This document provides an overview of credit ratings and rating agencies in India. It discusses the four main types of investors, the role of rating agencies in providing guidance to investors with money, and defines what a credit rating is. It also summarizes the key factors considered in credit ratings like management quality, earnings prospects, financial strength, and risk. Rating agencies ensure dependability through independence and collective judgment. The document provides examples of rating scales and factors considered for bank ratings and equity assessments.

1. Credit Rating
Dr. Vivek Sharma
Khandelwal College of
Management Science &
Technology,
Bareilly

2. Introduction
There are four types of investors in the market.
 1. Investors having money but not the
investment skill;
 2. Investors having money and investment
skill both;
 3. Investors having investment skill but less
money; and
 4. Investors possessing less money and
poor investment skill.

3. Contd…
 These who do not have enough of
money but are equipped with enough of skill
there are many individuals and institutions to
help them by procuring funds as per need.
But those who have money to invest (either
from their own resources or from borrowed
ones) need guidance and advice with expert
opinion as to where to invest? What forms
safer outlet both from income and get back
point of view, Credit Rating Agencies(CRAs)
serve this cause.

4. What Credit Rating is?
Credit Rating is a simple and easy to
understand symbolic indicator of the
opinion of a credit rating agency about
the risk involved in a borrowing
program of an issuer with reference to
the capability of the issuer to repay the
debt as per terms of issue. This is
neither a general purpose
evaluation of the company nor a
recommendation to buy, hold or
sell a debt instrument.

5. Definition
 "A rating is an opinion on the future ability
and legal obligation of the issuer to make
timely payments of the principal and
interest on a specific fixed income security.
The rating measures the probability that the
issuer will default on the security over its
life, which depending on the instrument,
may be a matter of 30 days to 30 years or
more. In addition long term rating
incorporate an assessment of the expected
monetary loss should default occur,“
Moody's

6. Credit Rating - Acronym
C- Credit Worthiness
R- Risk Analysis
E- Equity Assessment
D- Dividend and Earning Prospects
I - Intentions of Promoters
T- Transparency of Organization

7. Credit Rating - Acronym
R- Relative Strength
A- Authentic Information
T- Technical Analysis
I - Industrial Climate of Profile
N- Network Assessment
G- Guidance to Investors, Companies,
and the Government

8. Credit Rating Agency- Defined
"Credit rating agency" is a commercial concern
engaged in the business of credit rating of
any debt obligation or of any project or
program requiring finance, whether in the
form of debt or otherwise, and includes
credit rating of any financial obligation,
instrument or security, which has the
purpose of providing a potential investor or
any other person any information pertaining
to the relative safety to timely payment of
interest or principal.

9. Credit Rating Agencies in India
 CRISIL Limited
 ICRA Limited
 Credit Analysis & Research Ltd.
(CARE)
 Fitch Ratings India Private Ltd.

10. Input - Analysis – Output
Chart
INPUT ANALYSIS OUTPUT
Information on :
Economic/
Political System Rating
Industry Analysis Rating
Local Business - Exercise
Accounting &
Financial Market

11. How does a rating help an Investor?
The credit ratings provide an
investor with critical information
to enable him to take an informed
investment decision based on his
risk-return preferences. These
also help investors to select the
appropriate investment
opportunities from a large range
of options available.

12. How are credit ratings done?
In general the ratings are based on an
in-depth study of the industry as also
an evaluation of the strengths and
weaknesses of the company.
Some of the factors are :-
 inherent protective factors
 marketing strategies
 competitive edge
 level of technological development

13. Contd….
 operational efficiency,
 competence and effectiveness of
management,
 hedging of risks,
 cash flow trends and potential,
 liquidity,
 financial flexibility,
 government policies,
 past record of debt servicing,etc.

14. How long does a rating remain
valid?
Once a rating has been accepted by the
company, CRAs continuously monitor
the corporate and the rating is
monitored till the life of the
instrument. This process is known as
surveillance. During the surveillance
period, all changes affecting the
company are taken into account and
the rating, if necessary, is changed,
upwards or downwards. In other
words, a rating is valid during the life
of the instrument unless it is changed.

15. What does the suffix + or - with
the rating mean?
 The suffix + or - may be used
with the rating symbol to indicate
the comparative position of the
instrument within the group
covered by the symbol. Thus
MAA- lies one notch above MA+.

16. How does CRAs ensure
dependability of ratings?
 The CRAs maintain absolute
independence from market participants
to provide unbiased opinions. The
ratings are a result of collective
judgement of committee members.
The CRA's in-house research and data
base ensure that opinions are
supported by objective benchmarks
and peer comparison.

17. Factors considered while doing
an Equity Grading/Assessment?
The factors are:-
 management quality,
 industry outlook,
 corporate operations and
competitive character,
 financial strength (both past and
future).

18. Contd…
In other words, all relevant factors
affecting the corporates' earnings
prospects and inherent risks are
looked into. Grades are comments
on the fundamentals and do not
forecast the future market price
or comment upon the compliance
or violation of statutory guidelines
relates to issues.

19. How does the CRAs ensure dependability
of Equity Grades / Assessment?
CRAs maintain absolute
independence from market
participants to provide unbiased
opinions as it does not buy or sell
equity. The Gradings are a result
of deliberations of the committee
members. Benchmarks set up by
CRA's in-house research ensure
that gradings are consistent.

20. How does equity grading help
the investors?
Equity Grading gives investors
timely access to independent,
unbiased and dependable opinions
on a company's fundamental
strengths and weaknesses in form
of the earnings prospects and the
associated risks and, therefore,
help investors design their
portfolios by choosing investment
options according to their risk and
return preferences.

21. An example of an Equity Grade
The equity grades range from ER1A to
ER6C. To illustrate, an equity grade of
ER3B indicates Good Earnings
Prospects: Moderate Risk-Indicated
fundamentally on above average
position. The level, growth and quality
of earnings over the medium term are
of a high grade. However, changes in
business/economic circumstances, as
may be visualised, may moderately
impair the likely earnings and
underlying fundamentals.

22. Rating – Banks & FIs
CRAMEL model is used by the rating
agencies, comprising of: -
C = Capital Adequacy
R = Resource Raising Ability
A = Asset Quality
M = Management Quality and System
Evaluation
E = Earning Potential and Prospects.
L = Liquidity / Asset - Liability
Management

23. System for Rating
Management Growth Potential Disclosure/ Total
Stability [45]
Ability [20] [25] Reputation [10] [100]
・Asset for ・Sales Growth ・History ・Degree of
Collateral ・Profit Growth ・Net Worth Disclosure
COMPANY ・Attitude ・Marketability ・Settlement ・Public
ANALYSIS ・Experience ・Collateral Reputation 64
・Partners
12 15 30 7
Points

24. Explanation
A. NO CAUTION SHOULD BE NEEDED 80 - 100
B. NO CAUTION SHOULD BE NEEDED AT 65 - 79
PRESENT
C. MORE OR LESS CARE MAY BE NEEDED 50 - 64
D. CAUTION SHOULD BE RECOMMENDED 30 - 49
E. CAUTION SHOULD BE NEEDED 0 - 29
(all points are examples)

25. Thank You.