WHAT IS CREDIT RATING?
Credit Rating means an assessment made from credit-risk evaluation, translated into a current opinion as on a specific date on the quality of a specific debt security issued or on obligation undertaken by an enterprise in terms of the ability and willingness of the obligator to meet principal and interest payments on the rated debt instrument in a timely manner.
Thus Credit Rating is:
(1) An expression of opinion of a rating agency.
(2) The opinion is in regard to a debt instrument.
(3) The opinion is as on a specific date.
(4) The opinion is dependent on risk evaluation.
(5) The opinion depends on the probability of interest and principal obligations being met timely.
Such opinions are relevant to investors due to the increase in the number of issues and in the presence of newer financial products viz. asset backed securities and credit derivatives.
Credit Rating does not in any way linked with:
(1) Performance Evaluation of the rated entity unless called for.
(2) Investment Recommendation by the rating agency to invest or not in the instrument to be rated.
(3) Legal Compliance by the issuer-entity through audit.
(4) Opinion on the holding company, subsidiaries or associates of the issuer entity.
It should be noted that rating is a continuous process and as new information come, an earlier rating can be revised. While the rating is usually instrument specific, certain credit rating agencies like CARE, undertakes credit assessment of borrowers for use by banks and financial institutions.
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