Credit Rating (CAMELS Approach)

1. CREDIT RATING
SAUMYA SINGH
1321760

2. Meaning
 A credit rating measures creditworthiness, or
the ability to pay back a loan.
 Credit rating refers to assessment of the
financial position of the company based on
various parameters.

3. Contd..
 A credit ratings agency is a company that
assigns credit ratings to institutions that issue
debt obligations (i.e. assets backed by
receivables on loans, such as mortgage-backed
securities).
 Companies that issue credit scores for
individuals are usually called credit bureaus
and are distinct from corporate ratings
agencies.

4. Functions of Credit Rating
Agencies
1. Provides unbiased opinion
2. Provides quality and dependable
information
3. Provides information at low cost

5. Contd..
4. Provide easy to understand information:
Rating agencies
5. Provide basis for investment
6. Healthy discipline on corporate borrowers
7. Formation of public policy

6. Top Three Credit Rating
Agencies
In the United States :
 Moody‘s
 Standard & Poor's
 Fitch Ratings
In India :
 CRISIL (Credit Rating Information Services of
India Limited)
 CIBIL (Credit Information Bureau India Limited)
 Fitch Ratings India Private Ltd.

7. Uses of Credit Rating
A. Benefits to Investors :
1. Safety of investments.
2. Recognition of risk and returns.
3. Freedom of investment decisions
4. Wider choice of investments
5. Dependable credibility of issuer

8. Contd..
B. To the Company :
1. Easy to raise resources
2. Reduced cost of borrowing
3. Reduced cost of public issues
4. Rating builds up image
5. Rating facilitates growth
6. Recognition to unknown companies

9. Contd..
C. Benefits to Intermediaries :
 Stock brokers have to make less efforts in
persuading their clients to select an
investment proposal of making investment in
highly rated instruments.

10. Credit Rating Of Banks
 Credit Rating of banks are done on a certain
parameters, unlike other companies.
 CRISIL and ICRA both are engaged in rating of
banks based on the following six parameters,
also called CAMELS approach.

11. Contd..
 (C)apital adequacy
 (A)ssets
 (M)anagement Capability
 (E)arnings
 (L)iquidity (also called asset liability
management)
 (S)ensitivity (sensitivity to market risk, especially
interest rate risk)

12. Contd..
 C - C stands for capital adequacy of banks.
 A bank need to maintain at least 10 % capital
against risky assets of the bank.

13. Contd..
 A - A stands for asset quality.
 The loan is examined to determine non-performing assets.
An asset/loan is considered non-performing asset where
either interest or principal is unpaid for two quarters or
more.
 Ratios like NPA to Net Advances, Adequacy of Provision &
Debt Service Coverage Ratio are also calculated to know
exact picture of quality of asset of a bank.

14. Contd..
 M- M stands for management capabilities.
 Here, the efficiency and effectiveness of
management in framing plans and policies is
examined. Ratios like ROI, Return on Capital
Employed (ROC E), Return on Assets (ROA) are
calculated to comment upon bank’s efficiency to
utilise the assets.

15. Contd..
 E – E stands for earnings.
 It is the ability to earn an appropriate return on
its assets which enables the institution to fund
expansion, remain competitive, and replenish
and/or increase capital.

16. Contd..
 L - L indicates liquidity position.
 Liquid and current ratios are determined to
find out banks ability to meet its short-term
claims.

17. Contd..
 S - S stands for sensitivity to market risks.
 It addresses interest rate risk, the sensitivity
of all loans and deposits to relatively abrupt
and unexpected shifts in interest rates.

19. CRISIL’s Credit Rating
Process

20. CRISIL’s Credit Rating Scale
 Credit Ratings - Long Term Scale
 Credit Ratings - Short Term Scale
 Credit Ratings - Long Term Structured Finance
Scale
 Credit Ratings - Short Term Structured Finance
Scale
 Credit Ratings - Fixed Deposit Scale
 Credit Ratings - Corporate Credit Scale

21. CRISIL’s Rating Scale for
Long-Term Instruments
 CRISIL AAA - (Highest Safety)
Instruments with this rating are considered to
have the highest degree of safety regarding
timely servicing of financial obligations. Such
instruments carry lowest credit risk.
 CRISIL AA - (High Safety)
Instruments with this rating are considered to
have high degree of safety regarding timely
servicing of financial obligations. Such
instruments carry very low credit risk.

22. Contd..
 CRISIL A - (Adequate Safety)
Instruments with this rating are considered to
have adequate degree of safety regarding timely
servicing of financial obligations. Such
instruments carry low credit risk.
 CRISIL BBB - (Moderate Safety)
Instruments with this rating are considered to
have moderate degree of safety regarding timely
servicing of financial obligations. Such
instruments carry moderate credit risk.

23. Contd..
 CRISIL BB - (Moderate Risk)
Instruments with this rating are considered to
have moderate risk of default regarding
timely servicing of financial obligations.
 CRISIL B - (High Risk)
Instruments with this rating are considered to
have high risk of default regarding timely
servicing of financial obligations.

24. Contd..
 CRISIL C - (Very High Risk)
Instruments with this rating are considered to
have very high risk of default regarding
timely servicing of financial obligations
 CRISIL D - (Default)
Instruments with this rating are in default or
are expected to be in default soon.

25. Factors Affecting Assigned
Ratings
1. The security issuer’s ability to service its debt. In
order, they calculate the past and likely future cash
flows and compare with fixed interest obligations
of the issuer.
2. The volume and composition of outstanding debt.
3. The stability of the future cash flows and earning
capacity of company.
4. The interest coverage ratio i.e. how many number of
times the issuer is able to meet its fixed interest
obligations.

26. Contd..
5. Ratio of current assets to current liabilities (i.e.
current ratio (CR)) is calculated to assess the
liquidity position of the issuing firm.
6. The value of assets pledged as collateral security
and the security’s priority of claim against the
issuing firm’s assets.
7. Market position of the company products is
judged by the demand for the products,
competitors market share, distribution channels,
etc.

27. Contd..
8. Operational efficiency is judged by capacity
utilisation, prospects of expansion,
modernisation and diversification, availability
of raw material etc.
9. Track record of promoters, directors and
expertise of staff also affect the rating of a
company.

28. Instruments for Rating
i. Equity shares issued by a company.
ii. Preference shares issued by a company.
iii. Bonds/debentures issued by corporate,
government etc.
iv. Commercial papers issued by manufacturing
companies, finance companies, banks and
financial institutions for raising sh0l1-term loans.

29. Contd..
v. Fixed deposits raised for medium-term ranking as
unsecured borrowings.
vi. Borrowers who have borrowed money.
vii. Individuals.
viii. Asset backed securities are assessed to determine
the risk associated with them. The objective is to
determine quantum of cash flows emerging from the
asset that would be sufficient to meet committed
payments.

30. THANK YOU!
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