What is Credit Rating?

A credit rating is an essential assessment of a person's or an organization's creditworthiness, showing their capacity to pay back debts and fulfill financial obligations. These evaluations are carried out by credit rating companies, who offer a free evaluation of credit risk.Making wise financial decisions requires having a solid understanding of the significance of credit ratings.

Credit ratings are crucial in determining financial opportunities, whether for companies looking for investment or for governments looking to achieve favorable borrowing terms. Individuals and organizations can try to increase their creditworthiness and access better financial options by understanding the elements affecting credit ratings and actively managing financial responsibilities.

Types of Credit Ratings

There are two broad categories of credit ratings used by different credit rating agencies. Credit rating agencies may use slightly different terminology to classify credit ratings within these two broad categories, but the underlying concept remains the same.

• Investment Grade: Credit ratings in the investment grade category indicate that the corporate entity has demonstrated prudent financial management and is considered relatively low risk. These ratings suggest that the borrower is likely to fulfil their financial obligations and repay debts on time. Companies with investment grade ratings can easily access loans at favourable interest rates.
• Speculative Grade: Credit ratings in the speculative grade category imply a higher level of risk associated with the corporate borrower. These ratings indicate that the entity has engaged in riskier investments or may have financial challenges that could affect its ability to repay debts. Borrowers with speculative grade ratings may face difficulties in accessing loans and may be charged higher interest rates due to the perceived higher risk.

Users of Credit Ratings

Credit ratings of companies are considered by various entities or users and organisations, including:

• Investment Banks: Investment banks utilise credit ratings when underwriting and pricing debt instruments or equity shares before they are offered to the market. Credit ratings help determine the risk associated with the securities being issued.
• Lenders: Lenders such as banks or financial institutions assess credit ratings to evaluate the borrowing company's ability to repay loans. A favourable credit rating indicates a lower risk of default and increases the likelihood of loan approval.
• Retail/Institutional Investors: Retail and institutional investors analyse credit ratings to gauge the risk and potential returns of investing in a company's securities, such as stocks or bonds. Credit ratings influence investment decisions and assist investors in assessing the reliability of their investments.
• Debt Issuers: Companies themselves monitor their credit ratings to assess their creditworthiness and evaluate how their borrowing costs may be affected. This self-assessment assists them in managing their financial strategies and making informed decisions.
• Other Businesses/Corporations: When entering into business transactions or partnerships, companies often review the credit ratings of other organisations involved. This evaluation helps them assess the financial stability and creditworthiness of potential partners or counterparties.

Importance of Credit Rating

Credit ratings play a crucial role for lenders, borrowing companies, and other entities involved in investment decisions. Here's a more detailed elaboration on their importance:

• Lenders:Lenders such as banks and financial institutions heavily rely on credit ratings to evaluate the creditworthiness of borrowing companies. The credit rating provides a standardized assessment of the company's ability to repay its debts. Lenders use this information to make informed decisions regarding loan approvals, loan terms, and interest rates. A higher credit rating indicates a lower risk of default, increasing the likelihood of loan approval. Lenders can assess the company's financial health and repayment capacity through its credit rating.
• Borrowing Companies:Credit ratings are of significant importance to borrowing companies. The credit rating affects their ability to obtain loans for various purposes, such as operational needs, expansion plans, or capital investments. A good credit rating enhances the company's reputation and credibility in the financial market, making it easier to secure loans at favourable terms and interest rates. On the other hand, lower credit ratings can limit borrowing options and result in higher borrowing costs.
• Individual and Institutional Investors:Credit ratings are valuable information for investors who are considering investing in equity shares or bonds of a company. Investors use credit ratings to assess the risk associated with their investments. A higher credit rating indicates a lower risk of default and suggests a higher level of confidence in the company's financial stability. Investors can evaluate the potential risks and returns associated with investing in a particular company based on its credit rating. This information helps investors make informed investment decisions aligned with their risk appetite and investment goals.

What is Credit Rating Agency?

An entity's creditworthiness is evaluated by a credit rating agency (CRA) in general terms or in relation to a specific debt or financial obligation. Like a person's credit score, a company's or government entity's credit rating indicates how creditworthy they are. These organisations assist investors and lenders in assessing the possible risk of providing money to a specific borrower and assessing the borrower's ability to repay the loan based on previous credit behaviour.

According to SEBI Regulations, 1999 of the SEBI Act, 1992, Securities and Exchange Board of India (SEBI) has the jurisdiction to authorise and control credit rating agencies.

Who evaluates credit ratings in India?

Credit rating agencies (CRAs) play a crucial role in evaluating and determining the creditworthiness of individuals and companies. By analysing factors such as income, credit history, and financial obligations, CRAs assess the debtor's ability to repay debts and identify potential credit risks.

