Credit Rating in India

Credit rating has garnered a significant importance in India’s financial market in the past 20 years. There are several credit rating agencies in the country that assign ratings to organizations, countries, and different entities. One must note that Credit Rating is different from Credit Scores and Reports that are assigned to an individual. Credit Rating pertains only to entities such as companies, government bodies and countries.

What is Credit Rating?

Credit rating is an assessment of an entity’s ability to repay the debt. Through credit rating, investors get an idea about the creditworthiness of the borrower. With the help of the credit rating, investors can also analyse the borrower’s level of risk to default the payment.

Importance of Credit Rating

The main purpose of a credit rating is to predict how likely the entity or the borrower can repay loans. If an entity has a high credit rating, it suggests that the entity has a good repayment history. It also means that the entity has a higher possibility of repaying the loan without any issues and delays. On the other hand, a poor credit rating suggests that the borrower has a bad repayment history and has not been consistent towards payments. It also suggests that he might follow the same pattern in the future. A poor credit rating has a negative impact on the entity's chances of getting an easy approval for a certain loan or any additional benefits.

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, the 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 the companies and also as a resource that is helpful at the time of raising money. It reduces the cost of borrowings and helps in the company’s expansion.
Entities like special government bodies, companies and others can get an easier approval for the loan if there credit rating is higher. A company with a higher credit rating can get a wider audience like investment companies, banks and financial institutions to borrow.
Banks and lenders will offer loans at a lower interest rate if the entity has a higher credit rating.
It offers low-cost information to investors for taking the decision about the investment in a particular entity.
Credit rating encourages better accounting standards, detailed information disclosure and improved financial information.

What are Credit Rating Agencies?

Credit Rating Agencies (CRA) assess the creditworthiness of different entities like companies, government bodies, and so on. 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. There are a total of six credit agencies in India viz, CRISIL, CARE, ICRA, SMREA, Brickwork Rating, and India Rating and Research Pvt. Ltd.

1How do Credit Ratings Work in India?

Credit rating agencies assign ratings to entities like companies, local governmental bodies, state governments, non-profit organisations, countries, securities and special purpose entities. Credit rating agencies take into consideration several factors like the borrower’s ability to repay the debt, financial statements, level and type of debt, lending and borrowing history, and the past debts of the entity before rating them. Based on the credit rating from the agencies, investors can take a better investment decision following the analysis. 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.

Credit Rating Agencies in India

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

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. The company’s portfolio includes mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

Here are the credit ratings for long-term scale that are followed by CRISIL:

AAA - Highest safety
AA- High safety
A - Adequate safety
BBB - Moderate safety
BB - Moderate risk
B - High Risk
C - Very high risk
D - Default

Here are the credit ratings for corporate credit scale by CRISIL:

CCR AAA - Highest degree of strength with regard to honoring debt obligations
CCR AA - High degree of strength with regard to honouring debt obligations
CCR A - Adequate degree of strength with regard to honouring debt obligations
CCR BBB - Moderate degree of strength with regard to honouring debt obligations
CCR BB - Inadequate degree of strength with regard to honouring debt obligations
CCR B - High risk and greater susceptibility with regard to honouring debt obligations
CCR C - Substantial risk with regard to honouring debt obligations
CCR D - Default of some of all of its debt obligation
CCR SD - Selectively Defaulted on a class of debt obligations, but will continue to meet its payment obligations on other issues or classes of debt obligations.

2. ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The ICRA Group currently has four subsidiaries - Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes the rating for - corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market-linked debentures and so on.

The credit ratings followed by ICRA are similar to the credit ratings followed by CRISIL:

AAA - Highest safety
AA- High safety
A - Adequate safety
BBB - Moderate safety
BB - Moderate risk
B - High Risk
C - Very high risk
D - Default

Here is the rating scale for ICRA’s Long-Term Debt Fund Credit Risk:

This scale is used to rate the underlying credit risk of debt funds portfolio on the long-term rating scale

[ICRA]AAAmfs: Schemes with the highest degree of safety regarding timely receipt of payments from the investments.
[ICRA]AAmfs: Schemes with a high degree of safety regarding timely receipt of payments from the investments.
[ICRA]Amfs: Schemes with an adequate degree of safety regarding timely receipt of payments from the investments.
[ICRA]BBBmfs: Schemes with a moderate degree of safety regarding timely receipt of payments from the investments.
[ICRA]BBmfs: Schemes with a moderate risk of default regarding timely receipt of payments from the investments.
[ICRA]Bmfs: Schemes with a high risk of default regarding timely receipt of payments from the investments.

[ICRA]Cmfs: Schemes with a very high risk of default regarding timely receipt of payments from the investments.

3. Credit Analysis and Research Limited (CARE)

CARE offers credit rating services to several areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. It was launched in 1993 and has a corporate office in Mumbai. CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

4. Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognised as an external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.

Here is the rating scale for SME credit rating:

BWR SME 1 - Highest creditworthiness
BWR SME 2 - High creditworthiness
BWR SME 3 - Good creditworthiness
BWR SME 4 - Above average creditworthiness
BWR SME 5 - Average creditworthiness
BWR SME 6 - Below average creditworthiness
BWR SME 7 - Weak creditworthiness
BWR SME 8 - Poor creditworthiness

5. India Rating and Research Pvt. Ltd.

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognised by the Reserve Bank of India and National Housing Bank.

Here is the rating scale for Ind-Ra Rating for long-term structured finance Instruments [the instruments with the original maturity exceeding one year:

IND AAA(SO): Instruments with the highest degree of safety that carry the lowest credit risk.
IND AA(SO): Instruments with a high degree of safety that carry a very low credit risk.
IND A(SO): Instruments with an adequate degree of safety that carry a low credit risk.
IND BBB(SO): Instruments with a moderate degree of safety that carry moderate credit risk.
IND BB(SO): Instruments with a moderate risk of default.
IND B(SO): Instruments with a high risk of default.
IND C(SO): Instruments with a very high likelihood of default.
IND D(SO): Instruments that are in a default or are expected to be in default soon.

6. Small and Medium Enterprises Rating Agency of India (SMERA)

Established in 2005, SMERA is a joint initiative of SIDBI, Dun & Bradstreet India and leading banks in India. SMERA has joined hands with prominent institutions such as IIT Madras, The Bangladesh Rating Agency Limited, CAFRAL, CoinTribe, and SIES. Apart from its shareholder banks, SMERA has also entered into MoUs with over 30 Banks, Financial Institutions and Trade Associations of the country.

What’s the Difference Between Credit Rating 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 its default. On the other hand, a credit score is given to an individual after taking a look at his/her credit history and repayment behaviour.

News about CIBIL Credit Rating

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

CIBIL

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