Credit rating is an assessment of credit evaluation of a borrower or of a business or of an instrument of a business on relevant factors indicating the ability to pay the debt in general term. Credit Rating is a symbolic indication of the current opinion regarding the relative capability of a corporate entity to service its debt obligations in time with reference to the instrument being rated. It enables the investor to differentiate between debt instruments on the basis of their underlying credit quality. To facilitate simple and easy understanding, credit rating is expressed in alphabetical or alphanumerical symbols. Though credit rating is considered more relevant for the gradation of debt securities, it can be applied for other purposes also.
Credit rating is extremely important as it not only plays a role in investor protection but also benefits the industry as a whole in terms of direct mobilization of savings from individuals. The rating also provides a marketing tool to the company and its investment bankers in placing the company’s debt obligations with an investor base that is aware of, and comfortable with, the level of risk. Ratings also encourage discipline amongst corporate borrowers to improve their financial structure and operating risks to obtain a better rating for their debt obligations and thereby lower the cost of borrowing. Companies that get a lower rating are forewarned, as it were, and have the freedom, if they desire, to take steps on their financial or business risks and thereby improve their standing in the market.
Credit rating is useful to investors, issuers, intermediaries, and regulators
The main purpose of credit rating is to communicate to the investors the relative ranking of the default loss probability for a given fixed-income investment, in comparison with other rated instruments Large investors use the information provided by rating agencies such as upgrades and downgrades and alter their portfolio mix by operating in the secondary market.
The market places immense faith in opinion of credit rating agencies, hence the issuers also depend on their critical analysis. This enables the issuers of highly rated instruments to access the market even during adverse market conditions.
Rating is useful to Intermediaries such as merchant bankers for planning, pricing, underwriting and placement of the issues. Intermediaries like brokers and dealers in securities use rating as an input for monitoring risk exposures.
The Reserve Bank of India (RBI) prescribes a number of regulatory uses of ratings. The RBI requires that a NBFC must have minimum investment grade credit rating if it intends to accept public deposits. As per money market regulations of the RBI, a corporate must get an issue of CP rated and can issue such paper subject to a minimum rating. SEBI has also stipulated that ratings are compulsory for all public issue of debentures. SEBI has also made mandatory for acceptance of public deposit by Collective Investment Schemes.
Credit rating is important for activities like
- For merger
- For takeover
- For issuance of security instrument
- For issuance of debt instrument etc.
How do Credit Ratings Work in India?
As a matter of fact, every credit rating agency has its algorithm to evaluate the credit rating. However, the major factors are credit history, credit type, and duration, credit utilization, credit exposure, etc. Every month, these credit rating agencies collect credit information from partner banks and other financial institutions. Once the request for credit rating has been made, these agencies dig out the information and prepare a report based on such factors. Based on that report, they grade every individual or company and give them a credit rating. This rating is used by banks, financial institutions, and investors to make a decision of investing money, buying bonds, or giving loans or credit cards. The better is the rating; the more are the chances of getting money at payable interest rates.
Rating Agencies in India:
Credit Rating Information Services of India Limited is the first credit rating agency in the country which was established in 1987. It calculates the creditworthiness of companies based on their strengths, market share, market reputation, and board. It also rates companies, banks, and organizations, helping investors make a better decision before investing in companies’ bonds. It offers 8 types of credit rating which are as follows:
- AAA, AA, A – Good Credit Rating
- BBB, BB – Average Credit Rating
- B, C, D – Low Credit Rating
For more details, please visit https://www.crisil.com/
Credit Analysis and Research Limited (CARE) offers a range of credit rating services in areas like debt, bank loans, corporate governance, recovery, the financial sector, and more. Its rating scale includes two categories – long-term debt instruments and short-term debt ratings.
For more details, please click http://www.careratings.com/
Small Medium Enterprises Rating Agency Of India Limited has two divisions – SME Ratings and Bond Ratings. It was established in 2011 and is a hub of financial professionals. It offers credit ratings in the following format:
- AAA, AA, A – Low Credit Risk
- BBB, BB – Moderate Credit Risk
- B, C – High Credit Risk
- D- Defaulted
Investment Information and Credit Rating Agency of India was formed in 1991 and is headquartered in Mumbai. It offers comprehensive ratings to corporate via a transparent rating system. Its rating system includes symbols that vary with the financial instruments. Here are the types of credit ratings offered by ICRA:
- Bank Loan Credit Rating
- Corporate Debt Rating
- Corporate Governance Rating
- Financial Sector Rating
- Issuer Rating
- Infrastructure Sector Rating
- Insurance Sector Rating
- Mutual Fund Rating
- Public Finance Rating
- Project Finance Rating
- Structured Finance Rating
- SME Rating
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.
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