* A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default. * Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. * Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. * A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.
In India there are 5 credit rating agencies. First, Credit Rating InformationServices Of India Limited (CRISIL) set up by ICICI AND UTI in 1988. Secondly InvestmentInformation and Credit Rating Agency of India limited (ICRA) set up by IFCI in 1991. Thirdly,Credit Analysis and Research Limited (CARE) promoted by IDBI in 1993 in association withfinancial institutions. Fourthly, Duff and Phelps Credit Rating India Private Limited (DCR India) for rating non-banking financial companies for fixed deposits
TYPES OF CREDIT RATINGS
Two type of credit rating has been noticed :
1) Traditional debt rating (TDR)
2) Private placement rating (PPR)
Traditional debt ratings (TDR):
Traditional debt ratings are a symbolic prediction about the debtsecurity probability resulting in a default in timely payment of interest and principal. In other words,traditional debt rating reflects the current opinion of a credit rating agency of the relative capabilityand willingness of an issuer of a debt instrument to service the debt obligation as per the term of contract .Traditional debt rating is specific to specific to a debt instrument in term of credit risk associated with such instrument .Traditional debt rating enable an investor to establish a link between risk and return and provide a symbolic yardstick to identify the risk level associated withthe instrument and the return it offers to match with his preferences with expectations
Private placement rating (PPR):
Privately rating is newly introduced credit rating system finding in the literature generated by standard & poor on credit rating , private placement rating is not much different to traditional debt rating but it goes one step ahead to traditional debt rating ,ie. Apart fromevaluating a risk of default in timely payment it also evaluates the likelihood of loss to an investor in the vent of default according on the investment . Never the less, either or both of the two types of rating can be used for new issues of debt securitiesor structured obligations.
Rating agencies use symbols such as AAA, AA, BBB, B, C, D, to convey the safetygrade to the investor. Ratings are classified into three grades: High investment grades, investmentgrades and speculative grades. In all ratings is classified into 14 or 15 categories. Signs “+” or “-”are used to show the certainty of timely payment. The suffix + or – may be used to indicate thecomparative position of the instrument within the group covered by the symbol. Thus FAA- lies onenotch above FA+. To provide finer gradations, rating industry attach + or – to their ratings. Therating symbols for different instruments of the same company need not necessarily be the same.
High Investment Grades AAA: - Triple...