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CREDIT RATING AGENCIES

Presented by: Charan Teja. R II MFM 12208

What is a Credit Rating Agency ?


A credit rating agency (CRA, also called

a Ratings Service) is a company that assigns credit ratings- rating of the debtor's ability to pay back the debt making timely interest payments and the likelihood of default.

What are Credit Ratings?


Credit ratings are opinions about relative

credit risk. Credit ratings are not investment advice, or buy, hold, or sell recommendations. Credit ratings are not indications of the market liquidity of a debt security or its price in the secondary market. Credit ratings are not guarantees of credit quality or of future credit risk.

Factors affecting Credit Ratings


The security issuers ability to service its debt.

Volume and composition of outstanding debt.


Stability of the future cash flows and earning

capacity. Interest coverage ratio. Current ratio. Collateral security and the securitys priority of claim. Market position of the company. Operational efficiency. Track record of promoters, directors.

Business models
Subscription model: investors pay a

subscription fee for access to ratings Issuer-pays model: agencies charge issuers a fee for providing credit rating assessments and ratings are freely available to the broader market.

Big Three
Standard & Poor's (S&P):

Moody's
Fitch Group

Credit Rating Agencies in India


CRISIL Limited.

Fitch Ratings India Private Ltd.


ICRA Limited. Credit Analysis & Research Ltd.

(CARE). Brickwork Ratings India Private Limited. SME Rating Agency of India Ltd. (SMERA).

CRISILs RATING PROCESS

Rating methodology
Business Risk Analysis: Industry risk Market position of the company Operating efficiency Legal position Size of business Financial Analysis:

Benefits of Credit Ratings


For the Financial System: Reduces information asymmetry in the market. Facilitates pricing of debt instruments. For Issuers: Provides independent credit information from a credible third party to the community of potential investors. Enhances issuer's access to investor funds. Helps issuer differentiate itself in the

Benefits of Credit Ratings


For Investors: Helps in investment decision. Complements investors' own credit analysis. Facilitates asset monitoring. Easy understandability of investment proposal.

DISADVANTAGES OF CREDIT RATING


Possibility of bias exist.

Improper disclosure may happen.


Impact of changing environment (static

study). Problems for new companies. Downgrading by rating agency. Difference in rating.

THANK YOU