Hello Everyone. This topic is in the news more often and which is why I thought to publish another article today itself.
Credit
It is a loan, allowing you to receive goods and services now and pay for them later
It is an agreement that the money borrowed will be paid back
It is a debt, it is not income
It comes with fees; interest and other charges
Credit Rating - Credit Rating is an opinion on the relative degree of safety regarding debt obligations being met on time.
It estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history.
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.
However, in recent years, credit ratings have also been used to adjust insurance premiums, and determine employment eligibility
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
It is an opinion, not a recommendation
Assigned by a committee of experts in finance, management & economics, after a detailed and in-depth discussion
Credit Score
A credit score is a numerical expression based on a statistical, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.
Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.
Its not limited to banks. Other organizations, such as mobile phone companies, insurance companies and government departments employ the same techniques.
Credit Rating Agency
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations themselves.
In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.
A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.
The value of such ratings has been widely questioned after the 2008 financial crisis.
Some Agencies
Agencies that assign credit ratings for corporations include:
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
China Credit Information Service (China)
Fitch Ratings (U.S.)
Japan Credit Rating Agency (Japan)
Moody's Investors Service (U.S.)
Standard & Poor's (U.S.)
Rating Agency Malaysia (Malaysia)
Egan-Jones Rating Company (U.S.)
Uses of ratingsCredit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.
For investors, credit rating agencies increase the range of investment alternatives and easy-to-use measurements of relative credit risk; thus g increasing the efficiency of the market, lowering costs for both borrowers and lenders and in turn increases the total supply of risk capital in the economy, leading to stronger growth.
Credit Rating Types:
1) Personal Credit Ratings
2) Corporate Credit Ratings
3) Sovereign Credit Ratings
Personal Credit Rating
An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.
The factors which may influence a person's credit rating are:-
-ability to pay a loan
-interest
-amount of credit used
-saving patterns
-spending patterns
-debt
In different parts of the world different personal credit rating systems exist.
In the United States, an individual's credit history is compiled and maintained by companies called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the available credit data.
A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score.
The term FICO is a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.
In Canada, the most common ratings are the North American Standard Account Ratings, also known as the "R" ratings, which have a range between R0 and R9.
R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt. Very few people maintain the R0 status for long, as there are similar mechanisms in place in Canada that would allow for monthly updates of one's credit rating.
Corporate Credit Rating
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as A.M.Best, Standar & Poor’s, Moody’s or Fitch Ratings and have letter designations such as AAA, B, CC.
The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA, A, BBB, BB, B, CCC, CC, C, D.
Anything lower than a BBB rating is considered a speculative or junk bond.
The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
A.M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S.
Criticism:
Until the early 1970s, bond credit ratings agencies were paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their particular offerings.
Starting in the early 1970s, the "Big Three" ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings, which has led to charges that these ratings agencies can no longer always be impartial when issuing ratings for those securities issuers.
Securities issuers have been accused of "shopping" for the best ratings from these three ratings agencies, in order to attract investors, until at least one of the agencies delivers favorable ratings.
This arrangement has been cited as one of the primary causes of the subprime crisis (which began in 2007), when some securities, particularly mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) rated highly by the credit ratings agencies, and thus heavily invested in by many organizations and individuals, were rapidly and vastly devalued due to defaults, and fear of defaults, on some of the individual components of those securities, such as home loans and credit card accounts.
Sovereign Credit Rating
A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country.
The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.
It takes political risk into account.
Ratings are further broken down into components including political risk, economic risk.
Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).
Euro-money's bi-annual country risk index Country risk survey monitors the political and economic stability of 185 sovereign countries.
Credit Rating Agencies in India
Credit Rating Information Services of India Limited (CRISIL)
Investment Information and Credit Rating Agency of India (ICRA)
Credit Analysis & Research Limited (CARE)
Duff & Phelps Credit Rating India Private Ltd. (DCR India)
ONICRA Credit Rating Agency of India Ltd.
Credit Rating information Services of India ltd. (CRISIL)
First and the largest credit rating agency in India
4th Largest Rating Agency in the World
Affiliation with Standard & Poor’s (USA)
The first to rate a state government in India – Gujarat
The first municipal bond rating in Asia – Ahmedabad
Credit assessment of all the major state governments and more than 100 urban local bodies in the country. This also includes:
-5 municipal corporations
-2 Water and Sewerage Service providers
India's transformation into a market-led economy greatly increased its need for capital, and required extensive reforms and institution building. Accordingly, we diversified into the infrastructure advisory and business research domains.
