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.
What is Credit Rating?
Credit rating is the financial risk associated with entities such as governments, non-profit organisations, and countries, among others. The rating is given to entities by the credit rating agencies after analysing their business and finance risk. The agencies prepare a detailed report after taking into consideration some additional factors such as the ability to repay the debt.
What are credit rating agencies?
Credit rating agencies measure the likelihood of an entity turning into a defaulter. All the credit rating agencies in India are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
Some of the top Credit Rating agencies in India
Credit Analysis and Research Ltd. (CARE), ICRA, Credit Rating Information Services of India Ltd. (CRISIL), India Rating and Research (Ind Ra), and BrickWork Rating among others are some of the top credit rating agencies in the country.
Importance of Credit Rating
When a credit rating agency upgrades a company’s rating, it suggests that the company has a high chance of repaying the credit. On the other hand, when the credit rating gets downgraded it suggests the company’s ability to repay has reduced.
Once the company’s credit rating has been downgraded, it becomes difficult for the company to borrow money. Lenders will consider such companies as high-risk borrowers as they have a higher probability of turning into a defaulter. Financial institutions will hesitate to lend money to the companies with low credit rating.
Let’s take a look at the importance of credit rating:
- Credit rating does a qualitative and quantitative assessment of a borrower's creditworthiness.
- It allows investors to make a sound investment decision after taking into consideration the risk factor and past repayment behaviour. In other words, it establishes a relationship between risk and return.
- In the case of the companies, credit ratings help them improve their corporate image. It is useful especially for companies that are not popular.
- The credit rating acts as a marketing tool for companies and also as a resource that is helpful at the time of raising money. It reduces the cost of borrowing and helps in the company’s expansion.
- Lenders such as banks and financial institutions will offer loans at a lower interest rate if the entity has a higher credit rating.
- Credit rating encourages better accounting standards, detailed information disclosure, and improved financial information.
How do credit rating agencies work in India?
Each rating agency has its own method to calculate credit ratings. Agencies rate entities including companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies. At the time of calculating the rating, 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 past debts of the entity before rating them. 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.
Credit ratings that are given to the entities serve as a benchmark for financial market regulations. However, it should be noted that the ratings should not be considered as advice for investors and instead should be used as a tool to make a sound decision.
Different credit rating scales
An individual's creditworthiness is represented by their credit score. Similarly, a company’s creditworthiness is represented by the credit rating symbols assigned to them by the agencies. Credit rating agencies rate Non convertible debentures (NCD), company deposits, and fixed deposits, among others. Let’s take a look at some of the credit rating symbols offered by rating agencies for long-term and mid-term debt instruments.
|Rating Scale||India Ratings & Research||CRISIL||BrickWork Ratings||CARE||ICRA|
|Highest safety: Lowest risk of turning into a defaulter||IND AAA||CRISIL AAA||BWR AAA||CARE AAA||ICRA AAA|
|High safety: Very low credit risk||IND AA||CRISIL AA||BWR AA||CARE AA||ICRA AA|
|Low risk||IND A||CRISIL A||BWR A||CARE A||ICRA A|
|Moderate safety: moderate credit risk||IND BBB||CRISIL BBB||BWR BBB||CARE BBB||ICRA BBB|
|Moderate risk: moderate risk of default||IND BB||CRISIL BB||BWR BB||CARE BB||ICRA BB|
|High risk: high risk of default||IND B||CRISIL B||BWR B||CARE B||ICRA B|
|Very high risk: Very high risk of default||IND C||CRISIL C||BWR C||CARE C||ICRA C|
|Default: Instruments are already in default or on the verge of default||IND D||CRISIL D||BWR D||CARE D||ICRA D|
What’s the Difference Between Credit Rating and Credit Score?
A credit rating is assigned to a company or an organisation by the credit rating agencies after assessing their ability to repay the borrowed amount. Meanwhile, a credit score is computed by credit bureaus after taking into consideration several factors like credit history and repayment behaviour.