The list below comprises some of the prominent credit rating agencies in India:

1. CRISIL (Credit Rating Information Services of India Limited)
2. ICRA (Investment Information and Credit Rating Agency) Limited
3. CARE (Credit Analysis and Research Limited)
4. India Ratings and Research Pvt. Ltd.
5. Brickwork Ratings India Pvt Ltd.
6. Acuite Ratings and Research Limited
7. SMERA Ratings Limited
8. Infometrics Valuation and Rating Pvt Ltd

Different credit rating scales

Credit rating scales used by various credit rating agencies in India are an essential tool for assessing the creditworthiness of entities. Credit ratings use alphabetical symbols (AAA, AA, A, B, etc.) to assess the creditworthiness of corporate financial instruments. Higher ratings suggest a lower risk of default, with AAA being highly favourable, indicating strong financial capability. Ratings below BB are considered indicative of poor creditworthiness.

The three tables presented highlight different rating categories and their associated default risks. These credit rating scales serve as valuable tools for investors, lenders, and other stakeholders in evaluating the financial health and repayment capabilities of entities in India.

Table 1: Credit Rating Scale - High Safety, High Safety, and Low Risk

This table represents the credit rating scale for entities, ranging from high safety to low risk. It includes credit ratings from agencies like ICRA, BrickWork, CRISIL, CARE, and India Ratings and Research, providing an assessment of the default risk associated with each rating category.

Table 2: Credit Rating Scale - Moderate Safety and Moderate Default Risk

In this table, the credit rating scale focuses on moderate safety and credit risk levels. The credit ratings assigned by ICRA, BrickWork, CRISIL, CARE, and India Ratings and Research reflect the agencies' evaluation of entities' creditworthiness in terms of moderate credit risk and moderate default risk.

Table 3: Credit Rating Scale - High Risk, Very High Default Risk, and Defaulted Instruments

This table presents the credit rating scale for entities with high risk and very high default risk, along with a category for defaulted or about-to-default instruments. The credit ratings assigned by ICRA, BrickWork, CRISIL, CARE, and India Ratings and Research indicate the increasing levels of default risk associated with different rating categories.

Factors affecting Credit Ratings in India

The credit ratings of corporate entities in India are influenced by several factors. These factors collectively provide credit rating agencies with insights into the financial health, repayment capability, and overall creditworthiness of corporate entities in India.

Factors that influence Credit Rating in India are described below:

• Past repayment behaviour:The repayment history of previous loans is an important consideration for credit rating agencies. Timely repayment of debts demonstrates good financial management skills and enhances the borrower's creditworthiness, while a track record of late payments or defaults can negatively impact the credit rating.
• Loan portfolio:The composition of a corporate entity's loan portfolio significantly affects its credit rating. Having a higher proportion of secured loans compared to unsecured loans is viewed favourably, whereas a significant reliance on unsecured loans can have a negative impact on the credit rating.
• Market reputation: The market reputation and perception of the borrowing firm also influence its credit rating. A positive reputation can contribute to higher income and better loan repayment capability, thus enhancing the credit rating. Conversely, a negative reputation or poor market perception may lead to a lower credit rating.
• Future prospects of the business:The growth potential and projected earnings of the business play a crucial role in determining its credit rating. If the company demonstrates robust expansion plans and a promising outlook for future income based on strong fundamentals, it is likely to receive a higher credit rating. Conversely, if the outlook appears uncertain or lacks growth prospects, it may result in a lower rating.

How Credit Rating Agencies Work?

Credit rating agencies assign ratings to an organization or an entity. The entities that are rated by credit rating agencies comprise companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies. Credit rating agencies take into consideration several factors like the financial statements, level and type of debt, lending and borrowing history, ability to repay the debt, and the past debts of the entity before rating their credit. Once a credit rating agency rates the entities, it provides additional inputs to the investor following which the investor analyses and takes a sound investment decision. Poor credit rating indicates that the entity is at a high risk of defaulting. The credit ratings that are given to the entities serve as a benchmark for financial market regulations. Credit ratings are published by agencies like Moody’s Investors Service and Standard and Poor’s (S&P) based on detailed analysis.

Some of the Top Credit Rating Agencies in India are:

1.Credit Rating Information Services of India Limited (CRISIL)

CRISIL is a leading global analytics firm considered to be a top supplier of ratings, data, research, analytics, and solutions in India. The rating agency is owned by S&P Global Inc., a global leader in providing fair and unbiased ratings, benchmarks, analytics, and data to the capital and commodity markets.

CRISIL Limited, CRISIL House, Central Avenue,
Hiranandani Business Park, Powai
Mumbai – 400076
Tel: + 91 (22) 33423000
Fax: + 91 (22) 33423810
Email: info@crisil.com

2.Credit Analysis and Research (CARE) Limited

In less than three decades after it began operations in April 1993, CareEdge Ratings (CARE Ratings Ltd.) has made a name for itself as one of India's top credit rating companies.

CareEdge is a knowledge-based organisation that offers almost real-time research on all national and international economic trends. The industry research team continuously monitors and produces sector reports.

4th Floor, Godrej Coliseum
Somaiya Hospital Road
Behind Everard Nagar
Off Eastern Express Highway, Sion (E)
Mumbai 400 022
Tel: + 91 (22) 566 02871/ 72/73
Fax: + 91 (22) 566 02876
Email: care@careratings.com

3.Brickwork Ratings India Private Limited

Brickwork Ratings (BWR), a Credit Rating Agency registered with SEBI and authorised by the RBI, provides ratings for NCDs, Bank Loans, Fixed Deposits, Security Receipts, Commercial Paper, Securitized Paper, and other financial instruments.

