Credit rating seems a tough word to understand. It’s really simple. It’s just an assessment of the borrower be it a person, a group or a Company. A credit rating tells if a borrower can repay a loan on time. If a borrower has a good credit rating, it means he’s repaying loans on time.
You must be familiar with CIBIL which is a credit information bureau. TransUnion CIBIL collects data on your repayments vis-à-vis loans and credit card payments each month, from banks and financial institutions. Based on this information, CIBIL assigns you a score between 300 to 900. A score of 750+ is a very good score. Your loans are sanctioned in an instant. A poor score 650< is bad and banks may reject loan application.
Credit rating is very much the same thing. Credit rating gives the strength of Companies based on market share, reputation of the Company and the strength of the management. In simple words credit rating gives the credit worthiness of a Company.
Let’s understand more of credit rating. Want to know more on Corporate FD? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
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You must be familiar with CRISIL. It’s the pioneer of credit rating in India and is an S&P Global Company. It rates debt instruments and is a great help for SMEs (Small and Medium Enterprises) in India.
What does CRISIL do?
CRISIL rates corporate sector instruments:
CRISIL rates SMEs based on financial strength and performance. CRISIL rates a particular SME and tells you it’s credit worthiness vis-à-vis peers. A good rating means the SME can avail loans/credit really fast and at low interest.
CRISIL publishes the name of the rated agency (SME) in its journal named CRISIL SME Connect. SMEs published in the journal can easily access credit from leading banks and financial institutions.
ICRA is a Moody’s investor service Company. ICRA does ratings, gradings and research. ICRA rates rupee denominated debt instruments which are issued by Manufacturers, commercial banks, NBFCs, PSUs and even municipalities. It also rates bonds issued by Telecom, Power and Infra Companies.
Functions of credit rating:
ICRA Rating is done for:
Credit rating process:
What if the rating agency doesn’t accept the rating?
Banks use ratings to determine risk weights for loan exposure and use bank loan ratings (BLRs). CARE rates fund based and non-fund based facilities which have been sanctioned by banks. This includes cash credit, working capital loans, bill discounting and project loans among others.
CARE also does recovery rating. You must be familiar with the SARFAESI Act which helps banks recover NPAs, a big problem these days. According to this act, there are 3 methods of recovering NPAs which are securitization, asset reconstruction and enforcement of security.
Securitization Companies and ARCs (Asset Reconstruction Companies) issue SRs (Security Receipts) under the SARFAESI Act. Security Receipts are acquired by QIBs (Qualified Institutional Buyers). The value of SRs is measured by NAV. The NAV is arrived at depending on the rating by credit rating agencies, so that QIBs can value their investment. Credit rating agencies do recovery rating which gives the probability of recovery and not the chance of default.
The IL&FS fiasco is a black swan moment for credit rating agencies. The best of the credit rating agencies failed to spot the financial crisis at IL&FS which is struggling to service $12.6 Billion worth of debt.
IL&FS established in 1967 is a conglomerate which funds major infra projects in India. The Chenani- Nashri tunnel, which is India’s longest road tunnel was financed by IL&FS which has raised billions of dollars from India’s corporate debt market.
IL&FS is a big borrower accounting for 2% of outstanding commercial paper, 1% of the debentures and 0.7% of loans in the banking system. In June IL&FS Transportation Networks Ltd which is a subsidiary of IL&FS, defaulted on debt obligations. This was followed by defaults in group subsidiaries in August and September.
ICRA, CARE and other rating agencies cut their rating for IL&FS from AAA- (Investment Grade) to D, default status in real quick time. Rating agencies failed to notice cost overruns in IL&FS construction projects, roads, ports and also problems in land acquisition and approvals.
What could be the reason for this? Indian credit rating firms follow the issuer-pays model which is common in USA. A firm which issues a financial instrument, pays credit analysts upfront. Credit agencies greed for profits is being blamed for this mess. Many people believe IL&FS could be India’s Lehmann moment as stock markets crash. Shares of IL&FS hit 52 week lows as IL&FS share prices crashed heavily. IL&FS shares are firming up as LIC extends support to IL&FS.
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