Meaning of credit rating
When security is issued, the determination of what will be the value of that security at present from the date is called a credit rating. When security is issued, doubt arises in the mind of the investor regarding its timely repayment and whether the issuing institution will be able to pay interest and principal on time or not? Through credit assessment, the investor gets confidence that in which security it would be appropriate to invest money. Therefore, to assure its solvency, the issuing institution gets the security rated by a specialized and recognized institution, this rating is done by solvency experts on the basis of the creditworthiness of the issuing institution. This 'grade of credit' determination is called a credit rating. This rating is a measure of the quality of credit. This rating is based on current conditions in relation to the debt security and not the rating of the issuer. These rating conditions keep on changing and it keeps on getting higher or lower. Ratings do not constitute a recommendation to invest or not to invest. It is merely an opinion based on the creditworthiness, solvency, etc. of the issuing institution while influencing the investor to a substantial extent. In simple words, Credit Rating is a belief that is given for a credit instrument. Expresses the 'solvency' determined in relation to the price.
types of credit rating
There are the following types of credit rating-
(1) Debentures and Bonds Rating - This rating is done only on debentures and bonds, examples of such bonds are IDBI, Flexible Bonds, and ICICI Safety Bonds.
(2) Equity Rating - This format of rating equity shares issued by the company is not yet prevalent in India. Government companies discussed this from February-March, 2004
(3) Fixed deposit rating- It is mandatory for companies and financial institutions to get a rating done for obtaining fixed deposits from the public. Rating of fixed deposits has been made mandatory.
(4) Rating of Commercial Papers- CPs are a new popular means of obtaining short-term funds, which started being used in January 1990. CPs are required to have a minimum P2 rating of CRISIL or a minimum A2+ rating of ICRA for issuance.
(5) Credit rating of debt security- In India, the rating of debt security is done and not the rating of the borrower. Although the creditworthiness and reputation of the borrower are taken into account while determining the rating of the debt security, the rating of the borrower as a separate entity is not done.
(6) Rating of the federal government - Rating of the central or state government as a separate and integral unit comes under this form. This type of rating is needed when a country requires large foreign investments or loans from international institutions.
7) Personal Rating - Under this rating of personal creditworthiness of the borrower is done, such rating is done in case of durable home appliances available on hire purchase method and home loan. This rating is not done by any agency but is done by the staff of the lender on the basis of prescribed standards.
The important topics of credit assessment can be clarified as follows-
(1) Investment and Speculative Grades - Securities that have a rating lower than Standard and Poor's to BBB or Moody's to Baa are called non-investment grade or speculative grade or bad bonds. Rating agencies do not recommend rating securities as to which securities an investor should or should not invest in.
(2) Being under surveillance - The credit ratings published by them remain under close surveillance during the life of the securities. This monitoring can be on a quarterly, half-yearly, or yearly basis. A formal and comprehensive written review is conducted at least once a year but is reviewed immediately when a specific issue arises before the industry or company. If appropriate, the rating agencies may change the rating, depending on the likely impact of changing circumstances on the issuer's debt service capabilities.
The following are the factors affecting credit rating-
(1) Cash flow sufficiency- It is related to the ability of the cash flows to meet all the cash requirements of the business internally. It is a measure of the convertibility and lag of future cash flows relative to debt service obligations and other commitments. It measures cash flows against changes in raw material costs and selling prices.
(2) Possibility of stability in cash flow- What will be the possibility of stability of cash flow in the future, this element affects the credit rating to a great extent, because if there is no stability in cash flow in the future, it will not be in the interest of the investors. Will happen.
(3) The risk of the industry is assessed on the basis of factors such as business cycle, earnings fluctuations, any prospects, demand-supply forecasts, entry barriers, degree of competition, and nature and degree of control.
(4) Company's industry and market position - The company's sales position in its key areas and ability to maintain or increase market share historical background of its market position, (swot analysis) strength and position of bonds, price leadership, and distribution and marketing strengths /weaknesses, etc. are reviewed simultaneously.
(5) Amount and nature of unpaid loans- Outstanding loans and their nature also have an important role in affecting credit rating. The credit rating is done by the credit agencies keeping in mind the factor of whether the outstanding loans are short-term or medium-term.
(6) Financial Flexibility- Evaluation of the company's financial needs, plans, and options, its flexibility to meet its financial management programs under difficulties without putting its branch in even the slightest danger.
(7) Earning Preservation - Values of the main parameters indicate the long-term earning potential of the company which includes - return on capital, the margin of profits, income from various business segments, means of future earning growth, coverage ratio, etc.
8) Value of mortgaged or mortgaged property - rating is done by the rating agency keeping in mind what is the real and market value of the mortgaged or mortgaged property by the issuing institution because it gives knowledge of the financial soundness of the institution.
Following are the benefits of credit-
(1) Availability of free information to the investors.
(2) Monitoring of the credit rating agency on the compliance of the terms of the issue.
(3) Continuous rating observation.
(4) Criteria of investor trademark by financial institutions
(5) High rating helps in the success of the issue.
(6) The generator of credibility in the security issued.
(7) Compliance with high accounting standards.
(8) Detailed and accurate financial information and disclosure
(9) Availability of loan at low cost through high rating.
(10) Solvency information.
(11) Increase in fame.
(12) Increase in sales.
(1) Different ratings-The same security is given different ratings by different agencies.
(2) Human factor- Since it is based on human decision ability which is full of defects like personal bias, inclination, and incompetence.
(3) Rating Downgrade - Even if the agency downgrades the rating in the future, there is no special benefit to the investor, because he has made the investment decision on the basis of the original rating.
4) Current-based rating is based on the present condition of the industry and the issuing institution which is always subject to change in the future.
(5) Passive Rating- Rating is done on the basis of information provided by the issuing institution without auditing, hence the concealment of any important fact can render the rating meaningless.
(6) No liability with rating- Like a statutory audit, the rating agency does not have any statutory liability. Regulatory institutions like SEBI and RBI do not pay attention to the investigation of their complaints.
.jpeg)
.jpeg)
.jpeg)
.jpg)
.jpeg)
.jpeg)
0 Comments