Credit Rating as a Career Choice - Gaurang Shah
What is Credit Rating
A credit rating is a formal evaluation of a company’s financial health and ability to repay debt obligations and the likelihood of the borrower to default on a loan.
Need for Credit Rating
Cash flows from Foreign Institutional Investors (FII) are overwhelming the Indian capital markets and can dictate to a large extent the future direction of the stock markets. The growth and globalisation of Indian Capital markets have led to an exponential surge in demand for professional credit risk analysis.
Investors need to deploy funds quickly, to take advantage of fleeting opportunities. Most of the times, they must decide in a few minutes (or even seconds) whether to invest in a particular instrument or not. Also, all investors don’t have the time and expertise to study and form a well-informed opinion on all available investment instruments. So, they need brief up-to-date, authentic and value-added information in a user-friendly format that tells them all they need to know to make an informed decision.
Independent agencies have come into operation to fill in these need gaps. They provide ‘rating’ of equity debt, Fixed Deposit (FD), Certificate of Deposit (CD) and other instruments already issued or planned to be issued by corporates.
Credit Rating Agencies
Credit Rating Agencies (or CRAs) provide credit information to creditors, such as banks and businesses, to help them decide whether to issue a loan or extend credit.
There are several firms that investigate, analyse and maintain records on the credit status of individuals and businesses—for example, Equifax for individuals (in the UK), and Dun & Bradstreet for commercial firms. Standard & Poor’s and Moody’s assign ratings to bonds.
Borrowers are rated by CRAs according to the borrower’s creditworthiness or risk profile. It is based on the borrower’s current financial situation as well as past performance in debt repayment, foreclosures, insolvencies and write-offs. Any defaults and history of slow or delinquent payments get a low rating for the issuer.
Credit ratings are expressed as letter grades such as A-, B, or C+. The assessment is made on a particular issuer’s creditworthiness. Ratings range from triple A (very highly rated) to D (already in default).
There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower. Such independent, professional and impartial opinions help issuers, including lesser-known companies, access a broader investor base. The corporates also benefit because investors are more inclined to invest in rated instruments than in non-rated instruments. It increases the marketability of their issues. They can raise funds more easily and faster.
The Players
The Credit Rating Information Services of India Limited (CRISIL), Investment Information and Credit Rating Agency of India (ICRA), Credit Analysis and Research Limited (CARE) and Duff & Phelps –are the four major all-India CRAs in India. CRISIL and CARE are headquartered in Mumbai; ICRA is in New Delhi. All have a branch presence in most major Indian cities.
The Game - Product and Services Bouquet
CRAs now rate each and every instrument that requires an independent, unbiased opinion on the risks involved in investing in that instrument. The issuing corporate pays for the rating that may or may not be favourable. It is up to the corporate to use that rating or not.
Credit Rating Services
All CRAs rate rupee denominated debt instruments like:
- Bonds and Debentures (Long Term)
- Fixed Deposit Programmes (Medium Term)
- Commercial Paper and Certificates of Deposit (Short Term)
- Structured Obligations and sector specific debt obligations (issued by infrastructure companies)
The clients for such services cover the entire economic spectrum: manufacturing companies, banks and financial institutions, power companies, service companies, construction companies, insurance companies, municipal and other local bodies, non-banking financial corporations (NBFCs), telecom companies, companies involved in infrastructure such as ports, dams, roads, and highways.
The New Product Division helps develop new rating methodologies and also sells this technology to CRAs in other developing companies.
Apart from rating of debt and equity instruments, CRAs
- act as project finance advisors to International banks, Export Credit Agencies such as Japan bank for International Cooperation (JBIC), SACE, Export Credit Guarantees Department (ECGD) and US Exim and Multilaterals such as the World Bank and European bank for Reconstruction and Development (EBRD).
- provide Management Training and Courses through simulated case studies, lectures and staff access. These are both public and customised.
- organise regular annual conferences on various topics.
- publish a monthly journal along with a daily e-version and online database service in free and subscription paid versions.
- offer risk management solutions and advice to Banks and Corporates in the areas of credit and market risk.
- fund evaluation services, valuation tools and market benchmarks for the mutual fund industry.
- provide indices, index products and services to investors in Indian equities. The most notable being the S&P CNX Nifty and S&P CNX 500.
- conduct high-end customised equity research and analytics and knowledge process outsourcing. The clients are leading financial institutions, investment banks, private equity firms and consulting companies.
- act as a financial market newswire offering a strong combination of news, views, analytics and tools on Indian money and fixed income markets.
These activities offer substantial career scope for MBAs who are research-oriented and would like to train to be trainers and seminar organisers.
In a nutshell, CRAs enable clients to take informed investment and resource allocation decisions and provide benchmarks and analyses for policy and business decision makers. This they do on a real-time basis on multi delivery platforms. The CRAs are early adopters and heavy users of IT, and MBA graduates majoring in Operations can easily fill the slot.
Corporate Culture in CRAs
Being a part of the New Economy service sector, the CRAs excel in providing a fast track career to quick learners. Typically, they give early responsibility, tremendous learning opportunities with the cream of academic intelligentsia, international travel and experience.
The CRA'S provide a far superior training compared to Old Economy firms, coupled with the opportunity to work in different industry and advisory practices. Working on cutting edge financial analytics, information and risk management tools, completely facilitated by advanced IT infrastructure, make a CRA a good place to learn while you earn.
There is also another much overlooked benefit: the thorough grounding in the economic and financial fundamentals will launch you into a highly successful consulting or training career later on in life.
Career Opportunities for MBAs
There are two main career streams in CRAs: The first stream is that of the Financial and Industry Analysts who gather data, interview top managements and perform the initial analysis as per the proprietary methodology laid down by the CRA.
This would draw upon the analytical skills of MBA graduates and those who are engineers with a Finance major are at a distinct advantage. People having around two years’ experience in sectors like automobiles / cement / commodities / retail / metals or consulting or equity research in domestic broking houses are generally preferred.
The Career Path
Fresh MBA graduates are generally taken in as Trainee Analysts. Being work predominantly related to financial analysis, Chartered Accountants (CAs) and Chartered Financial Analysts (CFAs) also compete for a piece of the pie. However, at CRISIL, MBAs outnumber CAs by far.
The CRISIL website mentions that they have a rigorous 3 to 4 stage recruitment process and they constantly induct top-notch talent at entry as well as at lateral levels from premier universities, professional associations and management institutions. Entryspace level selection involves aptitude tests, group discussions and personal interviews. The four main attributes that will help you make the grade are: analytical and reasoning ability, domain Knowledge, personal and professional integrity, and communication skills.
In a couple of years, the trainees are groomed to be Research Analysts. Their primary responsibility would be to track and analyse industries and companies. They also manage a team of trainee analysts and associates.
The next level is that of Manager Ratings. They specialise in and track a few specific sectors or companies. The job includes direct interaction with senior management of client companies, writing reports and making presentations to CRA’s Rating Committee. Key responsibilities will include leading assignments, ensuring adherence to time, quality and client satisfaction.
Further up is the position of Manager – Ratings, International Projects.
The job involves:
- Leading a team of 5 - 6 Analysts
- Coordinating with international client and analysts
- Ensuring that the deadlines are met and quality standards are maintained
- Imparting a high degree of process orientation and implementation of Knowledge Management Systems.
Conclusion
Thus, if you are an engineer with an MBA in Finance, with an analytical understanding of macro-micro linkages, or interested in applying economic principles to live business applications, or want to become a corporate trainer, a job with a CRA would be the right one for you.
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