More Related Content
Similar to Credit rating (20)
Credit rating
- 1. Credit Rating BATCH: 2018-2020. BRANCH: MBA(4TH SEM) SUBMITTED TO: MS. ALKA SOOD SUBMITTED BY: RIDHI YADAV BUPIN: 18PBA010
- 2. Introduction Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past. Usually, is in the form of a detailed report based on the financial history of borrowing or lending and credit worthiness of the entity or the person obtained from the statements of its assets and liabilities with an aim to determine their ability to meet the debt obligations. It helps in assessment of the solvency of the particular entity. These ratings based on detailed analysis are published by various credit rating agencies like Standard & Poor's, Moody's Investors Service, and ICRA, to name a few.
- 3. Regulatory framework The regulation of credit rating agencies has become the point of considerationn since the financial crisis hit the financial markets in 2007. The regulatory efforts mark a turning point in the credit rating industies.Agencies in India and focuses on the role of various regulators. Credit rating is entirely a new concept in the history of Indian corporate sector and is intended for investors’ guidance and protection. It came into limelight only when Securities Exchange Board of India (SEBI) made credit rating compulsory for the Indian companies. The Securities and Exchange Board of India (Credit Rating Agencies regulationsns, 1999 empower SEBI to regulate credit rating agencies operating in India Thus, SEBI regulates the credit rating agencies under the SEBI (Credit Rating Agencies regulationsns, 1999 of the Securities and Exchange Board of India Act, 1992. In fact, SEBI Was one of the first few regulators, globally, to put in place an effective and comprehensive regulation for Credit Rating Agencies. SEBI regulates the functioning of credit rating agencies in order to protect the interest of investors and to make the system more helpful to them. Credit rating agencies are amongst the very few marke intermediariesies for which such detailed operating guidelines have been prescribe industries regulations. The regulation of credit rating agencies has become the point of consideration since the financial crisis hit the financial markets in 2007. The supervisoryry frameworks for credit rating agencies have been established recently and these regulatory efforts mark a turning point in the credit rating industry.
- 4. In addition to SEBI, the following regulatory agencies are involved in the regulatory mechanism of CRA’s in India: a. Reserve Bank of India (RBI) b. Insurance Regulatory and Development Authority (IRDA) c. Pension Fund Regulatory and Development Authority (PFRDA) The panel appointed by GOI which includes the officials from the finance ministry along with sector regulators like RBI, SEBI and IRDA, has taken the view very recently that SEBI would remain lead regulator for CRAs in addition to the above three. The panel suggested that while SEBI will set the minimum behavioral standards, the banking, insurance and pension regulators can impose discipline on CRAs for their respective sectors, depending on their requirements and capacities, the official said. Thus, the RBI, IRDA and the Pension Fund Regulatory Development Authority (PFRDA) can even accredit raters for meeting their rating requirements. Though the SEBI has introduced so many amendments in the Securities and Thoughge Board of (Credit Rating Agencies) Regulations, 1999, but still a strong regulatory mechanism could not be developed.
- 5. Key Regulatory Issues Despite maintaining a Chinese wall between advisory services and rating services of Credit Rating Agencies, but criticism persists as rating and non-rating entities have common ownership and top management. Therefore it is a key regulatory issue for bringing transparency in the functioning of CRA’s especially with reference to investor’s protection. CRAs in general maintain that while non rating services do pose conflict of interest challenges on one hand, revenues from other services reduce dependence on rating service revenues thereby enabling them to objectivity and independence. The CRA’s regulations cover issues with respect to confidentiality of information and disclosure with respect to the rationale of the rating being assigned. It considers how Indian law and regulation address the key regulatory issues concerning CRAs that avee emerged. These include: (a) Appropriate level of external oversight (b) Quality of the ratings process (c) Monitoring and updating of ratings (d) Conflicts of interest (e) Disclosure issues (f) Adequacy of organizational resources (g) Over-reliance on credit ratings by investors.
- 6. Credit Rating Agencies in India How Credit Rating Agencies Work Credit rating agencies assign ratings to an organization or an entity. The entities that are rated by credit rating agencies comprise companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies. Credit rating agencies take into consideration several factors like the financial statements, level and type of debt, lending and borrowing history, ability to repay the debt, and the past debts of the entity before rating their credit. Once a credit rating agency rates the entities, it provides additional inputs to the investor following which the investor analyses and takes a sound investment decision. Poor credit rating indicates that the entity is at a high risk of defaulting. The credit ratings that are given to the entities serve as a benchmark for financial market regulations. Credit ratings are published by agencies like Moody’s Investors Service and Standard and Poor’s (S&P) based on detailed analysis.
- 7. Some of the Top Credit Rating Agencies in India are: Credit Rating Information Services of India Limited (CRISIL) ICRA Limited Credit Analysis and Research limited (CARE) Brickwork Ratings (BWR) India Rating and Research Pvt. Ltd. Small and Medium Enterprises Rating Agency of India (SMERA)
- 8. Credit Rating process 1. Receipt of request from the company 2. Assignment to analytical team 3. Collecting information and conducting preliminary analysi 4. site vists and interaction with management 5. Presentation of findings 6. Communication of decision to the issuer 7. Dissemination to the public 8. Continous monitoring
- 9. Methodology Information is collected and then analysed by team professional in an agency. If necessary meetings with top management suppliers and dealers and a visit to the plants of proposed sites are arranged to collect additional data. These professionals submit their recommendations to the rating committee. Committee discusses this report and then assign rating. Rating assigned is then notified tothe issuer and only on his acceptance, rating is published. Assures confidentiality of information. Then once the issuer decides to use and publish the rating, agency has to continuously monitor it over the entire life of instrument, called surveillance.
- 10. Rating symbols AAA Highest creditworthiness supported by many excellent factors. AA Very high creditworthiness supported by some excellent factors. A High creditworthiness supported by a few excellent factors. BBB Creditworthiness is sufficient, though some factors require attention in times of major environmental changes. BB Creditworthiness is sufficient for the time being, though some factors require due attention in times of environmental changes. B Creditworthiness is questionable and some factors require constant attention. CCC Creditworthiness is highly questionable and a financial obligation of an issuer is likely to default. CC All of the financial obligations of an issuer are likely to default. D R&I believes that all of the financial obligations of an issuer are in default.
- 11. Thank You