Credit Ratings offered by CRISIL & CARE in India

In the previous article, we had seen how to choose a Good Corporate FD for investment. Towards the end of the article, I had said that, there will be an article on the ratings offered by Credit Rating Agencies in India. Well, here we are…

Before we Begin - I have already covered Credit Ratings in detail in the following posts. You can visit them to learn more about what Credit Ratings are:

1. Credit Ratings – Explained
2. What is a Credit Rating?

What are the various Credit Rating Agencies in India?

The famous & reputable Credit Rating Agencies in India are:

1. CRISIL and
2. CARE

If you see any investment scheme like Bonds, Corporate FDs etc., chances are that, they are rated by either or both of these agencies.

Ratings by CRISIL

CRISIL like any other rating agency in the world, uses the alphabets A through D to signify the creditworthiness of the Issue. Ratings of FA or above (FAA and FAAA) are considered Investment grade. All lower ratings are considered non-investment grade and must be avoided. The various ratings available are:

Rating	Safety Level	Description
FAAA	Extremely Safe (Highest Safety)	This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong. This is the highest possible rating that CRISIL will assign any issue.
FAA	High Safety	This rating indicates that the degree of safety regarding timely payment of interest and principal is strong.
FA	Adequately Safe	This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. Changes in circumstances can affect such issues more than those in the higher rated categories like FAA or FAAA.
FB	Inadequate Safety	This rating indicates inadequate safety of timely payment of interest and principal. Such issues are less susceptible to default than fixed deposits rated below this category, but the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments.
FC	High Risk	This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such issues have factors present that make them vulnerable to default; adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.
FD	In Default	This rating indicates that the fixed deposits are either in default or are expected to be in default upon maturity.
NM	Not Meaningful	Instruments rated 'NM' have factors present in them, which render the outstanding rating meaningless. These include reorganization or liquidation of the issuer, and the obligation being under dispute in a court of law or before a statutory authority.

Source: CRISIL India

Ratings by CARE:

CARE like any other rating agency in the world, uses the alphabets A through D to signify the creditworthiness of the Issue. Ratings of CARE A or above (CARE AA and CARE AAA) are considered Investment grade. All lower ratings are considered non-investment grade and must be avoided. The various ratings available are:

Rating	Safety Level	Description
CARE AAA	Extremely Safe (Highest Safety)	Instruments with this rating are considered to be of the best credit quality, offering highest safety for timely servicing of debt obligations. Such instruments carry minimal credit risk.
CARE AA	High Safety	Instruments with this rating are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk.
CARE A	Safe	Instruments with this rating are considered to offer adequate safety for timely servicing of debt obligations. Such instruments carry low credit risk.
CARE BBB	Moderately Safe	Instruments with this rating are considered to offer moderate safety for timely servicing of debt obligations. Such instruments carry moderate credit risk.
CARE BB	Inadequately Safe	Instruments with this rating are considered to offer inadequate safety for timely servicing of debt obligations. Such instruments carry high credit risk.
CARE B	Low Safety	Instruments with this rating are considered to offer low safety for timely servicing of debt obligations and carry very high credit risk. Such Instruments are susceptible to default.
CARE C	Very High Risk	Instruments with this rating are considered to be having very high likelihood of default in the payment of interest and principal.
CARE D	In Default	Instruments with this rating are of the lowest category. They are either in default or are likely to be in default soon.

Source: CARE India

Note: Rating agencies may include a “+” or “-” symbol along with ratings to indicate a relative position within the same rating category. For ex: a AA+ is better than AA which in turn is better than a AA-. However, even AA- is better than the other lower ratings.

Happy Investing!!!

Credit Ratings – Explained

In one of our previous articles, we learnt what Credit Ratings are.

It was just an introductory article about credit ratings. In this article we are going to learn what these credit ratings are and what they are not.

What are Credit Ratings?

Credit Ratings are:

a. An Expression/Opinion about Credit Risk
b. Are provided by Rating Agencies
c. Are Continually Evolving & Forward Looking
d. Are Intended to be Comparable across different sectors and regions

Credit Ratings are not:

a. An Investment Advise
b. Assurances of Credit Quality
c. Absolute measures of Default Probability

The points may look self-explanatory. Nonetheless, let us look in detail as to what each point means.

An Expression/Opinion about Credit Risk

Credit ratings express opinions about the ability and willingness of an issuer, such as a corporation or city government, to meet its financial obligations. Credit ratings are also opinions about the credit quality of an issue, such as a bond or other debt obligation, and the relative likelihood that it may default.
Are provided by Rating Agencies

Credit Ratings are provided by Rating Agencies. There are many agencies whose sole purpose is to provide credit ratings about issues. Some of the famous ones are Standard & Poor’s, Moody’s, Fitch etc.

Are Forward Looking & Continually Evolving

Though credit ratings are arrived at based on the analysis and evaluation of historical data, rating opinions are designed to be forward looking. Simply put, ratings take into account not only the present situation but also the potential impact of future events on credit risk. For example, while assigning ratings, agencies factor in anticipated ups and downs of business cycles in specific industries as well as trends and events that can be reasonably anticipated.

