Amity Business School

Credit Ratings

Credit rating and procedures

Amity Business School

Business Analysis: industry risk, with competition from others, demand and supply position,govt. policies etc. Marketing risk with competitive advantages or disadvantages, market share, selling and distribution network, quality of customer service, operating efficiency involved in location advantages, labour cooperation, cost efficiency, and operating margins and legal position as reflected in security offered, trust deed and trustees reputation etc. Financial analysis: Examining the accounting quality under the methods of depreciation, income recognition, treatment of bad debts, contingent liabilities etc. Earnings protection, under projection of future earnings, EPS, profitability ratios, proportion of interest to gross profit and net profit etc, adequacy of cash flows, reflected in working capital management, current ratio, inventory to sales, etc and financial flexibility, examined in terms of capital financing plans, flexibility in financing through alternative methods, planning methods and their flexibility

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Management Evaluation: This is examined in relation to track record of promoters, managers and top executives, their qualification and experience, planning and control systems, capacity to adjust with flexibility, foresight to meet adverse situations, goal setting, monitoring and evaluation with a view to achieve goals. Regulatory and competitive environment : This is assessed in terms of the structure and regulatory framework of the financial system, the efficiency of operations and regulatory authorities, trends in regulation and deregulation and the reaction of the competitors to regulation etc.

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Fundamental analysis: Under this head ,the companys liquidity management, capital structure, debt leverage, long term solvency, short term solvency, matching of cash inflows to outflows and ratio analysis of the company. The assets quality, in terms of credit risk management, receivable to current assets, systems of monitoring the sector credit, individual customer risk and management of problem credits. The companys profitability and financial position is also analyzed through study of historic profits, spread on funds deployment, revenue on non-fund based services, accretion to reserves, profit margins etc. Besides, the impact of interest tax rate changes on companys net profit is analyzed. The interest as a proportion to cash inflows or of gross profits is also used to examine the interest burden and potential for future earnings and the impact of debt burden on them is analyzed. These and many more such fundamental factors in a company are also analyzed

Amity Business School

Mandate

ICRAs Rating Process (An Overview)

Assign Rating Team

Initial Stage

Receive Initial Information & Conduct Research

Meetings and Visits Analysis and Report Preparation Preview Meeting Rating Meeting

Facts Findings & Analysis

Rating Finalization Fresh Inputs /Clarifications

Assign Rating
Communicate Rating and Rationale Acceptance

Request for Review

Surveillance

Non Acceptance

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STRUCTURE OF CREDIT RISK RATING SYSTEM

Amity Business School

CREDIT RISK

1. Internal a. Business risk i. Current market share ii. Market standing iii. Operating efficiency iv. Growth perspective v. SWOT analysis

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b) Financial Risk i. Past financial record ii. Quality of past financial records (performance) iii. Projected financials iv. Financial structure v. Cash flow position

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c) Management Risk i. Management Track Record ii. Repayment history of previous loans iii. Quality of management

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d) Credit Facility Risk i. Availability of security ii. Past payment record iii. Directors/corporate guarantee

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e) Project Risk i. DSCR Adequacy ii. Tenure of loan iii. Asset Coverage Ration iv. Future cash flows v. Financial leverage

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2. External a) Industry Risk i. Nature of industry ii. Competition and other players in the industry iii. Industry prospects iv. Industry SWOT

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CREDIT DERIVATIVE (ISDA)

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Unfunded credit derivative products include the following products: Single name Credit Default Swap (CDS) Total Return Swap First to Default Credit Default Swap Portfolio Credit Default Swap Secured Loan Credit Default Swap Credit Default Swap on Asset Backed Securities Credit Default Swaption (CDS) Recovery Lock Transaction
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Credit Spread Option CDS index products Constant Maturity Credit Default Swap (CMCDS)

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Funded credit derivative products include the following products: Credit Linked Note (CLN) Synthetic collaboration debt obligation (CDO) Constant Proportion Debt Obligation (CPDO) Synthetic constant Proportion Portfolio (Synthetic CPPI)

Insurance

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FUNCTIONS OF CREDIT RATINGS

Superior Information Low Cost Information Basis for a proper Risk-Return Trade Off Healthy discipline on corporate borrowers Formulation of public guidelines on Institutional Investment

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ORIGIN
CREDIT RATING IN INDIA

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BENEFITS OF CREDIT RATING

Low cost information Quick investment decision Independent Investment decision Investors Protection

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BENEFITS TO RATED COMPANIES

Sources of additional certification Increase in investors population Forewarns risks Encourages financial discipline Merchant bankers job made easy Foreign collaborations made easy Benefits in industry as a whole Low cost borrowing Rating as a marketing tool
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Amity Business School

CREDIT RATING AGENCIES IN INDIA

Credit Rating Information Service Ltd. (CRISIL) Investment Information and Credit Rating Agency of India (ICRA) Credit Analysis and Research (CARE) Duff Phelps Credit Rating Pvt. Ltd. (DCR India) Onida Individual Credit Rating Agency ltd. (ONICRA)

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RATING METHODOLOGY
Credit Rating Symbols

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