Tuesday, February 17, 2015

Credit Rating Agencies

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Lending is the riskiest service for a bank. Because if the borrower fails to pay back the loan amount, then the bank will face the loss, even if supported by collateral (will give an example later).

Therefore, before providing loans to corporate or governments or individuals, banks need to verify the credit worthiness of them, so that risk of default could be minimized. This is same as grading the borrowers.

Credit Rating Agencies
Credit Rating Agencies (CRA) are those institutions / companies who assign credit ratings to corporate, or governments (they generally do not rate individuals), according to their ability to pay back the debt or loans.

A CRA generally rates the credit worthiness of issuers of debt instruments (including government bonds, corporate bonds, CDs, stocks, collateralized securities, etc.)

International CRAs
The Big Three credit rating agencies (international) are -

  • Standards & Poor's (S&P)
  • Moody's
  • Fitch Group

Indian CRAs
Indian credit rating agencies registered with SEBI are -

  • CRISIL Ltd.
  • Fitch Ratings India Pvt. Ltd.
  • ICRA Ltd.
  • Credit Analysis & Research Ltd. (CARE)
  • Brickwork Ratings India Pvt. Ltd.
  • SME Rating Agency of India Ltd. (SMERA), etc.

CRISIL has rated 30,000 debt instruments, covering the entire debt market. The debt obligations rates include -
  • Non-convertible debentures / bonds / preference shares
  • Commercial papers / Certificate of Deposits / Short-term debt
  • Fixed Deposits
  • Loans
  • Structured Debt
CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex constituent companies and 39 of the NSE constituent companies, accounting for 80 % of the equity market capitalization. 

CRISIL rates a wide range of entities, including -
  • Industrial companies
  • Banks
  • Non-banking financial companies (NBFCs)
  • Infrastructure entities
  • Microfinance institutions
  • Insurance companies
  • Mutual funds (MFs)
  • State governments
  • Urban local bodies

World countries ratings
Standards & Poor's (S&P) rates the countries in 7 major categories - AAA, AA, A, BBB, BB, B, CCC. 
Foreign rating of India by S&P is - BBB

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