Credit Rating

Topics: Standard & Poor's, Credit rating, Credit rating agency Pages: 7 (1443 words) Published: February 19, 2013
Credit Rating (CR) as financial service, has come a long way, since John Moody first introduced the concept 1909. In India it started in 1988. Credit rating is has been used to rate debt instrument viz. Fixed Deposit, Commercial Paper Credit rating is a technique of credit risk valuation for the corporate debt instruments reflecting borrower’s expected capability and inclination to pay interest and principal in a timely manner. * In evaluation both qualitative and quantitative criteria are applied. * It involves past performance as an assessment of its future prospects and entails judgment of the company’s competitive position, operating efficiency, management evaluation, accounting quality, legal position, earnings, cash flow adequacy, financial flexibility, the quality of the product etc. CREDIT RATINGS: -

An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities * Rating is a symbolic indicator of the current opinion on the relative capability of timely servicing of the debts and obligations. * Lower rating does not mean lesser funds available rather it suggests higher risk level. * Credit rating essentially establishes a link between risk and return. * A rating is valid for the lifetime of the debt instrument subject to continuous surveillance and depending upon the performance of the issuer, it may be retained, placed under watch, upgraded or downgraded. NEED FOR CREDIT RATING

* It is necessary in view of the growing number of cases of defaults in payment of interest and repayment of principal sum borrowed by way of fixed deposits, issue of debentures or preference shares or commercial papers. * Maintenance of investors’ confidence, since defaults shatter the confidence of investors in corporate instruments. * Protect the interest of investors who can not into merits of the debt instruments of a company. * Motivate savers to invest in industry and trade.

The main objective is to provide superior and low cost information to investors for taking a decision regarding risk-return trade off, but it also helps to market participants in the following ways; * Improves a healthy discipline on borrowers,

* Lends greater credence to financial and other representations, * Facilitates formulation of public guidelines on institutional investment, * Helps merchant bankers, brokers, regulatory authorities, etc., in discharging their functions related to debt issues, * Encourages greater information disclosure, better accounting standards, and improved financial information (helps in investors protection), * May reduce interest costs for highly rated companies,

* Acts as a marketing tool
* Superior information
* Low cost information
* Basis for proper risk, return & Trade off
* Healthy discipline on corporate borrowers
* Formulation of public policy guidelines on Institutional investment BENEFITS: -
1. Benefits to Investors
* Safeguard against bankruptcy
* Recognition of risk
* Credibility of issuer
* Easy understandability of investment proposal
* Saving of resource
* Independent of investment decision
* Choice of investments
* Benefits of rating surveillance
2. Benefits of Rating to Company
* Lower cost of borrowing
* Wider audience for borrowing
* Rating as marketing tool
* Reduction of cost in public issues
* Motivation for growth
* Unknown issuer recognition
* Benefits to brokers and financial intermediaries
3. For Brokers and financial intermediaries
* Saves time, money, energy, and manpower in convincing their clients about investments. * Less effort in studying company’s credit position to convince their clients. * Easy to select profitable investment security

* Helps to...
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