At the same time, ratings are not static. Rating opinions may change if the credit quality of an issue or issuer alters in ways that were not expected at the time a rating was assigned. For example, the acquisition of a line of business, a change of policy by government, or erosion in the credit markets that was not foreseen may result in a rating adjustment that reflects this new information. The agency might choose to re-publish a revised credit rating for the affected party.

Are Intended To Be Comparable Across Different Sectors and Regions

Most rating agencies use the same rating scale across different types of companies. The rating scale is designed to provide a common language for comparing creditworthiness, regardless of the type of entity or assets underlying the debt instrument or the structure of the financial obligation.
This means that a ‘A’ rated party irrespective of whether it is a bank or a government or an automobile manufacturer carries the same level of credit risk as with other entities that have been assigned the same rating.

Are Not Investment Advise

Credit ratings are not designed to indicate the value, suitability, or merit of an investment. They are opinions of credit quality and, in some cases, the expected recovery in the event of default.

Credit ratings do not suggest whether:

• Investors should buy, sell, or hold rated securities
• A particular rated security is suitable for a particular investor or group of investors
• The expected return of a particular investment is adequate compensation for the risk it poses
• The price of a security is appropriate given its credit quality
• The market value of the security will remain stable over time

Though credit quality is an important consideration in evaluating an investment, it is not the sole criteria based on which you must base your investment decision.
Before deciding whether to invest in a particular investment option, the investor (you and me) must consider a wide range of factors like the investment strategy, time horizon, rate of returns, history of the house issuing the investment option etc. During this process the credit rating too will be considered but I repeat, we cannot and should not base our investment decision solely on the credit rating alone.

Are not Assurances of Credit Quality

Credit Ratings should not be viewed as an assurance of credit quality or the exact likelihood of default. Instead, ratings denote a relative level of credit risk that reflects a rating agency’s carefully considered and analytically informed opinion as to the creditworthiness of an issuer or the credit quality of a particular debt issue.

Are Not Absolute Measures Of Default Probability

Credit ratings are not exact measures of the probability that a certain issuer or issue will default instead, they expressions of the relative credit risk of rated issuers and debt instruments.

Most rating agencies, rank order the issuers and issues from strongest to weakest based on their relative creditworthiness and credit quality.
For example, a AAA rated issue has a higher credit quality than a BBB issue.

Similarly, if we compare the historic data, the annual average default rate of BBB rated issues was 0.30%. this does not mean that it is a prediction that, any BBB rated issue has a 0.30% default probability. It may so happen that, this year the default rate could be 0.6% or even 0.2%. in fact, the actual default rates for any specific rating category may fluctuate over time and are governed by the economic factors.

What is a Credit Rating?

A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by credit rating agency of the debt issuers likelihood of default

Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

What are the agencies that provide Credit Ratings?

Though each bank may have an internal rating system for large organizations and sovereign parties (Countries), the 3 most important or widely accepted rating agencies are:

1. Standard & Poors
2. Moody's
3. Fitch

A point to note is that the above agencies are not in any order of importance and the ratings by each agency is considered with equal importance. If two or more agencies provide a rating for a party, then it is widely accepted as the credit worthiness of the party.

What are the Rating Bands?

The rating bands issued by the rating agencies are grouped as follows:

1. Prime Investment Grade
2. High Investment Grade
3. Medium Grade
4. Speculative/Risky
5. High Risk
6. In Default

Where are these Ratings used?

These are used when investors buy debt instruments (bonds) issued by these parties. If I were to invest my money in a bond and I have 3 options, one Prime, one Medium and one High Risk, I will obviously choose the Prime rated company's bonds because, they are the least risky and they will repay the money they owe me in due time without any delays or defaults.

However, if the rating is not prime and falls in the other categories, companies usually offer a higher rate of interest to attract investors to invest in them (even though they are risky)

Remember the Risk - Return matrix? Higher the risk, higher the returns. Obviosly, there is a risk that the party may default, but they pay more nonetheless.

What are the actual Ratings?

Based on the Rating Bands that we just saw, the ratings from the respective agencies are:

Prime Investment Grade: No Risk of Default

Rating Agency	Rating
S&P	AAA
Moody	Aaa
Fitch	AAA

High Investment Grade:

Rating Agency	Rating
S&P	AA+, AA, AA-
Moody	Aa1, Aa2, Aa3
Fitch	AA+, AA, AA-

Upper Medium Grade:

Rating Agency	Rating
S&P	A+, A
Moody	A1, A2
Fitch	A+, A

Lower Medium Grade:

Rating Agency	Rating
S&P	A-, BBB+, BBB, BBB-
Moody	A3, Baa1, Baa2, Baa3
Fitch	A-, BBB+, BBB, BBB-

Non Investment Grade/Speculative:

Rating Agency	Rating
S&P	BB+, BB, BB-
Moody	Ba1, Ba2, Ba3
Fitch	BB+, BB, BB-

Highly Speculative:

Rating Agency	Rating
S&P	B+, B, B-
Moody	B1, B2, B3
Fitch	B+, B, B-

Extremely Risky:

Rating Agency	Rating
S&P	CCC+, CCC, CCC-, CC, C
Moody	Caa1, Caa2, Caa3, Ca
Fitch	CCC

In Default:

Rating Agency	Rating
S&P	D
Moody	C
Fitch	DDD, DD, D

As you can see, AAA is the best and D is probably the worst possible credit rating you can get.

