Credit rating
A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender (Black's Law Dictionary). Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
Personal credit ratings
An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.
The factors which may influence a person's credit rating are:
ability to pay a loan
interest
amount of credit used
saving patterns
spending patterns
debt
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In different parts of the world different personal credit rating systems exist.
Personal credit ratings in the US[/b]
Ø In the United States, there are government funded repositories like Equifax, Trans-world, Trans Union, Dun & Bradstreet etc, which act as credit rating agencies for retail borrowers.[/b]
Ø They provide member banks/NBFCs with credit history of an individual in terms of loans that he has paid in the past, loans that he is currently running, Credit Cards that he has held or currently active with repayment history of the same.[/b]
Ø There are other vital information that the agency report provide viz., if the borrower has ever filed for bankruptcy or if there is any litigation, court case etc. pending against him.[/b]
Ø Based on the overall credit history of the customer, he/she is given a credit rating, more popularly called, FICO (Notes 1) score. This may vary from agency to agency but the variation may not be more than 10%.[/b]
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Personal credit ratings in India[/b]
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Ø The retail segment in India, however, has been devoid of external agencies, which are into credit rating of individuals i.e. retail customers. The lending to retail customers is done basis purely on the lending policy of the bank, which vary from bank to bank, depending on the banks risk appetite.[/b]
Ø Difficulties in India[/b]
o Absence of Social security No. (SSN) concept. Hence difficult to identify customer.[/b]
Ø There was information available in the market but it was more scattered and specific. E.g Satyam[/i][/b] database (known as Master Card Negative Feedback[/b]) , local verification agencies etc.. But the limitations include :[/b]
o One the data is very limited and does not cover sizable proportion of the credit seeking population.[/b]
o MCNF and Verification Agencies have only derogatory data.[/b]
o Hence a more balanced approach was needed. This gave rise to the need for central database.[/b]
Ø The Credit Information Bureau of India Ltd or the CIBIL[/b] was incorporated in 2000[/b]. CIBIL[/b] was an effort of The Government of India and the Reserve Bank of India[/b]. The first promoters[/b] and the member banks were the State Bank of India (SBI[/b]) and HDFC[/b]. Necessary logistics and technology was provided by internationally reputed credit rating agencies like Dun & Bradstreet and Trans-union. This initiative called CIBIL has really been helpful in curbing delinquency and banks have starting weaving their credit lending policy around CIBIL.[/b]
Ø Initial Probs :[/b]
o Banks were reluctant to share their cust data.
o They were not under legal obligation to do so.
Ø However, with RBI's efforts, more and more banks and NBFCs have joined hand in providing customer data to CIBIL and in return get data on the customers on payment of some fees from CIBIL.
Ø Introduction of PAN cards and making the same mandatory for availing most banking services has helped improve quality of CIBIL reports.
Corporate Credit Ratings[/b]
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies such as A.M. Best, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C.
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Sovereign credit ratings
A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country[/b]. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account. Sovereign ratings address the credit risk of national governments, but not the specific default risk of other issuers.
Standard & Poor's appraisal of each sovereign's overall creditworthiness is both quantitative and
qualitative. The quantitative aspects of the analysis incorporate a number of measures of economic
performance, although judging the integrity of the data is a more qualitative matter. The analysis is also qualitative due to the importance of political and policy developments and because Standard & Poor's ratings indicate future debt-service capacity.
· In recent years, there has been growth in new rating mandates from countries and regions that view ratings as a means to attract foreign direct investment.
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Credit ratings by agencies and their meaning:[/b]
1. [/b]Satandard and Poor[/b]
a. [/b]The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D.[/b]
b. [/b]Anything lower than a BBB- rating is considered a speculative or junk bond.[/b]
2. [/b]Moody’s Ratings[/b][/b]
a. [/b]The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. A.M.[/b]
3. [/b]Best Ratings[/b][/b]
a. [/b]Best rates from excellent to poor in the following manner: