CU-MBA-SEM-III-Banking and Financial Services Management -Second Draft

the off chance that the credit score is higher than more will be the eagerness of a financial backer to make a speculation.  Provides safety In the event that the FICO assessment of an organization is high, it gives an affirmation of wellbeing to the financial backers identified with their speculation and there will be likewise a base danger of liquidation.  Saves time and effort FICO assessment assists the financial backer with taking the venture choice rapidly by relying on the appraisals which are finished by the expert civil score fix organization. The financial backer need not burn through his time and exertion in social occasion and investigating the monetary data about the credit remaining of an organization.  Done by expertise professionals Credit score is by and large done by the experts having the master information. The financial backers can undoubtedly depend on such evaluations and settle on a venture choice unafraid to them. The financial backer can know and investigate diverse credit instruments.  Recognition of risk and returns FICO score is a fundamental apparatus which helps in deciding the danger joined to a credit instrument and returns anticipated. It assists the financial backer with having the understandability the value of the organization. From a Company Point of View  Increases goodwill High credit score assists the organization with expanding the generosity of the organization subsequently making certainty and confidence in the personalities of the financial backers, investors, clients, providers about the picture of the organization.  Healthy credit score The Company having high credit score suggests that the FICO assessment of the organization is high. A high CIBIL score prepares for faster advance endorsements from the monetary organizations at low-financing costs and they likewise appreciate different credit benefits like a slower pace of interest on advances.  Helps in growth and expansion High FICO assessment helps the organization in getting the advances from the banks rapidly due to the high FICO rating which assists the organization with using that sum in development and broadening and modernization. 251 CU IDOL SELF LEARNING MATERIAL (SLM)

 Ensures liquidity On the lookout, an organization with a decent FICO score guarantees liquidity for different credit instruments and assembly of the assets. From the Consumer's Point of View  Helps in channelizing the funds High FICO assessment organizations channelize the reserve funds of individuals into useful speculations which thus builds the venture and foster saving propensities among the people.  Protection of interest No organization can attempt to swindle any person with a high pace of interest without credit score which thusly ensures the interest of a person. From the Intermediaries’ Point of View At the point when an organization gives a rating to various credit instruments it saves time, endeavours of the stockbrokers as they need to put forth less attempts in persuading their customers in regards to the choice of various speculation proposition. Subsequently FICO assessment is an instrument which is required by financial backers to settle on the venture choices. In the event that appraisals are in a straightforward and in a deliberate manner, it will be useful to financial backers. It is similarly urgent for a person to keep a solid financial assessment by reimbursing the exceptional equilibriums on advances and Mastercard’s convenient and routinely. Having a solid cibil score makes an individual future secure. 14.6 RATING PROCESS FICO assessment helps financial backers by giving an effectively unmistakable, basic device that couples a potential obscure guarantor with an instructive and significant image of credit quality. Credit score gives impartial appraisal of the reliability of the organizations giving obligation instruments. Furthermore, they additionally give data about the reliability of corporate to the financial backers for a minimal price. Credit Rating Process  Receipt of the Request The FICO assessment measure starts, with the receipt of a conventional solicitation for rating from an organization envious of having its issue commitments under proposed instrument appraised by FICO score offices. An understanding is gone into between the rating organization and the backer organization. 252 CU IDOL SELF LEARNING MATERIAL (SLM)

The understanding explains the details of the rating task and covers the accompanying perspectives: i. It requires the CRA (credit score organization) to keep the data classified. ii. It gives the right to the backer organization to acknowledge or not to acknowledge the rating. iii. It requires the backer organization to give all material data to the CRA for rating and resulting observation.  Assignment to Analytical Team On receipt of the above demand, the CRA allots the work to a scientific group. The group for the most part includes two individuals/investigators who have skill in the pertinent business region and are liable for doing the rating tasks.  Obtaining Information The insightful group acquires the imperative data from the customer organization. Guarantors are generally given a rundown of data necessities and an expansive structure for conversations. The necessities are gotten from the experience of the backer’s business and extensively affirm to every one of the viewpoints which have a direction on the rating. The insightful group investigations the data identifying with its budget summaries, income projections, and other significant data.  Plant Visits and Meeting with Management The get characterization and a superior comprehension of the customer's activities, the group visits, and interests with the organization's leaders. Plants visits work with comprehension of the creation cycle, survey the condition of gear and principal offices, assess the nature of specialized staff and structure an assessment on the key factors that impact level, quality, and cost of creation. Direct exchange is kept up with the backer organization as this empowers the CRA's to consolidate non-public data in a rating choice and furthermore empowers the rating to be forward-looking. The subjects examined during the administration meeting are wide-going including serious position, procedures, monetary approaches, chronicled execution, hazard profile, and methodologies as well as auditing monetary information.  Presentation of Findings 253 CU IDOL SELF LEARNING MATERIAL (SLM)

Subsequent to finishing the examination, the discoveries are talked about finally in the inward board, containing senior experts of the credit score organizations. Every one of the issues having a course on the rating are recognized. An assessment on the rating is additionally framed. The discoveries of the group are at last introduced to the rating council.  Rating Committee Meeting This is the last expert for doling out appraisals. The rating board meeting is the lone part of the cycle where the backer doesn't take part straightforwardly. The rating is shown up at after composite appraisal of the relative multitude of components concerning the backer, with the main points of contention feting more prominent consideration.  Communication of Decision The relegated rating grade is imparted at long last to the guarantor alongside reasons or reasoning supporting the FICO score. The FICO scores which are not acknowledged are either dismissed or checked on in the light of extra realities given by the backer. The dismissed credit scores are not unveiled and complete privacy is kept up with.  Dissemination of the Public When the guarantor acknowledges the rating, the credit score offices spread it through printed reports to the general population.  Monitoring for Possible Change When the organization has chosen to utilize the rating, CRAs are obliged to screen the acknowledged evaluations over the existence of the instrument. The CRA continually screens all appraisals regarding new political, monetary, and monetary turns of events and industry patterns. This data is checked on consistently to discover organizations for, significant changes. Any progressions in the rating are unveiled through distributed reports by CRAs. 14.7 TYPE OF CREDIT RATING All credit organization offices utilize different wording for decide credit scores. Nonetheless, the documentations are practically the same. Appraisals are constantly assembled into two: a 'venture grade' and furthermore a 'speculative grade'.  Investment grade These appraisals imply that the venture is a strong one and the guarantor will in all likelihood meet the reimbursement terms. These ventures are evaluated less when contrasted with speculative grade ventures. 254 CU IDOL SELF LEARNING MATERIAL (SLM)

 Speculative grade These speculations are known to be high danger. Along these lines, they accompany higher loan fees. 14.8 CREDIT RATING AGENCIES IN INDIA The FICO assessment is assessed by a credit office in India who thinks about the quantitative and subjective qualities of the borrower. The FICO assessment organization investigates different things like fiscal summaries, yearly reports, reports given by expert and so on This in the end assists them with deciding the rating to be given to the substance. A portion of the top FICO assessment offices in India are Credit Rating Information Services of India Limited (CRISIL), ICRA Limited, Credit Analysis and Research restricted (CARE), India Rating and Research Private Limited, and so forth. 14.8.1 Credit Rating and Information Services of India Limited (CRISIL) CRISIL is one of the most established FICO score organizations in India. It was dispatched in the country in 1987 after which the organization opened up to the world in 1993. Settled in Mumbai, CRISIL wandered into framework rating in 2016 and finished 30 years in 2017. CRISIL gained 8.9% stake in CARE FICO assessment office in 2017. It dispatched India's first list to benchmark execution of ventures of unfamiliar portfolio financial backers (FPI) in the fixed-pay market, in the rupee just as dollar adaptation in 2018. The organization's portfolio incorporates, common finances positioning, Unit Linked Insurance Plans (ULIP) rankings, CRISIL alliance record, etc. 14.8.2 Investment Information and Credit Rating Agency (ICRA) ICRA Limited is a public restricted organization that was set up in 1991 in Gurugram. The organization was once in the past known as Investment Information and Credit Rating Agency of India Limited. Prior to opening up to the world in April 2007, ICRA was a joint endeavour among Moody's and a few Indian monetary and banking administration associations. The ICRA Group as of now has four auxiliaries - Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. As of now, Moody's Investors Service, the worldwide Credit Rating Agency, is ICRA's biggest investor. ICRA's item portfolio incorporates rating for - corporate obligation, monetary rating, organized money, framework, protection, common assets, task and public money, SME, market connected debentures, etc. 14.8.3 Credit Analysis & Research Ltd. (CARE) Dispatched in 1993, CARE offers FICO score administrations to regions like corporate administration, obligation appraisals, monetary area, bank advance evaluations, backer appraisals, recuperation appraisals, and framework evaluations. Settled in Mumbai, CARE offers two distinct classifications of bank advance appraisals, long haul and momentary 255 CU IDOL SELF LEARNING MATERIAL (SLM)

