CREDIT RATING
Meaning of Credit Rating
Credit rating refers to an expression of an opinion through symbols about the credit
worthiness of the issue of securities with regard to a debt instrument. It is the
assignment of a symbol of the current opinion of the rating agency on the relative
ability and willingness of the issuer of debt instrument to make timely repayment of
the interest and principal. Good rating helps the corporate borrowers to raise funds
at a cheaper rate.
In determining the rating, both qualitative and quantitative analysis is employed by
the credit rating agency. The judgment given is essentially qualitative in nature. It
should be noted that credit rating does not amount to a recommendation to
purchase, subscribe, and hold or sale a particular debt instrument.
Credit Rating Agency
1. CRISIL: Credit Rating and Information Service of India Limited is the
India’s first credit rating agency. It was established in 1987.
2. ICRA: Investment Information and Credit Rating Agency of India Ltd was
established in 1990.
3. CARE: Credit Analysis and Research Ltd was established in 1993.
Credit Rating Symbol
Separate sets of symbols are used for long, medium and short-term debt
instruments.
Long- term instruments include debentures, bonds etc of companies.
Medium-term instruments include public deposit and other medium duration
securities.
Short-term instruments include commercial papers and other type of short-term
securities.
Long-Term
Terminology CRISIL Ratings ICRA Ratings CARE Ratings
Safety of Return of
principal and interest
Highest AAA LAAA Case AAA
High AA L AA Case AA
Adequate A LA Case A
Moderate BBB L BBB Case BBB
Inadequate BB L BB Case BB
Risky B L B-Risky Case B- Risky
LC-Substantial Case C-Highly Risky
Risk Case D-Likely to
LD-Expected to Default
Default
Medium-Term
Terminology CRISIL Ratings ICRA Ratings CARE Ratings
Safety of Return of
principal and interest
Highest FAAA MAAA Case AAA
High FAA M AA Case AA
Adequate FA MA Case A
Inadequate FB MB Case BBB
Risk Prove FB MC Case BB
Default Expected FD MD Case B- Risky
Case C-Highly Risky
Case D-Likely to
Default
Short- Term
CRISIL: P1 to P5
ICRA: A1 to A5
CARE: PR1 to PR5
Credit Rating Process
Issuer Company Appoints a Rating
Agency
Rating Agreement is Entered into
Analytical team is Assigned the
Work of Rating
Meeting with Issuer
Collection of Data
Rating Exercise by the Analytical
team
l
Meeting with Issuer for Resolving
Questions
Analysis of New and Emerging
Facts
Preparation of Rating Profile
Notification of Rating Decision to
the Issuer
Communication of Rating Symbol to
Issuer
Acceptance
Formal Notification
Surveillance
Benefits to Investors
1.credit rating symbols provide a guidance for ascertaining the risk involved in the
issue.
2.it provides a better choice among available investment options.
3.it enables quick decisions and easy understanding of investment opportunities.
4.it inform investors about the financial strength of the issuer and the risks involved
along with its safety.
5.rating ensures a fair assessment of the credibility of the issuer company.
6.it relieves the investors from collecting information about the issuer or the
security.
Benefits of Issuers
1.good rating enhances the goodwill and reputation of the issuer company.
2.highly rated instruments carry lesser returns. It , thus reduces the effective cost of
borrowings for the issuer company.
3.rating acts as a marketing device.
4.the issue is exposed to a wider investor base.
