Credit Rating

Credit Rating The need for ascertaining the creditworthiness of companies and financial institutions which approach the public for loan funds gave rise to the first ever credit rating agency, Standard and Poor’s, in the United States in the 1860s, and in 1909 came Moody’s to assess the creditworthiness of US banks. In India the first credit rating agency came up only in 1987, when the Credit Rating Information Service of India Ltd (CRISIL) was set up by the UTI, ICICI, LIC, GIC and ADB, among others. Its task was to rate the debt instruments of Indian Companies in the matter of timely payment of interest and principal on debentures, fixed deposits, short term instrument like commercial paper, etc. The objective was to give the investor the opportunity of informed choice.

Credit rating is not a buy or sell recommendation, but merely creating a risk awareness among investors. The better companies are already using the rating symbols in their prospectuses for debt instruments, although their use is not yet mandtatoy, as it is in the US , where the rating of two agencies is required.

Rating is assigned to a company after an evaluation of a host of factors like industry risk factors, market position of the company, its operating efficiently, the legal soundness of the prospectus, the company’s accounting quality, its earning protection adequacy of cash flow, its financial flexibility, its management quality, its capital adequacy, its asset quality, liquidity management profitability and financial position, interest and tax sensitivity, and many other pertinent details. The evaluation is made by a team of highly professional people. See CRISIL.

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