37463173 Credit Rating Agencies

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Submitted to: Prof Meghana Patil

Group Members

Avinash Mugale Pooja Mukherjee Malay Patel

57 58 70

Indraneel Patil


What Is Credit Rating?

A credit rating estimates the credit worthiness of an individual, corporation, or even a country.

A credit rating 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.

Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.


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) (1987)

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

Credit Analysis & Research Ltd. (CARE) (1994)
Duff & Phelps Credit Rating India Private Ltd. (DCR India) (1996) ONICRA Credit Rating Agency of India Ltd.

Range of Rating & Grading Services
Banks and FI ratings
IPO Grading Structured Finance Ratings Sub-sovereign ratings SME/SSI ratings Corporate ratings


Infrastructure ratings

Issuer Rating
Insurance/ CPA ratings Corporate Governance ratings Construction Grading

Grading of MFI

Fund credit Quality rating

Ratings awarded by major Credit Rating Agencies

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.


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.


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.

What can be Credit Rated ?
   

INDIVIDUAL CORPORATE SOVEREIGN (i.e. A Country) FINANCIAL INSTRUMENTS Bonds Bank Deposits Commercial Paper Term Loans Preference Shares Secured Debt Unsecured Debt Securities

The Rating Process

Initiated on a formal request

Providing information requirements

Secondary sources of information

Assessment of qualitative factors

Clarification & justification of fresh inputs

Right to appeal for a review

Communicate to the issuers

Preparing of Rating Report


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.

CARE’s 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).

Quality of Ratings
 Independent

& Renowned External Rating

 Impressive

Track Record of more than 15 years  Leader in bank ratings  Developing rating methodologies for new segments like Cooperatives, Service sector, trading etc.

Core Competency  CARE believes in independence in rating decisions and has an external rating committee that decides each rating.

It consists of members who are reputed professionals from various industries like IDBI Ltd, Reserve Bank of India, Hindustan Lever Ltd, etc.


CRISIL was incorporated in the year 1987 and was the first rating agency in INDIA. CRISIL Ratings plays a leading role in the development of the debt markets in India. CRISIL Ratings provides technical know-how to clients worldwide.

CRISIL Ratings is India's largest rating agency, having rated more than 24,541 debt instruments. CRISIL Ratings has a 70 per cent penetration in the domestic debt market.

The two main divisions under Crisil are:○ CRISIL LTD. ○ CRISIL INFRASTRUCTURES. There are three sections under Crisil ltd viz, Ratings, Research, Advisory.

Rating Methodology Different for different sectors such as; » Corporate/Manufacturing » Finance » Infrastructure » Structured Finance » Funds » Governance & Value Creation » Real Estate Developers/Project Rating » Maritime Grading » Microfinance Institutions Grading » SME Criteria for Small and Medium Enterprises

  

The level of secrecy is high Rating validity All information gathered is only from the company Companies are monitored even after its rated A company is rated only if its clear in all aspects

 ICRA was

set up by IFCI on 16th January

is in Alliance with ‘Moody's Investors Service’ and ICRA’s largest shareholder.

 ICRA Limited

It is a public limited company with an authorized share capital of Rs.10 crores, Rs. 5 crores is paid up.

ICRA’s major shareholders IFCI (26%), and the balance by UTI, LIC, GIC, PNB, Central Bank of India, Bank of Baroda, UCO Bank and banks (SBI).


Alliance with Moody’s Investor Services has given them Brand name and it provides high value Technical services.

It benefits ICRA’s in-house research capabilities and access to Moody’s global research base.

Core Competency  Dedicated teams for Monetary, Fiscal, Industry and Sector Research.

Fees are received in advance.

Challenges faced:
Authenticity and credibility of data. Fraud cannot be detected as its based on annual reports. Investigation is not possible. Difficulty in getting secondary data in case of small scale industries and family owned businesses. Fees and manpower rates are high.

Business model

Value Proposition
The services are offered in order to solve customer problems like unbiased independent assessment, comparisons, risk identification.  The products offered are the grading, advisory and ratings provided.  The source credibility and the brand name of the agencies are the values that the customers get.

Customers Relationship
The Investors, Issuers, intermediaries are the customers.  The CRA’s are customer centric and cater to their needs.  A level of secrecy is maintained.  The customers have an access to the management.

Value chain structure

CRISIL - market leader position with a 70% share. - research credibility. - brand name. - innovation. - employees.
ICRA - Global technical support. - Research base. - Brand name.

CARE - large number of well qualified and multi-faceted professionals from diverse backgrounds such as; financial analysts, economists, sector specialists, chartered accountants.

Position in value network

CRISIL- market leader, an S & P’s company , acquisition of IREVNA. ICRA- alliance with Moody’s which gives them a global edge. CARE- CARE is a founder member of Association of Credit Rating Agencies in Asia.

Competitive strategy

CARE- believes in independence in rating decisions and has an external rating committee that decides each rating.

