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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


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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