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Content
1. Meaning
2. Importance of Credit Rating
3. Credit Rating Process
4. Video (Credit Rating)
5. Download PPT
1. Meaning of Credit Rating
A credit rating is an independent evaluation of the company’s ability to repay a particular debt or financial obligation by a credit rating agency. This evaluation is based on the company’s current and past earnings.
It measures the company’s earnings for timely repayment of principal & interest of a debt or financial obligation. Generally, a higher credit rating is safest so it would lead to more demand or marketability on debt. i.e bond.
Some Credit Rating Agencies in India are India Ratings & Research, CRISIL, Brickwork Ratings, CARE, etc. “AAA” is the highest credit rating and “D” is the lowest as all the rating has been provided in the picture below. Difference Between Credit Rating and Credit Score – Click here to read
2. Importance of Credit Rating
The Importance of Credit Rating are given below
1. Better Investment Decision – No banks or money lender Companies would like to give money to a risky company. With Credit Rating, they can get an idea about the ability of that company So credit rating helps banks and money lenders Compnies to take Better Investment decisions.
2. Safety assured: High Credit rating means Assurance about the safety of the money that it will be paid back with interest on time so credit rating also assured safety.
3. Easy Loan Approval – With a high rating the Company seen as a risk-free company so It gets easy for the company to get loan approval.
4. Considerate rate of Interest – Creditl rating helps borrowing Company to get debt at less rate of interest because one of the major factors that determine the rate of Interest on debt that is the credit rating. Higher the rating, lower the Intest or vise versa
3. Process of Credit Rating
- These are the Nine steps in the credit rating process.
- Issuing Formal Request
- Assigning Analytical Team
- Obtaining Financial Information
- Research and Meeting with Management
- Discussion Meeting
- Final Rating Meeting
- Informing Assigned Rating
- Announcing to the Public
- Monitoring the company
1. Issuing formal request
The credit rating process begins when the issuer ( who wants to get a credit rating ) issues the formal request for credit rating to credit rating agencies. i.e. CRISIL. When a credit rating agency accepts the request. An agreement is made between the issuer company and rating agency.
The agreement terms cover the following aspects:
1. It requires the CRA ( Credit Rating Agency ) to keep the Company’s information confidential.
2. The issuer company has the right to accept or not to accept the rating.
3. Issuer company needs to provide true material & information to the CRA for rating.
2. Assigning Analytical Team
In the second step, the Credit Rating Agency (CRA) assigns the job and duties of credit rating to an analytical team. The analytical team is responsible for rating projects/assignments. The team usually has two members/analysts who have expertise in the relevant business area.
3. Obtaining Financial Information
In this, the analytical team will collect all the required information from the client or issuer company. The analytical team provides a list of the required information and plans for discussions to issuer company.
The analytical team analysis the information relating to its financial statements, cash flow projections, and other relevant information.
4. Research and Meeting with management
In this step, analytical team research client’s operations by visiting the company’s plant or factory, and makes meeting with the company’s executives for better understanding. This includes an understanding, collecting of the key factors that influence production level, quality, and cost of production.
Direct meeting is maintained with the issuer company’s management as this enables the CRA ( Credit Rating Agency ) to incorporate or Disclose non-public information in a rating decision and enables the rating to be future-looking.
5. Discussion Meeting
When all the analysis has been done, the team will discuss the findings at length with the internal committee, comprising senior analysts of the credit rating agencies. All the issues having an effect on the company are identified. An opinion on the rating is also formed. The results of the team’s analysis are finally presented to the top authority of the rating committee.
6. Final Rating Meeting
This is the final authority meeting for assigning ratings and the work of the analytical team comes to end. The rating committee meeting is the only process in which the issuer does not participate directly.
Now final authority will check facts, findings, and factors like political, social, and other factors.. After considering all the results, facts, and other information the credit rating agency will assign the actual Credit Rating.
7. Informing Assigned Rating
After assigning the rating grade, CRA will inform the issuer company about the rating along with reasons supporting the credit rating. Now, the issuer company can accept, reject, or can provide additional facts to review it again. The credit rating rejected by the issuer company should be kept confidential and not disclosed to the public.
8. Announcing to the Public
Once the issuer accepts the rating, the credit rating agencies circulate ratings through printed reports, newspaper, etc. to the public.
9. Monitoring the company
Once the company has decided to accept the rating, CRAs are obliged to monitor the accepted ratings over the life of the instrument or based on time written at contract. The CRA needs to constantly monitor all ratings with reference to new political, economic, and financial developments and industry trends.
All this information is reviewed regularly to find the major changes. if any changes occurs in credit rating, CRA will make updated rating public through newspaper, printed reports.
4. Video- Credit Rating (Meaning, Process & Importance)
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