Credit Rating in India

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
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.

News about CIBIL Credit Rating

  • Banks warned against trusting credit scores of loan applicants blindly by the Finance Minister

    On 26 February 2020, the Finance Minister Nirmala Sitharaman told state-owned banks not to blindly trust the credit scores of loan applicants. She asked banks to improve the branch-level connect with customers.

    The Finance Minister made the announcement on the same day she launched several reform measures to improve the role of technology for Public Sector Banks (PSBs). She advised banks to go back to branch banking as customers may expect a little personal touch from them. The Finance Minister asked banks not to take the ratings provided by credit agencies as an advisory but just as an indicator. She told banks to listen to branch level staff in regards to any concerns and provide them with details about government schemes. The Finance Minister held two meetings with chief executive officers and managing directors of PSBs regarding various areas of banking and on issues of micro, small, and medium enterprises. She also asked bankers to increase credit even though they told her about the lack of demand in the economy.

    27 February 2020

  • Sovereign Credit Rating of ‘BBB’ for India Maintained by S&P

    Standard and Poor, or S&P as it is commonly called, maintained India’s ‘BBB’ sovereign credit rating as the outlook appears stable. The fiscal position of the nation was highlighted by the agency, saying that it is unstable, and adding that the fiscal deficit as well as the government’s net indebtedness is widening. However, the rating given by the agency means that India has adequate resources as required to ensure that its financial obligations are met. A statement released by S&P said that the ‘BBB’ rating of the country was affirmed, but the fiscal deficits have been in excess of the plan of the government. It went on to add that limited consolidation is expected in the coming years. The forecast for the country’s GDP growth is only 5% for the current financial year, and it is expected that the economy could retaliate and bounce back with a 6% growth in the next financial year.


    14 February 2020

  • Indian companies no longer declining in credit ratings

    The banking crisis in India slowed down the economy and as a result, the financial health of companies was also affected. However, the deterioration has stopped for the moment. According to Care Ratings Debt Quality Index, following 8 successive months of decline, the credit rating of Indian companies rose to 88.02 in January, marking an increase of 0.04 points. The liquidity stress in India’s shadow banking industry had become really bad and companies found it hard to raise funds or sell assets, as revealed by Care. Although the marginal improvement recorded in January can by no means be considered as the end of the country’s credit crisis, there are signs that things will get better. Enhancement in debt metrics has the potential to improve the country’s efforts to strengthen credit flow, thereby facilitating economic growth which is forecast to decline to its weakest levels in the past 10 years or so. Keeping certain other indicators in mind, Care believes that liquidity could improve in the near future.

    12 February 2020

  • Reducing risk weight on consumer loans will be credit negative for the RBI

    The decision made by the Reserve Bank of India to reduce the risk weight on consumer loans will be credit negative according to Moody’s Corporation. Due to this decision, banks might increase their exposure to this loan segment at a time in the economy where credit risks have been increasing.

    On 12 September 2019, the Reserve Bank of India had reduced the risk weightage on consumer loans such as personal loans from 125% to 100% excluding credit card receivables.

    Moody’s Corporation which is a global credit rating company, mentioned that amongst all the banks, HDFC Bank Limited had the highest exposure to personal loans. This will make them more vulnerable to a rise in risk for their assets due to this decision by the RBI.

    According to the company, reducing the risk weights would lower the capital requirements which would serve as a loss-absorbing buffer on the loans. This decision by the RBI will also encourage banks to further increase their exposure at a time where the marco-economy is slowing down.

    20 September 2019

  • HUDCO surveillance credit ratings upgraded: ICRA

    ICRA Limited credit rating company has reaffirmed their surveillance credit rating of Housing and Urban Development Corporation Limited (HUDCO) for the financial year 2019-20. ICRA has upgraded HUDCO ratings to:

    • Long Term Borrowing Programme - [ICRA] AAA; Outlook Stable.
    • Commercial Paper Programme - [ICRA] A1+
    • Line of Credit (Long Term/Short Term Bank Facilities (including non-fund- based facilities)) - [ICRA] AAA; Outlook Stable/ [ICRA] A1+
    • Fixed Deposit Programme - MAAA; Outlook Stable
    Earlier in March 2019, global rating agency Moody's assigned Baa2 rating to HUDCO and kept its outlook stable due low credit risk business model and support from the government. The agency assigned a baseline credit assessment (BCA) of ba1 to the company.

