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Business Credit Monitoring
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Business Credit Monitoring:
The debt market in India is increasing. A number of companies that have been borrowing directly from the capital market also create a healthy situation. The industrial environment has become more and more competitive demanding for the supply of funds. The investors have been increasing towards the capital market and they find the borrowers assurance in the timely payment of interest and principal. At the present situation, the investors need an independent and credible agency which judges impartially and gives a better direction in this regard. The quality of debt obligation depends upon many factors.
The companies needs are different, the investors expectations are different; the financial institutions environment is different for making the investment decisions. For a thorough understanding of the concept of credit monitoring, it is necessary to know the definitions given by some authorities in this field. It is a process of evaluating the risk associated with the credit instrument.
credit monitoring can be defined as Credit Monitoring is designed exclusively for the purpose of grading bonds according to their investment quality.
According to Moodys Investor Service, Monitoring are designed exclusively for the purpose of grading according to their investment qualities.
S&P defined the credit monitoring as A S&Ps corporate or municipal debt ranging is current assessment of the credit worthiness of an obligator with respect to specific obligation.
The CRISIL has defined Credit Monitoring as The CRISIL monitoring symbols indicate in a summarized manner CRISILs current opinion as to the relative safety of timely payment of interest and principal or a debenture, preference share, fixed deposit or short term instruments.
credit monitoring is not a recommendation to the investors / buyers of a financial product. It is a method of evaluation of the company. It is not a one time evaluation of risk. It has to be done by specialized, expert, reputed, accredited institutions. The monitoring process is meant for the debt instruments. It does not grade the whole organization. It is only confined to the financial affairs of the concern. It reflects the issuers financial strength, the soundness of operations, and efficiency of top-level management and overall performance of the organization. Generally the monitoring firms undertake the task of monitoring the financial instruments on a request by the organization issuing that instrument. It is an act of assigning values to the financial instruments by estimating the solvency. The monitoring reflects the financial status of the company in the market. credit monitoring is just like getting of the ISI mark to a commodity. It is an observation made by the outside concern regarding the financial capabilities of a firm. Equity shares cannot be rated like bonds, debentures or any debt instrument.
The first credit monitoring services emerged in U.S.A in 1909. It was first introduced by John Moody. His monitoring became popular with the investors. In U.S.A, the S&P monitoring became very popular in 1920. They began to rate the companies and governing bodies issuing bonds to the public. The first credit monitoring was done by CRISIL in 1988 in India. The monitoring have been the indicators of the current opinion of the relative capability of timely servicing the debts and obligations. Different instruments of the same company may carry different credit monitoring. The credit monitoring is highly beneficial to both the investors and the borrowing companies.
The benefits to the various parties concerned with the monitoring are listed below: a) To the investors. b) To the borrowers. c) To the Government. d) To the Credit monitoring companies.
A. To the Investors: The following are the advantages to the investors due to the credit monitoring services. a) The investors will get the best quality of information at low cost. b) The investor can take the calculated risk in their investments. c) The credit monitoring services encourage the common man to invest his savings in the capital market for getting the higher returns. d) Credit Monitoring will provide safeguard against the bankruptcy and other malpractices by the corporate sector. e) credit monitoring will guide the investors by monitoring the instruments to various companies for the investment making decision.
B. To the Borrowers: a) Companies with good monitoring can enter the capital market confidently. b) For sincere and honest corporate buyers, they can raise large resources of funds from the market at cheaper rates. c) It can be used as a marketing tool. d) The good monitoring can attract the foreign collaborators. e) It is the barometer of financial discipline among the corporate borrowers. f) There is no scope for propaganda among the companies during the rise of resources from the market.
To the Government: a) Fair and good monitoring motivate the investors towards the investment. Therefore the idle fund will be canalized for the productive use. b) Mega issues can enhance the employment opportunities which will be attracted by the credit monitoring. c) It provides protection to the investors without any burden on the part of the government. d) It facilitates the formulation of public policy guidelines on institutional investments. To the Credit Monitoring Companies: a) Honest and impartial credit monitoring agencies would definitely survive in the market. b) The existence and development of the credit monitoring companies largely depend upon their performance. c) The credibility is the life of the monitoring companies. d) There will be tremendous scope for other allied financial services.
Types of Credit Monitoring:
credit monitoring are of various types, depending upon the needs of the rates. The following are the common types of the credit Monitoring:
a) Debentures/Bond Monitoring. b) Commercial paper Monitoring. c) Equity Monitoring.
Debentures/Bond monitoring is the major business of the credit monitoring agencies. Monitoring the debentures/bonds or debt securities issued by the company or semi-government is called Bond monitoring. Commercial paper means a short term, unsecured promissory note. These papers are generally issued by the large companies. They are very popular in U.S.A. It is mandatory on the part of a company to obtain the monitoring approved by the monitoring agency to issue the commercial paper. In USA, there is much demand for monitoring of these papers. The monitoring of equity capital is called equity monitoring.
