Types of Credit Rating
We
have seen the various rating symbols for different categories of the
debt instruments. We can also classify credit rating as types of credit
rating which are based on different securities. These are: 1. Equity rating
2. Bond rating 3. Promissory note rating
1. Equity Rating
When different
companies are issuing shares, equity rating will enable the investor to choose
proper equity share on the basis of the credit rating. While judging the equity
rating, the past performance of the company, the earning per share and the
turn-over of the company will be taken into account. If a loss making company
turns into a profit making one, after wiping off its losses, its equity rating
will go up. At the same time, if there is a decline in the dividend rate of an
existing concern, compared to its previous years, its rating will get a
beating.
2.
Bond Rating Bonds
are issued both by Government as well as by private sector companies. In the
international market, rating of bonds will depends on the rate of interest
offered and the value of the currency it represents. If the bond is issued in
terms of U.S. Dollar or Pound Sterling, its value will be high and the rating
will naturally be on the positive side. But the bonds of under developed countries
will have lesser credit rating due to high fluctuations in their currency
value. Bonds are also issued in the domestic market by both State and Central
governments. Even the local governments, such as Corporation, such as
Corporations and Boards also issue bonds for raising long-term finance in
India; government bonds are preferred to private bonds as there is a guarantee
for repayment of the principal and interest amount.
3.
Promissory Note Rating In
order to raise short-term loans, promissory note are issued by different
commercial companies and depending upon their resources, these promissory notes
will have credit rating. But, the issue of promissory notes will have no
backing and the person advancing the resources against the promissory notes
will undertake greater risks. Depending upon the credit rating, ranging from P1
to P6, promissory notes are preferred as a short-dated instrument. The
unutilized resources lying with commercial banks may be invested in promissory
notes of a better credit rating so obtained on idle funds.
4.
Commercial Papers These
are instruments issued by leading non-banking financial companies which
can be obtained by companies for raising short-term loans from commercial
banks. On due date, commercial banks will present these papers to the NBFC
which has issued the commercial paper and funds will be obtained along with
interest. Later on, the NBFC will collect the amount from the company which has
utilized its commercial paper for raising its short-term loans. In order to
enable the commercial banks to discount commercial papers, credit rating is
provided to the commercial papers which depends upon the standing of the
non-banking financial company NBFC) which is issuing the commercial paper.
5.
Sovereign Rating When
countries are issuing credit instruments in the international market such
as Treasury bills and Bonds, they will be rated according to the economic
condition of the country. Generally, the countries in the world are grouped
under three categories, viz.,
(a) Countries which are
politically and economically well developed.
(b) Countries which are
politically stable but economically week.
(c) Countries which are
politically and economically unstable or weak. In the first category, we have
all the developed countries like U.S.A., U.K., Japan, etc., and their bonds
will have high credit rating. In the second category we have countries like
India which have slightly lesser credit rating and in the third category we
have some of the African countries such as Rwanda, Kenya, Zulu, etc. The credit
rating of the third category of countries will certainly be lower. In India,
State Bank of India issued in the international market different credit
instruments such as India Resurgent
Bonds and Millennium Deposits and they were oversubscribed owing to
the reputation of SBI,. All the NRIs throughout the world, could
subscribe to these bonds and SBI could raise a substantial amount in terms of
foreign exchange.
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