CREDIT RATING

Credit rating

Credit Rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default.

The Credit Rating Agency will take the following factors into account:

  1. Credit Worthiness – Ability to pay back a loan.
  2. Operational Efficiency
  3. Commitment to new projects and group companies
  4. Past performance
  5. Estimates of future Earnings. Projections for next 3 to 5 years.
  6. Orders in hand.


Your (Company or Personal) credit history determines what loans you will qualify for and the interest rate you will pay. Lenders get your credit history by obtaining your credit score.

The Credit Rating scales of Companies other than SMEs are rated as below:

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.
AA
(Highest 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.
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.
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.
BB
(Moderate Risk)
Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
B
(Highest Safety)
Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
C
(Very High Risk)
Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
D
Default
Instruments with this rating are in default or are expected to be in default soon..
The credit rating agencies may apply '+' (plus) or '-' (minus) modifiers for ratings from 'AA' to 'C' to reflect comparative standing within the category.

The Credit Rating scales of SMEs are rated as below:

CRISIL SME Ratings reflect the level of creditworthiness of a SME, adjudged in relation to other SMEs. A rating of SME 1 and SME 2 by an SME will get an interest subsidy from the banks.

SME Rating
(Highest Safety)
Definition
SME 1 Highest
SME 2 High
SME 3 Above Average
SME 4 Average
SME 5 Below Average
SME 6 Inadequate
SME 7 Poor
SME 8 Default

The Credit Rating Process:-

  1. Receipt of request from Company to the Credit Rating Agency
  2. Assignment to analytical team
  3. Obtaining information
  4. Meetings with Management for clarifications
  5. Presentation of Findings
  6. Rating Committee Meeting
  7. Communication of Decision
  8. Acceptance of the rating by the company
  9. Dissemination to the public
  10. Monitoring for possible change.

Rating Methodology

  1. Business Risk Analysis
    1. Industry risk
    2. Market position of the company
    3. Operating efficiency
    4. Legal position
    5. Size of business
    6. Promoter’s age and succession plans
  2. Financial Analysis
    1. Quality of book keeping
    2. Earning potential / profitability
    3. Cash flow analysis
    4. Financial flexibility
    5. Projections for next 3 to 5 year
  3. Management Evaluation
    1. Company organogram and structure
    2. Management Goals
    3. Plans and Strategies for future
    4. Professionals on board
  4. Geographical Analysis
    1. No of branches across
    2. Government subsidies if any
    3. Locational advantages or disadvantages
  5. Regulatory and Competitive Environment
    1. Board composition
    2. Cases pending against company
    3. Whether financial statements are prepared under regulatory framework
  6. Fundamental Analysis
    1. Liquidity management
    2. Asset quality
    3. Technology
    4. Interest and Tax sensitivity
    5. Profitability and financial position
    6. Impact of IT pending appeals etc
    7. Effect of contingent liabilities.

Have you missed any payment towards your bank loan installment or failed to serve the interest?

The Impact is as follows
  1. The CCR score takes a toll
  2. The personal CIBIL score of director takes a toll if he fails to repay any loan he has taken in individual capacity.
  3. You become a risky borrower
  4. Late payments and penalty
  5. Healing time of 7 years for one missed payment to go off record.

COMPANY CREDIT REPORT (CCR)

A CIBIL Company Credit Report (CCR) is a record of your company's credit history. This is created from data submitted to CIBIL by lending institutions across India.

It is important to understand that while the CCR is not a credit rating it is heavily relied on by loan providers to evaluate & approve loan applications. The past payment behavior of a company is a strong indication of its future behavior. The basic difference between your credit report and your credit rating (and the reason why a CCR is heavily relied on by lenders) is that your CCR is created from information submitted directly by the banks. Credit Ratings are usually solicited by the ratee and then issued by the credit rating agency once it has evaluated documents provided by the company and interviewed the company's managements.

CCR plays a critical role in the loan approval process. This report is used by the lender to make informed lending decisions - quickly and objectively. You can also use the CCR to negotiate better credit terms while doing business by providing this report to potential business partners as confirmation of your company's financial strength.

Personal CIBIL Report

CIBIL (Credit Information Bureau India Limited) is the credit rating and research organization of India. Based on spends and payments through and on credit lines such as credit cards, personal loans, home loans, car loans and others, information is provided by lenders to CIBIL. This information is carefully collated and curated over a period of time and an analysis of the same provides the data that gives you the credit score and history. Depending upon the score and credit history, most banks and lenders take decisions on whether to provide you with extra lines of credit or not.

The combination of CCR and key persons CIBIL will decide the loan eligibility of the company.

Central Repository of Information on Large Credits (CRILC)

Communication gaps between different banks financing the same borrower have always existed. A common approach by all institutions in a multi-creditor situation is certainly desirable when the exposure is stressed. But the first step towards any such ideal is that all participants should have the same information at their disposal. Hence, RBI’s Central Repository of Information on Large Credits. All banks are required to report basic information in respect of all exposures in excess of Rs 5 crores to a central database. Knowledge of experience of other lenders is sure to improve the quality of all lending.

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