What is credit rating?

A credit rating estimates the credit worthiness of an individual, corporation,

or even a country. It is an evaluation made by credit bureaus of a borrowers overall credit history. It is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender. Credit ratings are calculated from financial history and current assets and liabilities.

Objectives
It provides guidance to investors or creditors in determining a credit risk

associated with debt instrument or credit obligation.

Establishes a link between risk and return. Helps investors in making investment decisions. Credit rating shows the exact worth of the organization.

Credit rating Agencies In India

Credit Rating Information Services of India Ltd. (CRISIL) (1988)

Investment Information and Credit Rating Agency of India (ICRA) (1991)

Credit Analysis & Research Ltd. (CARE) (1993)

ONICRA Credit Rating Agency of India Ltd.(1993)

CRISIL :
CRISIL was set up by financial institution on January 19,1988.

CRISIL Ratings plays a leading role in the development of the debt markets

in India. CRISIL has a capital base of Rs.4 crore. FUNCTIONS:

Independent & unbiased report

Reliable financial information

WORKING:

1. QUALITATIVE CRIETERIA 2. QUANTITATIVE CRIETERIA

PROGRESS:
Its inception till march 2,2005,crisil has so far completed rating of issues

824 companies consisting of various types of debt instruments of companies both in public & the private sectors. Credit rating analysis is relatively a new development in india. It is expected that establishment of crisil will provide a strong impetus to the systematic risk evaluation of specified corporate instruments as well as the companies issuing them.

ICRA
ICRA formally known as the investment information & credit rating agency of india was promoted by the industrial finance corporation of india(IFCI).

It was incorporated on jan 16 ,1991 as public limited company and started functioning with effect from September 1,1991.
ICRA also performs credit rating functions & finalies its rating norms & standards in consultation with credit rating information & servicies of india ltd.(CRISIL) ICRA has an authorized capital of rs.10 crores IFCI,UTI,LIC,GIC,HDFC,ILFS,SBI & 17 commercial banks are its shareholders.

PROGRESS: Its inception till end of march 3,2005 ICRA has rated debt instruments of 597 companies. ICRA has carried out several studies for financial sector intermediaries and has been appointed as a consultant by the disinvestment commission,ministery of finance.

CARE
A full service rating company that offers a wide range of rating and 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 recognized 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).

ONICRA(ONIDA INDIVIDUAL CREDIT RATING AGENCY)

ONICRA is the first individual credit agency in India promoted by famous

ONIDA group. ONIDA covers approximately 75 million households owning three popular items colour TVs, refrigerators & washing machines.
RATING SCALE ONICRA has been pioneer introduce the concept of individual credit rating. It has develop a rating system for various types of credit extension by conducting in debt study of all aspect the behaviour of credit seekers. The creditworthiness of the individual is measured on various Parameters such as age, qualification, occupation, savings, stability of works and history of repayment etc.

Who uses Credit Rating?

Investors In absence of credit rating system, risk evaluation depends on name recognition. Credit rating helps investors in selecting appropriate instrument from broad spectrum of investment options. Banks use ratings of other banks for decisions regarding interbank lending, swap agreements, etc. Credit rating agencies also provides services like industry reports, corporate reports, seminars and open access to the analysts of the agencies. Regulators Restrict entry to market of new issues rated bellow a particular grade. Prohibit investors from purchasing or holding of instruments rated bellow a particular level.

Issuers Compared to unrated securities, issuers of rated securities have access to much wider investor base & more faith is placed. Investor confidence enables issuers of highly rated instruments to access market even under adverse market conditions.

Intermediaries Merchant bankers use rating for planning, pricing, underwriting, placement. Brokers and dealers in securities use rating as an input for their monitoring of risk exposures.

DISADVANTAGES OF CREDIT RATING

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.