CRISIL offers domestic and international customers a unique combination of local insights and global perspectives, delivering independent information, opinions and solutions that help them make better informed business and investment decisions, improve the efficiency of markets and market participants, and help shape infrastructure policy and projects. Its integrated range of capabilities includes credit ratings; research on India's economy ,industries and companies, risk management and infrastructure advisory services more .
CRISIL's majority shareholder is Standard & Poor's, the world's foremost provider of independent credit ratings, indices, risk evaluation.
Rating Process
Multi-member rating teams
Multi-tier rating process
All rating decisions taken by a rating committee comprising experienced, competent and reputed professionals
Organisation-wide internal transparency, with each stage of the rating process for all ratings - including the rating committee's discussions - being open to all analytical staff in CRISIL's rating division
Rating methodologies and criteria that are clearly spelt out and published, and are consistently applied
CRISIL keeps information obtained for the rating exercise confidential, by enforcing appropriate process safeguards; for instance, all CRISIL employees are required to sign a confidentiality agreement. CRISIL does not disclose confidential information that it has obtained for the purpose of credit rating to anyone (other than to market regulators or law enforcement authorities, if required).
Credit Analysis & Research Ltd. (CARE)
Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices.
CARE Ratings has completed over 5307 rating assignments having aggregate value of about Rs.14801 billion (as at December 2008), since its inception in April 1993.
CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc
Methodology
CARE undertakes rating exercise based on:-
information provided by the company
In-house database and data from other sources that CARE considers reliable. CARE does not undertake unsolicited ratings.
The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet debt obligations in adverse conditions.
The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first deals with the operational characteristics and the second with the financial characteristics.
Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative and qualitative factors affecting the credit quality of the issuer.
The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee.
Regulation
Who regulates a rating agency?
The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.
Who pays for a credit rating?
Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating.
Once a rating is assigned and published, CRISIL keeps the rating under surveillance until the instrument is fully repaid. The surveillance process may result in rating changes from time to time.
Credit
It is a loan, allowing you to receive goods and services now and pay for them later
It is an agreement that the money borrowed will be paid back
It is a debt, it is not income
It comes with fees; interest and other charges
Credit Rating - Credit Rating is an opinion on the relative degree of safety regarding debt obligations being met on time.
It estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history.
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.
However, in recent years, credit ratings have also been used to adjust insurance premiums, and determine employment eligibility
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
It is an opinion, not a recommendation
Assigned by a committee of experts in finance, management & economics, after a detailed and in-depth discussion
Credit Score
A credit score is a numerical expression based on a statistical, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.
Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.
Its not limited to banks. Other organizations, such as mobile phone companies, insurance companies and government departments employ the same techniques.
Credit Rating Agency
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations themselves.
In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.
A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.
The value of such ratings has been widely questioned after the 2008 financial crisis.
Some Agencies
Agencies that assign credit ratings for corporations include:
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
China Credit Information Service (China)
Fitch Ratings (U.S.)
Japan Credit Rating Agency (Japan)
Moody's Investors Service (U.S.)
Standard & Poor's (U.S.)
Rating Agency Malaysia (Malaysia)
Egan-Jones Rating Company (U.S.)
Uses of ratingsCredit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.
For investors, credit rating agencies increase the range of investment alternatives and easy-to-use measurements of relative credit risk; thus g increasing the efficiency of the market, lowering costs for both borrowers and lenders and in turn increases the total supply of risk capital in the economy, leading to stronger growth.
Credit Rating Types:
1) Personal Credit Ratings
2) Corporate Credit Ratings
3) Sovereign Credit Ratings
Personal Credit Rating
An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.
The factors which may influence a person's credit rating are:-
-ability to pay a loan
-interest
-amount of credit used
-saving patterns
-spending patterns
-debt
In different parts of the world different personal credit rating systems exist.
In the United States, an individual's credit history is compiled and maintained by companies called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the available credit data.
A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score.
The term FICO is a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.
In Canada, the most common ratings are the North American Standard Account Ratings, also known as the "R" ratings, which have a range between R0 and R9.
