Your Career as "A" Credit Rating Analyst

Introduction:

This article intends to help readers to know more about the career opportunities as Credit rating analyst in India. In this section, I would briefly describe about the process of credit rating / appraisal typically followed in India, the kind of career growth prospects one can expect working as credit rating analysts, and what are the key entry requirements for entering into this industry.

Credit markets historically have played a crucial role in sustaining growth in almost all countries, including advanced countries which have now fully developed capital markets. The credit market in India has traditionally played a predominant role in meeting the financing / investment needs of various segments of the Indian economy. In fact the bank credit to GDP ratio in India has increased from a mere 7.1% to whopping 35% in 2011.Extension of credit, however, also poses some risks, which range from pure credit risk to the risk of over lending. While pure credit risk is the risk of loss due to non-payment by the borrower, the risk of over-lending arises when banks extend loans without appropriate credit  appraisal and due diligence on account of excessive optimism about future prospects. It is here where credit analysis plays a major role in the due diligence of the business or organization.

Credit analysis is a process by which one calculates the creditworthiness of a business / organization or individual. Credit analyst is responsible for assessing a loan applicant’s creditworthiness. Credit analysts are typically employed by commercial and investment banks, credit card issuing institutions, credit rating agencies and investment companies. Crisil, ICRA and CARE are the three major local credit rating agencies in India. Apart from this, PSU and private banks such as IDBI, ICICI, HDFC, SBI, Yes Bank, etc also aggressively hire credit analysts. In addition, global banking institutions such as HSBC, Well Forgo, Deutsche Bank, GoldmanSachs, etc have off shored their global credit appraisal process, in turn creating an additional employment opportunity for finance graduates in credit research in India.

Why rating is useful? 

There are two aspects of this. Credit rating is very critical for investors to gain insight about company business, operating performance, and key risk before they decide to invest or lend money to the organization. Thus credit ratings are essential tools for helping investors to make investment decisions. On the other side of spectrum, credit ratings are equally important for the entities looking for investors. For instance, an investment grade rating can put a security or company on the market radar, and thus can easily attract investments at lower funding costs. Thus credit rating acts to facilitate investments and many companies strive to maintain and improve their ratings.

What are the typical job responsibility or work profile as credit analyst?

Credit analyst jobs often include looking at financial documentation, including bank statements, tax returns and other loan records. From this information, the analyst evaluates whether the borrower demonstrates the ability to repay the credit or loan amount. Analyzing financial statement and performing ratio analysis for assessing is one of the critical aspects in credit rating / appraisal. This also includes projecting the financial standing of the company on the basis of analysis of Balance Sheet, Profit & Loss Account and cash flow statements, writing rating report and rationale for assigned ratings, conducting research on the industry in which the company is operating and keeping a track on the performance of the industry as a whole, and carrying out SWOT analysis.

Apart from this, another integral aspect of credit rating process is interacting with CFO’s and MD’s of companies and visiting company sites for deeper understanding the nature of their business, the operations & risk factors associated with them.

Conflict of Interest

As you might have guessed, here there is a clear conflict of interest as the fees for the rating is paid by the same client for whom the rating is conducted. However, in the industry this is very well managed by creating a firewall between business development and ratings team thus ensuring that the commercial terms (such as fees) does not have any impact on the rating's of the client.

Career path as a credit research analyst

The entry designation in these profiles is usually an analyst/junior analyst depending on your educational background and work experience. The career path usually follows as Analyst-->Senior Analyst-->Manager-->Senior Manager-->Group Head. The roles usually entail more responsibilities as you move up the organization ladder including client relationship management, business development etc. Typically, it takes about 2-3 years at a level post which you can expect to move to a higher level in the organization.  The salary at entry level usually varies from company to company and could be in the range of Rs.3lpa to Rs.6lpa depending on your educational qualifications.

In terms of other career options, after having a solid work experience at a rating agency, you can move to credit department of a bank which is involved in credit appraisal of existing and new clients. You can also move into debt syndication, project financing and consulting domains after you have gained considerable experience in ratings domain.

Recruitment process

The typical recruitment process includes a written test, followed by 2-3 rounds of technical interview and an HR discussion. Usually, a CA/MBA/CFA is preferred for the role of rating analyst, but there is no rank or college preference as such. Hence this is more or less open to  MBA's with any background and not just one of Commerce or Engineering. Further,  certifications such as Financial Risk Management (FRM) or CFA course does enhance prospects of an individual in the industry.

Piece of Advice

Although all sorts of educational background people are out there in the industry, however knowledge of accounting standards, financial analysis, Balance Sheet ratios is a must before one sits for any of these interviews. Typical interview questions would focus on financial analysis, balance sheet, accounting practices, current industry trends and other factors to be considered for credit rating. You will also face questions regarding current work-ex, if any.

For more insights on interview questions visit 

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In terms of work and profile, this is a good industry to be in with good growth prospects. Further, you would get to build strong network as you meet and interact with senior management of big companies in varied industries. This will give you extremely useful insights in the industry helping your overall career prospects. However, please do note that in terms of compensation this is not the best in finance industry; in fact I would say that starting compensation is sometimes even lower when compared to KPO/Captive firms.

