Page 139 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes Companies normally have a board of directors. These directors are elected representatives of
the shareholders or the lenders, and are there to oversee that the company looks after the
interests of shareholders and lenders.

Lenders

Lenders loan money (or other resources) to the organisation. They are interested in only one
thing— being repaid with interest. Lenders include banks, financial institutions, finance companies
and public. Lenders look for information to help them assess whether an organisation is likely
to repay or not. External reports help them answer questions about the organisation such as:
How promptly has the company paid its past loans?

What are the risks that it currently faces?
Can it repay its current obligations and current liabilities?
How relevant are its cash flow projections with which it will repay its obligations?

Often, reports from the credit rating agencies are used to know the credit standing of the company.
There are several international and Indian credit rating agencies. Among Indian agencies, the
major ones are CRISIL (Credit Rating and Information Services of India Ltd.), CARE (Credit
Appraisal and Rating Agency Ltd.) and ICRA (Information and Credit Rating Agency Ltd). All of
them have one or the other financial institution as their promoter. Financial institutions floated
these agencies because of their own credit appraisal and information requirements, but these
agencies perform credit ratings on an independent basis, free of the influences of their promoters.

Caselet Case: S&P Ups ICICI Rating

nternational credit rating agency Standard and Poor’s (S&P) some time back revised
its rating outlook on ICICI Ltd to ‘stable’ from ‘negative’, even as it reaffirmed the
Ifinancial institution’s long-term rating of ‘BB’ and short-term foreign currency rating
of ‘B’.
With the upward revision in outlook, ICICI’s rating is on par with India’s sovereign rating
and a notch higher than the long-term outlook of other financial rivals like IDBI and BoB
at ‘negative’. The other major player SBI does not have a long-term rating.
In a release, S&P had stated the change in outlook was ‘supported by continuing progress
in the strengthening of ICICI’s balance sheet and a lesser probability that asset quality
will deteriorate significantly from current levels.’
S&P had said ICICI’s steps towards universal banking have helped it diversify its risks
better than its peers, which will give it a competitive advantage. However S&P said it
would still take some time for ICICI’s universal banking strategy to manifest itself fully
in its balance sheet and earnings profile.
S&P has noted that by virtue of its expertise in innovative project and infrastructure
financing, ICICI had taken a leadership position that should enable it to withstand increased
competition from the commercial banks, which are now entering this market.
Contd...

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