CRISIL- uses innovation. Crisil's fees are also at a premium to that of other rating agencies such as ICRA and CARE.
ICRA- a strong research (center of excellence) base as a differentiator.

Revenue Generation
CRISIL  Amongst all its products the number of revenue-generating activities is quite high.  Crisil’s revenue segment are broadly classifieds in 3; Ratings, Advisory, Information Services.  Among these segments, ratings are most profitable.

ICRA  A significant portion of the revenues, around 54.13% is generated from the rating services offered.

Primarily linked to the issuance of debt securities in the Indian capital markets.

"Credit rating business" and its Industry Size in India

Difficult to gauge industry size in India as all companies with borrowings over Rs. 10 crores are to be rated.

Different process for different sector…

Yes there are different methodologies for different industries depending upon industry characteristics (cement and cotton yarn companies).

Acceptable standards to achieve positive ratings

Ratings are not model based and consider lot of qualitative factors. Hence, there cannot be a predetermined formula to improve ratings.

Challenges faced by the CR agencies in India

Now-a-days Credit Rating Agencies (CRAs) are required to rate companies from growth sectors like Life Insurance, Bio technology, IT/ITES etc apart from earlier rated mature sectors. Higher management risk.

Besides rating well-known listed entities, CRAs are now rating trading and partnership/proprietorship firms where there is less transparency in their accounts. With market for complex products evolving, CRA’s in India are exposed to different kinds of structures with varied complexities.

Apart from basic risks, legal implications are also significant.

Future of credit rating agencies in India

With developing secondary market securities, rating agencies will always have growing business. However, with banks to follow standardized approach in the medium term, ratings under Basel II may reduce as banks will use their internal ratings and not require rating from external agencies for bank facilities.

Effects of wrong credit ratings
  

Wrong credit rating will cause credit crunch. Many banks are closed due to credit crunch. Many lenders have been hit hard, because the crunch has resulted in increased difficulties in: Getting finance on the wholesale money market Increased cost costs relating to inter bank lending

1. 2.

Micro Finance Institutes

Providing credit, thrift and other financial services and products to the economically challenged to enable them to raise their income levels and living standards. Customers of microfinance institutions (MFIs) do not have access to banking services, and depend on informal sources (such as friends, relatives and money lenders) for their credit requirements.

MFIs fulfill the critical objective of providing financial services to the economically challenged; such services enable clients to meet their credit requirements, fulfill their entrepreneurial ambitions and enhance their economic status. To make this happen, CRISIL offers risk assessment (including MFI Grading) and diagnostic services to help MFIs and other constituents in the microfinance industry to measure, mitigate and manage their business and financial risks.

CRISIL Grading
 

CRISIL launched MFI grading in 2002. World’s first credit rating agency to develop a separate methodology and scale to assess MFIs. Since then, CRISIL has assessed around 150 MFIs and established itself as the leading rating agency in the Indian microfinance space.

In addition to MFI grading and risk assessment services, it rates MFIs’ bank facilities and securitization transactions.

It is India’s first rating agency to have rated bank loans of MFIs and securitization transactions involving microfinance loan receivables.


For MFIs- A MFI Grading is based on through analysis of your microfinance programme and the grading report from CRISIL therefore carries weight with donors, investors and lenders, and can help you access cost effective funds in a timely manner.

- The MFI would also receive a report from CRISIL, which would include rationale for the grading, summary of the performance across various parameters - Management, Institutional arrangement, Capital adequacy and asset quality, Resources, Operational Effectiveness and Scalability and Sustainability, summary of key financial and operational indicators.

- The report will not only be helpful in fund raising but also in identifying the weaknesses that the MFI needs to address.

For Banks- CRISIL's MFI Grading would help bankers to evaluate the functioning of the MFIs and NGOMFIs and increase their priority sector disbursements.

Process of MFI Grading

CRISIL has developed the microfinance grading to meet the requirements of the constituents of the sector - apex MFIs, banks, MFIs and social investors.
Hence the MFI Grading is not a credit rating and does not indicate the credit worthiness of an MFI (obligor). The MFI Grading cannot also be compared with the credit rating assigned to a debt instrument (fixed deposits, debentures, etc) of the same MFI.

Pros  People with good credit are at an advantage because their credit files will only enhance their ability to borrow.

Lenders have the advantage of being able to reward or punish people with their reports.

It helps to evaluate on the risk involved with various investment alternative. It helps the issuers of the debt instrument to price their issue correctly and to reach out to new investors. Makes it easier to raise funds for the rated firm.


Sometimes incorrect credit information is reported, or a consumer's identity is stolen. Wrong credit rating will affect the business and foreign people invested in our country.

 Entries

such as lawsuits, bankruptcies on a credit file are among the most serious.
Non disclosure of significant information.

Rating is not certificate of soundness.

www.crisil.com  www.icra.com  www.care.com  www.sebi.co.in  www.irda.co.in


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