How to Improve your Credit Score

Your credit score is one of the most important indicators of your financial strengh and profile. The better your credit score, the better would be the services offered to you by service providers.

There are some simple steps that we can take towards improving our credit score.

Lenders analyze your credit scores to determine whether or not to approve a home mortage, a car purchase and nearly all other types of loans.
Before lending you money, creditors want to determine how much of a risk you are in other words, how likely you are to repay the money they loan you. Credit scores help them do that, and the higher your score, the less risk they feel you'll be.

Most increases to your credit scores take place over time and require an ongoing effort from you. The only true credit score quick-fixes are to pay down debt and to successfully dispute negative information on a credit report.

Credit scoring software looks at five areas of your credit reports:
Your Payment History
Amounts You Owe
Length of Your Credit History
Types of Credit Used
Your New Credit

The article How Your Credit Score is Calculated explains what's included in each of the five categories. You can improve your credit scores by taking a close look at your credit reports and charting a plan of action to improve them.

Some main items you can focus and address are:

1. Improve your Payment History
2. Keep Debt to a Minimum
3. Length of Your Credit History
4. Manage New Credit Wisely
5. The Types of Credit You Use


Improve Your Payment History
1. Always pay your bills on time. Late payments play a major role in driving down your score.
2. Contact your creditors as soon as you know you will have a problem paying bills on time. Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
3. If your situation is serious, see a legitimate, non profit credit counselor. Avoid the scam artists who promise a quick reversal of your credit problems.

Keep Debt to a Minimum
1. Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
2. Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
3. Don't close unused accounts, because zero balance might help your score.
4. Don't open new accounts that you don't need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score.

Length of Your Credit History
1. Time is the only thing that can improve this aspect of your scores, but you can manage it wisely
2. Don't open several new accounts in a short period, especially if your credit history is less than three years. Adding accounts too rapidly sends up a red flag that you might not be able to handle your credit responsibly.

Manage New Credit Wisely
1. Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.
2. Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.
3. Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits.

The Types of Credit You Use
1. A mixture of credit cards and installment loans, loans with fixed payments, can help raise your score if you manage the credit cards responsibly.
2. Having many loans can lower your scores since payments remain the same until balances are paid in full.
3. Don't open new accounts just to have several accounts or to attempt a better mix of credit.
4. Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.

All the very best!!!

Credit Score

A Credit Score is something we have been hearing or rather we hear all the time. In the US Banks talk about your credit score when you go to get a loan. Right from getting a loan to getting a job, your credit score is something that is checked. Even in India private banks and lending institutions have started checking the credit history of a customer before entering into a loan agreement with him. So, it is imperative that we learn what a credit score is and how we can build it.

What is a credit score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan. Usually banks and lending institutions would prefer somebody with a good credit score than someone who does not have such a strong credit score.

How are credit scores calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different. Generally lesser your outstanding debt and better the pay check you receive every month, it is better for your credit score. For ex: let us say A & B draw a salary of Rs. 50,000/- every month. A has a home loan for which he pays an EMI of Rs. 20,000/- every month whereas B does not have any such loans. So, obviosly the credit score of person A would be better than that of B and he would stand a better chance of striking a better deal or a loan from any bank or financial institutions.

Which parts of a credit history are most important?

There are many aspects of your credit history that affect your credit score.

35% - Your Payment History - Credit cards, Telephone bills and other utility bills
30% - Amounts You Owe - Outstanding credit amounts in loans and credit cards
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit

Why is your credit score important?

The credit score of an individual is an indicator of how worthy he is as a borrower to receive a financial product from a bank. A loan is a commitment on the part of the borrower or the customer to repay the loan. So, a bank would prefer a customer who has a better chance of repaying the loan than someone who has a past of being irregular or delinquent in his payments.

Most customers with decent credit scores manage to get a loan or any other service from a bank but at a price. Let us take the same example as above A & B. The rate of interest at which person B gets any new loan would be lesser than person A. This is because person A has a lesser credit score and hence the bank would want to collect as much money as possible from B before he stops making payments. If A manages to pay off his loan properly, this would eventually improve his credit score.

Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.

What's a Good Credit Score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because banks service nearly everyone.

It is believed that only around 10% of the population has a credit score of over 800. The bulk of the customers who receive services from banks and financial institutions are in the 550 - 700 score range. Anyone who has a score of over 700 can easily get services from banks without much of a hassle.

The next article would be on how to improve your credit score.