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Lecture 3.11 Credit Rating-Introduction

The document discusses the role and importance of credit ratings in banking and financial services, outlining their purpose in assessing the creditworthiness of debt issuers. It explains how credit ratings are evaluated by agencies like Moody’s, S&P, and Fitch, and highlights different types of ratings such as sovereign, short-term, and corporate credit ratings. Additionally, the document emphasizes the need for credit ratings to maintain investor confidence and protect their interests.

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Vikash kumar
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9 views

Lecture 3.11 Credit Rating-Introduction

The document discusses the role and importance of credit ratings in banking and financial services, outlining their purpose in assessing the creditworthiness of debt issuers. It explains how credit ratings are evaluated by agencies like Moody’s, S&P, and Fitch, and highlights different types of ratings such as sovereign, short-term, and corporate credit ratings. Additionally, the document emphasizes the need for credit ratings to maintain investor confidence and protect their interests.

Uploaded by

Vikash kumar
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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INSTITUTE-UNIVERSITY SCHOOL OF

BUSINESS
DEPARTMENT-MBA
Banking and Financial Services Management
20BAA-721
Chapter 3.3

FACULTY NAME: Ms. Manpriya Singh


(Assistant Professor)

Topic- Credit Rating-


Introduction DISCOVER . LEARN . EMPOWER
Role of Credit Rating

Course Outcome
Blooms
Course
Description Taxonomy
Outcome Level
1 To demonstrate a comprehensive knowledge of the disciplines Understand/
of banking and financial services Remember
Source: www.economictimes.indiatimes.com

2 Employing the knowledge of financial services to choose Apply


between lease, buy or hire-purchase
Will be covered in this
lecture
3 To analyse the performance of the various financial Analyze
instruments

4 Evaluating the different investment vehicles on the basis of Evaluate


credit ratings

5 Design/Create
To structure and appraise the debt securitisation deals for the
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business
Credit Rating

• Asymbolic indicator of the current objective assessment

• Relative capability and willingness of an issuer of a debt programmes

• To service the debt obligations as per the terms of the contract.

• Current opinion of a borrower’s credit quality in terms of business and financial


risk.

• Investors get some idea about the degree of certainty of timely repayment

3
Credit Rating
• Credit ratings are not based on mathematical formulas.
• Instead, credit rating agencies use their judgment and experience.
• The credit rating is used by individuals and entities that purchase the
bonds
• 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.
NEED FOR CREDIT RATING

 It is necessary in view of the growing number of cases

 Maintenance of investor’s 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.


OBJECTIVES OF CREDIT RATING
 Improves a healthy discipline on borrowers,
 Lends greater credence to financial and other representations,
 Facilitates formulation of public guidelines on institutional investments,
 Encourages greaterinformation 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
Who Evaluates Credit Ratings?

• A credit agency evaluates the credit rating of a debtor by analyzing


the qualitative and quantitative attributes of the entity in question.

• The information may be sourced from internal information provided


by the entity, such as

• audited financial statements, annual reports, as well as external


information such as analyst reports, published news articles, overall
industry analysis, and projections.

7
Who Evaluates Credit Ratings?

• A credit agency is not involved in the transaction of the deal and,


therefore, is deemed to provide an independent and impartial
opinion of the credit risk carried by a particular entity seeking to
raise money through loans or bond issuance.
• Presently, there are three prominent credit agencies that control
85% of the overall ratings market:
• Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch
Group.
• Each agency uses unique, but strikingly similar, rating styles to
indicate credit ratings.

8
TYPES OF RATINGS
• SOVEREIGN CREDIT RATING
A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national
government. The sovereign credit rating indicates the risk level of the investing
environment of a country and is used by investors looking to invest abroad. It
takes political risk into account.

• SHORT TERM RATING


A short-term rating is a probability factor of an individual going into default
within a year. This is in contrast to long-term rating which is evaluated over a
long timeframe. In the past institutional investors preferred to consider long-
term ratings. Nowadays, short-term ratings are commonly used.
TYPES OF RATINGS
• CORPORATE CREDIT RATINGS
• Financial indicator to potential investors of debt securities
such as bonds.
• The Standard & Poor's rating scale is as follows, from excellent to poor:
• AAA, AA+, AA, AA-, A+, A, A-,
• BBB+, BBB, BBB-, BB+, BB, BB-,
• B+, B, B-, CCC+, CCC,
CCC-, CC, C, D.
Anything lower than a BBB- rating is considered a speculative or junk bond.
Users of Credit Ratings

• Both institutional and individual investors: to assess the risk related to


investing in a specific issuance, ideally in the context of their entire portfolio.

• Intermediaries such as investment bankers utilize credit ratings to evaluate


credit risk and further derive pricing of debt issues.

• Debt issuers such as corporations, governments, municipalities, etc., use


credit ratings as an independent evaluation of their creditworthiness and credit
risk associated with their debt issuance.

• Businesses and corporations that are looking to evaluate the risk involved
with a certain counterparty transaction also use credit ratings.
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Credit Score

• A credit score, however, is strictly for indicating an individual’s


personal credit health.
• It indicates the individual’s ability to undertake a certain load and
his or her ability to honor the terms and conditions of the loan,
including the interest rate and dates of repayment.
• A credit score for individuals is used by banks, credit card
companies, and other lending institutions that serve individuals.

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References:
• Economicdiscussion.net
• Onlinecourses.swayam.ac.in
• Khan M Y, “INDIAN FINANCIAL SYSTEM, Tata Mc Graw-Hill, New Delhi, 2001.
• Santhanam, B., BANKING AND FINANCIAL SYSTEM, Margham Publiations, Chennai.
• Swami, H. R, GUPTA, INDIAN BANKING AND FINANCIAL SYSTEM, Indus Valley Publication, 2009.
• Bhole L.M., (1998), Financial Institutions and Markets Structure, Growth and Innovations, 2nd Ed.
• Thorn, Richard S., (1976), Introduction to Money and Banking, New York, Harper & Row. 2. 3)Luckett, D.G.,
(1976), Money and Banking, McGraw Hill, New York.
• Ritter, L.S., and Sibler, W.L., (1977), Principles of Money, Banking and Markets, Basic Books, New York, 3rd
Ed.
• https://www.pdfdrive.com/indian-financial-system-and-management-of-financial-institutions-
d42675152.html
• https://www.pdfdrive.com/money-banking-and-financial-system-d39561701.html

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