obligation instruments. The organization likewise offers evaluations for Initial Public Offerings (IPOs), land, environmentally friendly power administration organizations (RESCO), monetary appraisal of shipyards, Energy administration organizations (ESCO) grades different courses of instructive foundations. CARE Ratings has likewise wandered into valuation administrations and offers valuation of value, obligation instruments, and market connected debentures. Additionally, the organization has dispatched another global credit score office 'Bend Ratings' by collaborating with four accomplices from South Africa Brazil, Portugal, and Malaysia. Circular segment Ratings has initiated tasks and finished sovereign evaluations of nations, including India. 14.8.4 ONICRA The full type of ONICRA is Onida Individual Credit Rating Agency of India. Singular FICO score is a target evaluation of the danger connected to a monetary exchange as for a person. ONICRA FICO score office of India Ltd has spearheaded singular credit score administrations in India. ONICRA has been advanced by notable 'ONIDA' bunch, a 900- crore market pioneer in customer durables in India. An overview directed by Onida shows that solitary 0.7 million families own the three mainstream things, shading TV, fridges and clothes washers and the expected purchasers for a large group of different products like music framework, forced air systems, microwaves, and so forth is exceptionally enormous. With India moving quickly towards a credit only economy dependent using a credit card and commercialization, singular FICO assessment will be a file that the loaning foundations should bet on. Created economies like the US, Australia, UK, and so on is credit-driven and no advance is authorized without an accreditation from a rating organization. 14.9 SUMMARY  A FICO score is an evaluated appraisal of the reliability of a borrower in everyday terms or concerning a specific obligation or monetary commitment.  Credit appraisals decide not just whether a borrower will be supported for a credit or obligation issue yet additionally the financing cost at which the advance should be reimbursed.  A credit score or score can be allocated to any element that tries to get cash—an individual, an enterprise, a state or commonplace power, or a sovereign government.  Individual credit is evaluated on a numeric scale dependent on the FICO estimation; securities gave by organizations and governments are appraised by credit offices on a letter-based framework. 256 CU IDOL SELF LEARNING MATERIAL (SLM)

 Credit history is a record of your capacity to reimburse obligations and exhibited liability in reimbursing them.  Your credit report incorporates data about the number and kinds of your credit accounts, how long each record has been open, sums owed, measure of accessible credit utilized, regardless of whether bills were paid on schedule, and the quantity of late credit requests.  You will receive benefits for having a decent record, for example, being offered lower financing costs on contract credits and vehicle protection.  Credit rating measure is the cycle where a FICO assessment organization (ideally outsider) takes subtleties of a security, stock, security or an organization and examinations it to rate them with the goal that every other person can utilize those appraisals to utilize them as ventures.  There are just two manners by which any organization would finance its business – value or obligation. The value piece of the capital design could be gotten extensively from three sources: Promoters putting resources into the business, Company's inward incomes building over the course of the years to value, or IPO (Initial Public Offering)/FPO (Follow-on-public contribution) for which an organization taps distinctive monetary business sectors.  A credit score decides the likelihood of the organization taking care of its monetary obligation inside the specified time. The appraisals could be relegated to a specific organization, or could likewise be issue explicit.  Creditors depend intensely on the FICO score organizations for loaning at a specific cost for the danger reward proportion. Henceforth, the rating organizations need to guarantee decency of assessment, a falcon looked at approach for likely improvements later on, just as impartial credit scores for an organization they are assessing. In different instances of corporate loaning, the actual banks lead acknowledge investigation, as they probably shouldn't depend on outer credit offices and rather structure their own view on the credit of an organization. 14.10 KEYWORDS  Credit rating - A credit score is a measured appraisal of the reliability of a borrower in everyday terms or as for a specific obligation or monetary commitment. A FICO assessment can be doled out to any substance that tries to acquire cash—an individual, an organization, a state or commonplace power, or a sovereign government.  Credit worthiness - Creditworthiness is the way a bank confirms that you will default on your obligation commitments, or that you are so qualified to get new credit. 257 CU IDOL SELF LEARNING MATERIAL (SLM)