    The ba1 BCA rating reflected the fact that almost all lending is to entities owned by Indian state governments, resulting in a low credit risk business model. Shares of Housing and Urban Development Corporation Ltd was last trading in BSE at Rs.33.75 as compared to the previous close of Rs.34.6.

    31 July 2019

  • RBI governor affirmative on revised guidelines on NBFC bad loans

    The Reserve Bank of India (RBI) governor Shaktikanta Das has stated that the revised guidelines on NBFC (Non-banking finance companies) bad loans will sustain improvement in credit culture. The central bank issued a revised 'Prudential Framework for Resolution of Stressed Assets. The move comes from the central bank a month after the Supreme Court scraped the Reserve Bank's circular of 12 February 2018 for resolution of stressed assets.  

    The RBI governor was speaking at the NIBM, at the 15th Annual Convocation of Post Graduate Diploma in Management in Pune. He added that the RBI was taking necessary regulatory and supervisory steps in a bid to uplift and strengthen the NBFC sector and to maintain stability and avoid regulatory arbitrage. Das also mentioned that to maintain financial stability, the RBI will not hesitate to take any required steps. He also stated that the apex body will continue to monitor the activity and performance of the NBFC sector with a focus on major entities and their inter-linkages with other sectors. 

    Along with the NBFC sector, the RBI will also focus on banks. It will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults, so that the momentum towards effective resolution remains uncompromised. The NBFC sector has been struggling owing to debt repayment and poor performance by several companies. Das concluded saying that, the RBI will evaluate and monitor the performance of the MDs and CEOs of the public as well as private sector banks. The performance evaluation system is aimed at improving their financial and operating parameters. 

    10 June 2019

  • What Rating Requirements Does a Company Coming with a CP Need?

    As per SEBI guidelines, the company looking forward to raise funds via CP should have a minimum credit rating of A-2. The company also needs to obtain the credit rating either from CRISIL, ICRA, CARE, FITCH or any other credit rating agency (CRA) that may be specified by RBI. The issuers also needs to ensure that at the time of issuance of Commercial Paper the rating so obtained is current and has not fallen due for review. Since such instruments are not backed by collateral, only firms with high credit ratings from a recognised rating agency will be able to sell their commercial paper at a reasonable price. CPs are usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing company or institution would have to pay. Interest rates will tend to fluctuate with market conditions, but will be lower than bank rates

    3 December 2018

  • CASHe, India’s First Alternate Credit Rating System Launched

    A large number of potential audience is deprived of credit due to a lack of credit history. In a bid to address this major issue, a private equity investor Mr. V Raman Kumar has announced the launch of CASHe, an alternate credit rating system. Dubbed as The Social Loan Quotient’ (SLQ), it is the first alternate credit rating system in the country. The real-time platform leverages big data analytics, Artificial Intelligence and predictive tools. A lack of credit history makes it difficult for traditional lending institutions like banks and non-banking finance companies (NBFC) to offer credit in the form of loan or credit cards to individuals. The new SLQ platform will tap these individuals and help them avail credit by taking into consideration other parameters like his/her mobile, social and media footprint, education, remuneration, career and financial history. All the aforementioned parameters will be considered to calculate the borrower’s creditworthiness and thereby the credit score. The platform will analyze unstructured data from social media profiles, mobile data, KYC documents to provide the users with a system that will continuously update a borrower’s credit worthiness. As the scores are calculated in real-time, the individuals will know instantly if they are qualified for a loan with CASHe.

    2 August 2018

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