Bird's Eye view of Derivatives job opportunity in India

Derivative is a financial security whose price is dependent upon or derived from one or more underlying assets. The legendry investor Warren Buffett once described derivatives as “financial weapons of mass destruction.”  Derivatives like MBS and CDOs played the pivotal role in causing the 2007 global recession. Today the best of MBA graduates want to land up with a derivative trader’s job, which typically pays from a 100,000 USD to 150,000 USD for fresh graduates. We recommend you to watch the 2011 movie “Margin Call”, loosely based on the 2008 Lehman Brother Bankruptcy,  to get a feel of how a derivative-trading department works. However, derivative job landscape in India is slightly different.

Work Profile Classification in Derivatives

Broadly the work profile in derivatives can be classified into Front office work, Middle office work, and Back office work.

Front office jobs include that of a trader, sales person, structuring, legal attorney and quantitative analyst.  For trading and sales most of the investment banks hire the top MBA graduates from the top B-Schools globally; these jobs are typically located in the banks’ global finance centers like London, New York, Tokyo, Hong Kong etc. However, there are a few trading jobs available in India also. Firms like Futures First, NCDEX hire graduates who have the capability to become successful traders. Work load wise it is a high-stress job and firms expect trader’s to consistently make money. Those who do not perform are also fired on a short notice.

For quants and structuring jobs typically a math degree with Masters or Phd is mandatory. For candidates with required academic background there a few job opportunities in India. These jobs typically involve financial modeling and programming for trading strategies, valuation of derivatives etc.

Middle Office jobs include support functions to front office activities, risk management and financial control. There are many middle office job opportunities available in India in Bank captives and Finance KPOs. The key job profiles are as follows

1.    Exotic Trade Review

This job profile involves reviewing the trade booked by traders in the banks’ risk management systems. The main function of this job is to understand the booking of an OTC derivative and match it with the actual terms and conditions of the trade. If there are any mismatched between the booking and the term and conditions it needs to be escalated to the trader or booking team. These errors significantly increases the banks risk, because once trade is booked in banks risk management system based on the booking trader hedges the position to mitigate the risk. If the actual booking is wrong then the hedging also goes wrong. On similar lines if trade terms are wrongly drafted it creates a legal risk for bank at the time of settlement when the trade matures.

2.    P&L Control

The value of derivative contracts keep changing on a day-to-day basis. Primary responsibility of this function is to monitor the changes in derivative instrument and provide explanation for any large changes in the MTM value of derivative instruments. The purpose of this function is to monitor effect of changes in market parameters on derivative instruments.

3.    Price Testing

Price-testing involves the independent check of the prices at which a portfolio of derivative transactions is priced at a particular point of time. This is done by comparing the prices at which the portfolio has been closed against the independently-sourced market data, from sources such as Bloomberg, Reuters, or market consensus forums such as TOTEM. Post this comparison if the portfolio is overly aggressive or conservative in how it has been marked, trader’s P&L is adjusted.

4.    Trade Booking Support

This involves helping trader in booking the trades in the bank’s risk management systems. It also provides support for any change in the booking as result of change of contract terms or market events.

Most of the global banks have opened their captives in India which offer most of the middle office jobs. Middle office jobs are also offered by KPOs like Irevna, Amba Research, Copal Partners. Pay scale is in KPO is slightly lower than that in the captives but work quality is same. Average pay scale is around 6-9 lacs p.a. for fresh graduates. These firms typically hire MBA graduates from tier 1 or tier 2 schools like IIM Kozhikode, SP Jain, IMT Gaziabad, SP Jain etc, CAs, and engineering graduates from IITs, BITs, DCE and top NITs. Thought graduates from engineering background are expected to have completed some certification like CFA, FRM before applying for these jobs.

Back Office Jobs involves data-checking once the trades are done and transacting the required transfers, which involves cash settlement with counter parties when a contract expires or when a contract is signed with counterparty. Many banks have outsourced their back office operations. It is, however, a critical part of any bank. Generally graduates from tier 2 or tier 3 MBA schools are able to get jobs in back office derivative functions.

Regulatory reporting is also an important back office functions which requires good understanding of financial market regulations and derivative accounting and reporting standards.

Technology and Back office

An important part of back office job functions is technology support.

Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. For finance graduates who have the understanding of domain and technology role of a business analyst is highly lucrative. There are many technology firms operating in finance domain which hire graduate from top B-schools in India for the roles of business analysts. Most of the business analyst roles in technology have ample on-site opportunities and pay scale is above average.

A Few Tips

Which type of job any graduate is able to land up with is entirely dependent upon the academic background and aptitude of the aspirant. However it is important to do some basic research before making a career decision in derivatives. Front office jobs are high-stress, high pay and scarce. Middle office jobs are available in India and one can grow well by continually working on his/her skills and hard work. Back office jobs also provide decent growth opportunities. In fact roles like business analyst in financial technology firms are considered to be very good. We also recommend graduates to do relevant certifications and nurture a habit of learning new things about the derivative domain on a daily basis. This not only improves the knowledge and skill of individuals but also helps them grow faster in the organizations they work for.