How Credit Rating System Helps Investors

8/14/2019 How Credit Rating System Helps Investors

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Delawar Barekzai


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Objectives of theSeminar How credit rating system helps InvestorsShould the credit rating system be

mandatory

How businesses are affected from

wrong credit ratings.


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What is Credit Rating?

A credit rating is an evaluation of a potentialborrower's ability to repay debt.

It estimates the credit worthiness of anindividual, corporation, or even a country.

Credit score affects a persons ability to borrow

money through financial institutions such as banks.


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Personal credit rating

The factors which may influence a person's

credit rating are;

Ability to pay a loan Interest

Amount of credit used

Saving patterns

Spending patternsDebt


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Corporate credit ratings

The credit rating of a corporation is afinancial 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, A,

BBB, BB, B, CCC, CC, C, D.


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Credit Rating in India

FAAA (F-Triple A) Highest Safety

FAA (F-Double A) High Safety

FA Adequate Safety

Speculative Grades;

FB Inadequate Safety

FC High Risk FD Default


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Credit Agencies

These agencies help, evaluate and reporton the risk involved with various

investment alternative.

Rating agencies have recently begun to

aggressively downgrade large amounts

of mortgage-backed debt.


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Cont

Public credit rating agencies are consideredmore trustworthy;

EX:

Credit Rating Information Services of India Limited (CRISIL)

Investment Information and Credit Rating Agency of India (ICRA)Credit Analysis & Research Limited (CARE)

Private credit rating agencies sometime give

wrong rating.


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Instruments for rating

Equity shares

Preference shares

Debentures

Commercial papers

Fixed Deposits , etc.

Other ratings:Country rating, Rating or real estate builders &

developers, chit funds, Banks, etc.


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Pros & Cons of CreditRatings

People with good credit are at an

advantage because their credit files will

only enhance their ability to borrow.

Lenders have the advantage of being

able to reward or punish people with

their reports.

Pros


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Cont

It helps to evaluate on the risk involved

with various investment alternative.

It helps the issuers of the debt

instrument to price their issue correctly

and to reach out to new investors.


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Cont

Easy to raise funds

Freedom on decision


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Cons

Sometimes incorrect credit information is

reported, or a consumer's identity is stolen.

Wrong credit rating will affect the business

and foreign people invested in our country.

Entries such as lawsuits, bankruptcies on a credit file areamong the most serious.


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Cont

Non disclosure of significant information

Static study

Rating is not certificate of soundness


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Effects of wrong credit

ratings Wrong credit rating will cause credit crunch. Many banks are closed due to credit crunch.

Many lenders have been hit hard, because the crunch has resulted

in increased difficulties in:

Getting finance on the wholesale money market

Increased cost costs relating to inter bank lending


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Conclusion

A credit rating is a useful tool for bothinvestor & entities looking for investors.

An investment grade rating can put asecurity, company or country on theglobal radar.

It shows the worthiness of money fromforeign investors.


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Group Stand

Our group support that the credit rating

helps the investors a lot and should be

mandatory for all financial institutes.


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Suggestions

The credit rating should be done accurately inorder to avoid credit crunch in the market.

Financial institution should take care whilegiving loans to the borrowers, so that they issue

appropriate information to them.

How Credit Rating System Helps Investors

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