Your financial soundness is the thing that leasers take a gander at before they endorse any new credit to you.  Default - Default is the inability to reimburse an obligation, including interest or head, on a credit or security. A default can happen when a borrower can't make ideal instalments, misses instalments, or dodges or quits making instalments. People, organizations, and even nations can default on the off chance that they can't keep up their obligation commitments. Default chances are frequently determined well ahead of time by banks.  Credit Score- A financial assessment is a number somewhere in the range of 300 and 850 that portrays a buyer's reliability. The higher the score, the better a borrower looks to expected banks. A FICO assessment depends using a credit card history: number of open records, complete degrees of obligation, and reimbursement history, and different variables. Banks use financial assessments to assess the likelihood that an individual will reimburse advances in an ideal way.  Credit History - Your record is a proportion of your capacity to reimburse obligations and showed liability in reimbursing them. It is recorded in your credit report, which subtleties the number and sorts of your credit accounts, how long each record has been open, sums owed, the measure of accessible credit utilized, regardless of whether bills are paid on schedule, and the quantity of late credit requests. Your credit report additionally contains data with respect to whether you have any liquidations, liens, assortments, or decisions. 14.11 LEARNING ACTIVITY 1. If you are a credit rating agency, how do you determine whether you should lend money to a company? ___________________________________________________________________________ ___________________________________________________________________________ 2. If a company has a low credit score, what suggestions you would recommend to improve their credit rating? ___________________________________________________________________________ ___________________________________________________________________________ 14.12 UNIT END QUESTIONS A. Descriptive Questions Short Questions 258 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Define credit score. 259 2. What is credit history? 3. What is full form of FICO? 4. Name few credit rating agencies? 5. Define credit worthiness. Long Questions 1. Describe credit rating agencies in India? 2. Explain types of credit rating. 3. Discuss credit rating process in detail? 4. What are the benefits of credit rating? 5. What are the functions of credit rating? B. Multiple Choice Questions 1. What are the 3 C’s of credit rating? a. Character, capital and charity b. Character, capacity and charity c. Charity, capital and censor d. Character, capacity and capital 2. Which is an advantage of using credit to complete a purchase? a. Impulse buying b. Overbuying c. Financial Difficulties d. Instant enjoyment 3. How can an established credit rating be damaged? a. A person has no collateral. b. A borrower fails to live up to the repayment terms of an agreement. c. A person’s income increases. d. A person’s expenses decrease 4. Which is a disadvantage of credit? a. Impulse buying b. Emergencies c. Savings CU IDOL SELF LEARNING MATERIAL (SLM)

d. Convenience 5. What is the term for a person or business that owed money? a. Creditor b. Debtor c. Investor d. Financial institution Answers 1-d, 2-d, 3-b, 4-a, 5-a 14.13 REFERENCES References  Ahn, M., S. B. Bonsall and Buskirk, A. V.(2019). Do managers withhold bad news from credit rating agencies? Review of Accounting Studies.  Akins, B. (2018). Financial reporting quality and uncertainty about credit risk among ratings agencies. The Accounting Review.  Albert, A. (1976). A cash flow approach to corporate credit analysis. Management Accounting. Textbooks  Alissa, W., Bonsall, S. B., Koharki, K. and Penn, M. (2013). Firms' use of accounting discretion to influence credit ratings. Journal of Accounting and Economics.  Allen, L., Boudoukh, J. and Saunders, A. (2003). Understanding Market, Credit, and Operational Risk: The Value at Risk Approach. Blackwell Publishing.  Altamuro, J., Johnston, R., Pandit, S. and Zhang, H. (2014). Operating leases and credit assessments. Contemporary Accounting Research. Websites  https://economictimes.indiatimes.com/definition/credit-rating  http://www.saharating.com/~saharati/en/services/credit-rating/credit-rating- methodology/  https://www.yourarticlelibrary.com/economics/7-important-benefits-of-credit-rating- to-a-company/1447 260 CU IDOL SELF LEARNING MATERIAL (SLM)