R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt. Very few people maintain the R0 status for long, as there are similar mechanisms in place in Canada that would allow for monthly updates of one's credit rating.
Corporate Credit Rating
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as A.M.Best, Standar & Poor’s, Moody’s or Fitch Ratings and have letter designations such as AAA, B, CC.
The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA, A, BBB, BB, B, CCC, CC, C, D.
Anything lower than a BBB rating is considered a speculative or junk bond.
The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
A.M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S.
Criticism:
Until the early 1970s, bond credit ratings agencies were paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their particular offerings.
Starting in the early 1970s, the "Big Three" ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings, which has led to charges that these ratings agencies can no longer always be impartial when issuing ratings for those securities issuers.
Securities issuers have been accused of "shopping" for the best ratings from these three ratings agencies, in order to attract investors, until at least one of the agencies delivers favorable ratings.
This arrangement has been cited as one of the primary causes of the subprime crisis (which began in 2007), when some securities, particularly mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) rated highly by the credit ratings agencies, and thus heavily invested in by many organizations and individuals, were rapidly and vastly devalued due to defaults, and fear of defaults, on some of the individual components of those securities, such as home loans and credit card accounts.
Sovereign Credit Rating
A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country.
The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.
It takes political risk into account.
Ratings are further broken down into components including political risk, economic risk.
Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).
Euro-money's bi-annual country risk index Country risk survey monitors the political and economic stability of 185 sovereign countries.
Credit Rating Agencies in India
Credit Rating Information Services of India Limited (CRISIL)
Investment Information and Credit Rating Agency of India (ICRA)
Credit Analysis & Research Limited (CARE)
Duff & Phelps Credit Rating India Private Ltd. (DCR India)
ONICRA Credit Rating Agency of India Ltd.
Credit Rating information Services of India ltd. (CRISIL)
First and the largest credit rating agency in India
4th Largest Rating Agency in the World
Affiliation with Standard & Poor’s (USA)
The first to rate a state government in India – Gujarat
The first municipal bond rating in Asia – Ahmedabad
Credit assessment of all the major state governments and more than 100 urban local bodies in the country. This also includes:
-5 municipal corporations
-2 Water and Sewerage Service providers
India's transformation into a market-led economy greatly increased its need for capital, and required extensive reforms and institution building. Accordingly, we diversified into the infrastructure advisory and business research domains.
CRISIL offers domestic and international customers a unique combination of local insights and global perspectives, delivering independent information, opinions and solutions that help them make better informed business and investment decisions, improve the efficiency of markets and market participants, and help shape infrastructure policy and projects. Its integrated range of capabilities includes credit ratings; research on India's economy ,industries and companies, risk management and infrastructure advisory services more .
CRISIL's majority shareholder is Standard & Poor's, the world's foremost provider of independent credit ratings, indices, risk evaluation.
Rating Process
Multi-member rating teams
Multi-tier rating process
All rating decisions taken by a rating committee comprising experienced, competent and reputed professionals
Organisation-wide internal transparency, with each stage of the rating process for all ratings - including the rating committee's discussions - being open to all analytical staff in CRISIL's rating division
Rating methodologies and criteria that are clearly spelt out and published, and are consistently applied
CRISIL keeps information obtained for the rating exercise confidential, by enforcing appropriate process safeguards; for instance, all CRISIL employees are required to sign a confidentiality agreement. CRISIL does not disclose confidential information that it has obtained for the purpose of credit rating to anyone (other than to market regulators or law enforcement authorities, if required).
Credit Analysis & Research Ltd. (CARE)
Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices.
CARE Ratings has completed over 5307 rating assignments having aggregate value of about Rs.14801 billion (as at December 2008), since its inception in April 1993.
CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc
Methodology
CARE undertakes rating exercise based on:-
information provided by the company
In-house database and data from other sources that CARE considers reliable. CARE does not undertake unsolicited ratings.
The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet debt obligations in adverse conditions.
The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first deals with the operational characteristics and the second with the financial characteristics.
Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative and qualitative factors affecting the credit quality of the issuer.
The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee.
Regulation
Who regulates a rating agency?
The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.
Who pays for a credit rating?
Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating.
Once a rating is assigned and published, CRISIL keeps the rating under surveillance until the instrument is fully repaid. The surveillance process may result in rating changes from time to time.
Comments
Post a Comment