referral feedback collected

Request received for rating

Draft Report and Rating proposal

Pre-Analysis and Document Collection

Indepth Analysis of Business UnitV

Report evaluation by Rating committee

Assignment finalized and detailed questionnaire prepared

Site Visit scheduled and Data Collected

Final evaluation and Rating given

ANALYSIS UPON THE CREDIT RATING PROCEDURE:

y y RECEIPT OF COMPANY S REQUEST TO GET CREDIT RATING At this stage client s authorized representatives need to register the application officially and to sign an agreement on implementation of rating procedure. COMPRISING OF THE CREDIT RATING COMMITTEE Credit-Rating agency begins preparation procedure and forms analytic group. Analytic group consists of two or three analysts and group manager (leading analyst) who controls the whole work. COMPILING INFORMATION To get all the information necessary for analysis, Credit-Rating agency sends a client the letter with information requirements: a list of all the information and documents necessary for credit rating analysis. Credit-Rating guarantees that your confidential information will be kept safe. THE MEET WITH CLIENT COMPANY MANAGERS Meetings and consultations with client company managers and officials are very important in the process of credit rating assignment. In the first meeting analysts would ask questions about financial plans and further development prospects. This information helps us to remain objective in assessment of client s financial position for the long-term period. FACTORS AFFECTING CREDIT RATING PROCEDURE Qualitative analysis Specialists study management system of the issuer, financial and development plans. Quantitative analysis Study of both standard methods (analysis of internal and external factors, profitability) and special methods worked out by out analysts to determine financial position and development tendencies of the issuer. Legal analysis Analysis also includes studying of management, labor and business relations and legal field of cooperation between central office and affiliates. THE RESULT : After all types of analysis have been conducted, the results are brought together and analytic group sums up analysis. Final meeting with client company managers serves for completing missing information or clearing up some questionable situations Final results represent characteristics of client s business, assessment of its market niche, financial and strategic situation and development trends.

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ASSIGNMENT OF CREDIT RATING TO THE COMPANY / CLIENT: Analytic group prepares presentation based on results of analysis and suggests assigning one or another credit rating. The presentation is submitted to rating committee consisting of four or

five members. All committee members are qualified in the sphere of client company s activity. Having studied all the materials, rating committee takes a decision about credit rating assignment. A client receives written notice and rating report with detailed grounding of assigned rating. y y DECISION REGARDING RATING TO BE PUBLISHED OR NOT: Decision about rating publication is taken by a client individually. Client may decide not to publish assigned rating. Even if rating is not published the procedure of credit rating assignment remains useful as conclusions of agency analysts written in the rating report may help to determine factors influencing client s credibility. Their improvement in the future may lead to credit rating upgrade. Agency may not submit publication of upgrades/downgrades of once published rating to client s approval. APPEAL TO THE CREDIT RATING AGENCY IF RATING NEEDS TO BE CHANGED OR VERIFIED: If a client thinks that in the process of rating assignment some important factors have not been taken into consideration, client s authorized representatives may appeal to rating committee within the next ten days after rating assignment. The appeal will be accepted only if a client can bring new data and documents that are important for rating procedure. After examination of these documents, credit rating committee will take a decision which cannot be appealed.

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EFFECT OF CREDIT RATING ON U.S. :

y y y Increase in borrowing costs: Debt crisis in effect to credit rating is likely to raise borrowing costs for the American government, companies and consumers. Negative outlook:The outlook on the new U.S. credit rating is "negative," indicating another downgrade is possible in the next 12 to 18 months. Deterioration in economic standing: The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the U.S. dollar's reserve currency status. Withdrawal of bonds from U.S. Financial Markets: People and companies have started withdrawing their bonds from the U.S. economy in fear of losing money and have started investing in other countries to get profitable returns. Impact on housing market: Mortgage rates will likely be on the verge to rise as the increase in the borrowing costs. Fall in the oil prices: Crude fell more a barrel after rating agency Standard & Poor's downgraded the United States' top-tier credit rating, raising concerns on the outlook for demand in the world's biggest oil consumer. US oil fell as low as $83.68 a barrel and traded at $84.22.

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CONCLUSION: In a nut shell, credit rating plays an important role in the frame work of an economy. Credit rating agencies support the economy by providing superior information at a low cost which helps the investors to take quick & independent investment decisions.
Thus, Credit Rating benefits the industry as a whole by increasing the investor population, forewarning risk, encouraging financial discipline, making foreign collaborations and merchant bankers job easy. Hence, we could conclude by saying that credit rating has become a marketing tool for one and all.