Canara Bank, a prominent public sector bank, is the promoter and strategic partner of Brickwork Ratings.

3rd Floor, Raj Alkaa Park
29/3 & 32/2, Kalena Agrahara
Bannerghatta Road,
Bangalore – 560 076
Tel: +91 (80) 4040 9940
Fax: +91 (80) 4040 9941

4.Investment Information and Credit Rating Agency of India (ICRA) Limited

ICRA Limited (formerly known as Investment Information and Credit Rating Agency of India Limited) was founded by leading financial institutions, commercial banks, and financial services firms in 1991 to serve as an independent and expert investment information and credit rating agency.

The ICRA Group of Companies is made up of ICRA and its subsidiaries (Group ICRA). ICRA is a public limited company, and the National Stock Exchange and the Bombay Stock Exchange both list its shares.

105, Kailash Building, 11th Floor 26,
Kasturba Gandhi Marg
New Delhi 110 001
Tel: + 91 (11) 23357940 – 50
Fax: + 91 (11) 23357014
Email:info@icraindia.com

5.Acuite Ratings & Research (earlier SMERA Ratings Limited)

The aim of Acuite Ratings and Researcg is to pursue their mission to unleash the development potential of financial markets and give their clients the insights they need to make wise and informed decisions as India's leading credit rating and research organisation.

The company is supported by the largest and most potent public and private sector banks in the nation and is also a SEBI registered and RBI authorised credit rating agency. The agency benefits from Dun & Bradstreet's co-promotion of them as a leading global provider of data and analytics.

Unit No.102, 1st Floor, Sumer Plaza
Marol Maroshi Road, Marol
Andheri (East)
Mumbai 400 059
Tel: + 91 (22) 67141144/45
Fax: + 91 (22) 67141142

6.Infometrics Valuation and Rating Pvt. Ltd.

INFOMERICS Valuation and Rating Private Limited is a SEBI registered and RBI authorised credit rating agency. The company aims to reduce information asymmetry between lenders and investors and connecting borrowers and issuers with various fund-raising options and channels.

Flat No. 104/108, 1st Floor
Golf Apartments
Sujan Singh Park
New Delhi 110003
Tel:+ 91 (11) 24601142, 24611910, 24649428
Fax No.:+ 91 (11) 24627549
E-mail:vma@infomerics.com

7.India Ratings and Research Pvt. Ltd.

India Ratings and Research (Ind-Ra) is dedicated to offering the credit markets in India accurate, fast, and prospective credit opinions. Ind-Ra has gained a considerable market position in India's fixed income market thanks to its foundation of independent thinking, rigorous analytics, and an open and fair approach to credit research.

Wockhardt Towers, 4th Floor, West Wing
Bandra Kurla Complex, Bandra East
Mumbai 400 051
Tel: + 91 (022) 40001700
Fax: + 91 (022) 40001701
Email: investor.services@indiaratings.co.in

FAQs on Credit Rating Agencies

1. What is the difference between credit ratings and credit score?

   A credit rating is given to a company, organisation or a government body by calculating its ability to repay the debt and to predict the likelihood of default. On the other hand, a credit score is given to an individual after taking a look at his credit history and repayment behaviour.

2. Who regulates credit rating agencies?

   All the credit rating agencies in India are regulated by Securities and Exchanges Board of India (SEBI). The credit rating agencies are monitored and reviewed by SEBI.

3. How is credit rating denoted?

   Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A-, etc.

4. How much time does it take for the rating process to be over?

   Credit Rating is a long process and takes around 3-4 weeks to complete from the date of receipt.

5. Which five credit rating categories are there?

   Typically, credit ratings fall between 300 to 850. Scores go into one of five categories, including bad, fair, good, very good, and excellent, depending on where they fall within that range.

6. How are credit scores determined?

   Credit score algorithms often consider your payment history, amount due, and how recently and frequently payments were missed. The number of your credit accounts that have been past due relative to all of the accounts you have on file will also be shown in your credit history.

7. Who controls CIBIL?

   CIBIL is owned by TransUnion who owns 92.1% of it.

8. Is RBI a licensee of CIBIL?

   Four credit reporting agencies exist in India: TransUnion CIBILTM, Equifax, Experian, and CRIF High Mark. The Department of Banking Operations and Development of the RBI directly oversees these credit reporting agencies.

9. What are short-term credit ratings?

   A short-term credit rating reflects the likelihood that a borrower will default within the year. It provides an assessment of the borrower's ability to meet their financial obligations in the near term, typically within the next 12 months.

10. How is a Credit rating denoted?

    Credit ratings for corporate financial instruments are represented by alphabetical symbols such as AAA, AA, A, B, and so on. These ratings reflect the creditworthiness of the borrower, with higher ratings indicating a lower probability of default. AAA is considered a favorable rating, signifying a strong ability to fulfill financial obligations, while ratings below BB are regarded as indicators of poor creditworthiness.