Corporate debt issues are preferred to bank borrowing because of flexible structuring with multiple options, floating or indexed interest coupons, better pricing, debenture trustee supervision, credit monitoring, credit enhancement facilitates the decision making by the issues and the investors. It provides a better fit on the expectations. Corporate debt issues also help in reaching the retail investors who get a better yield.
Limitations to Monitoring:
The monitoring the credit is important to the investment activity in the capital market. But the monitoring have the following limitations:
a) Monitoring of the financial debt instruments are only the indicators of risk. b) Monitoring are only a time bound grading of quality of a financial product. c) Monitoring carry some weight because opinions are made by the experts in the field and poor grade instruments will get flop in the market. d) If the monitoring agencies are not retaining the best talented expert professionals, then the monitoring will become undependable. e) Monitoring agencies do not give the monitoring of equity.
Credit monitoring provides a relative ranking of the credit quality of the debt instruments. It does not evaluate about the reasonableness of issue price, possibility of capital gains, and liquidity in the secondary market, risk of pre-payment by issue or interest or exchange risks. It is an opinion expressed by an independent professional organization. It helps the issuer of debt instruments to price their issue correctly and to reach out the potential investors.
Scope of Credit Monitoring:
The scope of credit monitoring in India is restricted to the debt instruments. The financial instruments such as debentures, bonds, fixed deposits and commercial papers are rated. But in the developed countries like USA and UK, the equity shares are also rated. In the present environment, the credit monitoring has become an obligation. There is a strong need for the credit monitoring in the market. The lack of the information in the market about the issuer and the instrument led to the need for the credit monitoring. The corporate sector entirely depends upon the public for the project finance. This has resulted in the issuance of a number of debt instruments. The capital market is dominated by the share brokers and the other intermediaries. Sometimes they canvas for themselves. They motivate the investors in favor of a particular financial instrument. Therefore to overcome this problem, it is necessary for the safety of the investors to rate the debt instruments in the market. If the credit monitoring does not exist in the market, the investors may fall in dilemma and there will be chance to cheat the innocent investors. After the introduction of free pricing of securities by the companies, the credit monitoring has become a weapon in the hands of the investors to analyze the financial instruments floated by the issuing company.
Objectives of Credit Monitoring:
The basic objective of credit monitoring is to provide the best and low cost information to the investors to take the investment decisions, in a particular instrument. The following are the objectives of the credit monitoring system.
a) It imposes a financial discipline on the borrowers. b) It helps the financial intermediary in discharging the functions relating to the debt issues. c) It guides the investor regarding his commitment towards a particular debt instrument for his better returns. d) It facilitates the formulation of the public guidelines on the institutional investment. e) It may provide adequate funds for the high rated companies at a low rate of interest. f) It lends greater credibility to the financial and other representations. g) It encourages transparency of information and better accounting standard.
Credit monitoring process:
The credit monitoring process involves the following procedure:
a) The issuing company approaches the monitoring agencies. b) On the basis of client needs, monitoring agency appoints a team of experts to appraise the financial position of the company. c) The experts team makes report to the agency after evaluating the clients financial position. d) Credit monitoring agency submits its observation about the quality of debt instrument through symbols.
Credit Monitoring Agencies in India:
The credit monitoring is a specific evaluation about the credit quality of the issuer of securities. It is done for a particular financial instrument. It has assumed great importance for the individual investors, brokers and financial advisers with the expansion of the capital market. The credit monitoring agencies not only rate the instruments of the private corporate sector but also rate the public sector units debt instruments. The proposed bond issued by the Public sector units should be evaluated by the SEBI and the credit monitoring agencies. The permission has been granted with a view of making the Public Service unit bonds more attractive in the market. The credit monitoring agency does not create a fiduciary relationship between the credit monitoring agency and the monitoring users. Unsolicited credit monitoring exists in abroad. It is based on the information provided by the issuing company. Credit Monitoring Agencies consider various factors such as risk composition, market situation, opemonitoring efficiency, track record, accounting quality, planning and control systems, financial flexibility, profitability, liquidity and asset quality of the issuer company. It completes its task and assigns the grades. The monitoring are continuously monitored by the agency and the grades are changed, suspended or withdrawn by it at any time according to the new information. It is not only to guide the investors, fund managers, brokers, financial analysts, but it is also used to misguide them which depend on the sincerity and honesty of the agency.
In India, the following agencies are fully involved in the Credit Monitoring activities.
1. Credit Monitoring and Information Services of India (CRISIL). 2. Investment Information and Credit Monitoring Agency of India Limited (ICRA). 3. Credit Analysis and Research Limited (CARE). 4. Onida Individual Credit Monitoring Agency of India Limited (ONICRA).
Related Topics:
1. Credit Monitoring of Manufacturing Companies. 2. Credit Monitoring of Financial Companies
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