Credit Rating
Credit rating has garnered significant importance in the country’s financial market in the last 20 years. In simple terms, credit rating is assessing the creditworthiness of an entity. There are a number of credit agencies in the country that rate companies and organisations after measuring their ability to repay the borrowed amount.
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A credit rating is a determination of a company's creditworthiness and capacity to pay back debt based on its revenue and payment history. It provides information about an organization's or company's ability to repay a debt. Based on the borrower's revenue, debt, earnings, and other factors, the Credit Rating Agencies create and assign the credit ratings.
Before approving a loan, credit rating is thought to be the first thing that lenders look at. A high credit score indicates that the borrower can make timely loan repayments.
What does Credit Rating Mean?
An entity's creditworthiness and ability to repay a loan are assessed when it applies for or receives a credit rating. In essence, it is a registered Credit Rating Agency's (CRA) assessment of an entity's capacity and willingness to make timely loan repayments. It goes without saying that a high credit score indicates both a responsible credit history and an enterprise, company, or organization's responsible credit behaviour. An entity's credit rating affects a lender's decision to approve or reject a loan application.
Benefits of Credit Rating
The benefits of credit rating for borrowers are mentioned below -
- Good interest rate - Your credit history is one of the main variables that affects the interest rate on the loan you take out. Lower interest rates are associated with higher credit ratings.
- Easy approval loan - Having a high credit score will make you appear to be a low-risk or no-risk consumer. As a result, banks will quickly approve your loan application.
The benefits of credit rating for lenders are mentioned below -
- Better decision for investment - A dangerous customer is the last person a bank or money lending company wants to loan money to. Through credit ratings, they determine a company's creditworthiness and associated risk when they borrow money. They can choose a better investment by analysing this.
- Assured safety - A high credit score is indicative of financial stability and timely repayment of principal and interest.
Who Asks for Credit Rating?
Businesses that ask for credit rating are -
- Institutional and retail investors
- Debt lenders
- Investment banks
- Other business organisation
Types of Credit Rating
Investment Grade and Speculative Grade are the two primary categories under which credit ratings are generally calculated. Nonetheless, a corporate entity's risk is rated in accordance with the credit standards established by each of India's credit rating agencies. Credit ratings are generally ranked from highest (AAA) to lowest (D), with variations based on the agency and company's characteristics.
- Investment grade - An investment grade credit rating indicates that the business has made wise investments and will be able to pay back its debts on schedule. This category of corporate companies can readily obtain loans at cheap interest rates.
- Speculative grade - Businesses in this category have taken on hazardous business ventures and won't be able to pay back the loan on schedule. As a result, while at higher interest rates, these business organisations do receive loans.
Top Credit Rating Agencies in India
The top credit rating agencies in India are mentioned below -
Credit Rating Information Services of India Ltd. (CRISIL):
CRISIL Ratings Limited was founded in 1987 and is a full-service credit rating agency that covers banks, NBFCs, PSUs, manufacturing companies, financial institutions, state governments, urban local bodies, etc. It is a subsidiary of CRISIL Limited, an S&P Global company, and serves investors, lenders, issuers, market intermediaries, and regulators. Commercial entities' creditworthiness is assessed by Credit Rating Information Services of India Limited (CRISIL) based on their strengths, market share, and reputation. The firm provides credit ratings for businesses, organisations, and banks to assist investors in making well-informed investment decisions. Among the many ratings services that CRISIL creates, and offers are Expected Loss (EL) Ratings, Fund Ratings, Recovery Risk Ratings, Corporate and Financial Sector Ratings, and Independent Credit Evaluation. It also provides services for Insurance Hybrids and Structured Finance.
Credit Analysis and Research Ltd. (CARE)
Credit Analysis and Research Limited (CARE), a seasoned credit rating firm that was founded in 1993, serves a range of market sectors, including industry, infrastructure, and the financial sector, which includes non-financial businesses and banks. Companies involved in creating bank debt and capital market products, such as corporate bonds and debentures, structured credit, and CPs, receive ratings from the agency. Investors can utilise their credit ratings to make well-informed judgements based on expectations for risk-return and credit risk. CARE Advisory, Research & Training Ltd. and CARE Risk Solutions Pvt Ltd. are just a few of the fully owned subsidiaries that are managed and run by CareEdge Ratings (CARE Ratings Ltd.).
Investment Information and Credit Rating Agency of India Ltd. (ICRA)
An impartial and expert provider of investment information and credit rating services is ICRA Limited, formerly known as Investment Information and Credit Rating Agency of India Limited. Formed in 1991, ICRA gives advice and information to institutional and individual investors and creditors. It ranks loan instruments issued by commercial banks, NBFCs, PSUs, manufacturing firms, and municipalities that are predominantly denominated in rupees. Corporates are given full credit ratings by the agency using an open rating approach. It specialised in grading corporate governance, mutual funds, structured finance, performance, and other categories.
India Ratings and Research Pvt. Ltd.
One of the top credit rating companies, India Ratings and Research (Ind-Ra), is a fully owned subsidiary of the Fitch Group and is accredited by the RBI and acknowledged by SEBI. Ind-Ra offers credit rating services to banks, insurance companies, corporate issuers, financing and leasing firms, urban local bodies and managed funds, structured finance and project finance organisations. The agency has seven branch offices around India, including Delhi, Chennai, Kolkata, Ahmedabad, Bengaluru, Hyderabad, and Pune, in addition to its head office in Mumbai.
FAQs on Credit Rating
- Why is a company's credit rating important?
First and foremost, lenders look at credit ratings before approving a loan. Lenders use credit ratings to determine a potential borrower's creditworthiness. It helps assess the reliability of financial institutions and corporate issuers.
- What is the Indian credit rating agencies' credit rating scale?
The alphabetical symbols used in credit rating scales indicate a business entity's creditworthiness and capacity for repayment. The credit rating scale is arranged in descending order from high to low and is labelled as (AAA, AA, A, BBB, BB, B, CCC, CC, C, D), etc. The highest grade, AAA, denotes a reduced default risk. A credit score of less than BB denotes a borrower with inadequate creditworthiness.
- Do credit rating companies face regulations?
Indeed, the Credit Rating Agencies (CRAs) are regarded as a crucial component of the banking system in India. The Securities and Exchange Board of India (SEBI) oversees all of the top CRAs through the SEBI (Credit Rating Agencies) Regulations, 1999.
- How can one build and keep up a strong credit standing?
The best and quickest approach to keep your credit score high is to pay off all of your credit card and loan balances on time, raise your credit limit, check for inaccuracies on your credit report, have a long credit history, and register your business.
- In your credit report, how is your credit rating expressed or indicated?
Typically, a company's credit rating is represented by an alphabet, such "AAA," "AAA," "A," "BBB," and so forth. These ratings vary from "AAA," the highest rating, to "D," the lowest grade given by all credit rating agencies. Many credit rating agencies classify grades from BB to D as Speculative Grade and categories from AAA to BB as Investment Grade.
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