Credit rating is an assessment of a borrower’s creditworthiness based on their credit history, financial statements, and other factors that may impact their ability to repay debt. Credit ratings are issued by independent credit rating agencies, which provide objective assessments of the likelihood that a borrower will default on their financial obligations. Lenders use these ratings, investors, and other financial institutions to evaluate credit risk and determine the interest rates and terms of credit they offer.
In India, there are currently four credit rating agencies that are registered with the Securities and Exchange Board of India (SEBI): Credit Rating Information Services of India Limited (CRISIL), India Ratings and Research Private Limited (formerly known as Fitch Ratings India Private Limited), ICRA Limited, and Care Ratings Limited. Each of these agencies has its rating methodology and scale for assessing creditworthiness.
Credit Rating Information Services of India Limited (CRISIL)
CRISIL is India’s first and most prominent credit rating agency, established in 1987. It is a subsidiary of Standard and Poor’s, a global credit rating agency. CRISIL provides credit ratings, research, and risk and policy advisory services to various clients, including corporates, financial institutions, and governments. CRISIL rates companies on a scale of AAA to D, with AAA being the highest and D the lowest. Investors widely use CRISIL’s credit ratings to make investment decisions.
India Ratings and Research Private Limited
India Ratings and Research Private Limited (Ind-Ra) is a subsidiary of Fitch Ratings, a global credit rating agency. Ind-Ra provides credit ratings and research services to corporates, banks, financial institutions, and governments. Ind-Ra rates companies on a scale of AAA to D, with AAA being the highest and D the lowest. In addition to credit ratings, Ind-Ra also provides research reports on various sectors, including infrastructure, banking, and finance.
ICRA Limited
ICRA Limited (formerly known as Investment Information and Credit Rating Agency of India Limited) is a credit rating agency established in 1991. It is a subsidiary of Moody’s Investors Service, a global credit rating agency. ICRA provides credit ratings, research, and risk management services to corporates, banks, financial institutions, and governments. ICRA rates companies on a scale of AAA to D, with AAA being the highest and D the lowest. Investors widely use ICRA’s credit ratings to make investment decisions.
Care Ratings Limited
Care Ratings Limited (formerly Credit Analysis and Research Limited) is a credit rating agency established in 1993. It provides credit ratings and research services to corporates, banks, financial institutions, and governments. Care Ratings rates companies on a scale of AAA to D, with AAA being the highest and D the lowest. Care Ratings is India’s second-largest credit rating agency after CRISIL, and investors widely use its credit ratings to make investment decisions.
All four credit rating agencies in India are governed by the Securities and Exchange Board of India (SEBI) and authorized to provide credit ratings by the Credit Rating Agencies Regulation Act 1999. They play a crucial role in the Indian financial market by providing unbiased and independent credit ratings to corporates, banks, and financial institutions, which in turn helps investors to make informed investment decisions.
Credit ratings are usually expressed as a letter grade or score that ranges from AAA (the highest rating) to D (the lowest rating). A credit rating of AAA indicates that the borrower is highly creditworthy and is likely to repay their debts in full and on time. A rating of D suggests that the borrower is in default or has already defaulted on their financial obligations.
Credit rating agencies use a range of factors to determine credit ratings, including:
Financial history:
Credit rating agencies examine borrowers’ credit history to evaluate their past economic behavior. This includes the borrower’s payment history, outstanding debt, length of credit history, and other factors that may impact their ability to repay debt.
Industry-specific factors:
Credit rating agencies also consider industry-specific factors that may impact a borrower’s creditworthiness. For example, the agency may consider the stability of the borrower’s industry, the competitive landscape, and regulatory changes that may impact the borrower’s ability to repay debt.
Market conditions:
Credit rating agencies also consider overall market conditions when evaluating creditworthiness. This includes factors such as interest rates, inflation, and economic indicators that may impact the borrower’s ability to repay debt.
Company-specific factors:
Credit rating agencies consider factors specific to the borrower when evaluating creditworthiness. This may include the borrower’s financial statements, credit history, management team, and other factors that may impact their ability to repay debt.
Credit rating agencies assign credit ratings for various types of debt, including corporate bonds, government securities, and structured debt. Each type of debt has its own rating methodology and scale.
For example, CRISIL assigns credit ratings for corporate bonds using a scale that ranges from AAA to D. The AAA rating indicates the highest level of creditworthiness, while a D rating indicates default. CRISIL also assigns credit ratings for government securities, which use a slightly different scale that ranges from “AAA (so)” to “D”. The “so” designation indicates that the sovereign guarantees back the security.
In addition, to evaluate creditworthiness, credit ratings also play an essential role in determining the interest rates and terms of credit that borrowers are offered. Borrowers with higher credit ratings are typically provided lower interest rates and more favorable terms. In comparison, borrowers with lower credit ratings may be offered higher interest rates and more restrictive terms.
Credit ratings also impact the cost of capital for companies and governments. Companies with higher credit ratings can access capital at lower costs, while those with lower credit ratings may have to pay higher interest rates to attract investors.
Overall, credit ratings play an essential role in the financial system by providing independent assessments of creditworthiness. By evaluating the creditworthiness of borrowers and assigning credit ratings, credit rating agencies help investors and lenders make informed decisions about investing in or lending to a particular borrower.
Credit ratings play a vital role in the financial markets, as they provide investors with a measure of the creditworthiness of a particular borrower or security. Credit ratings can affect the interest rates on loans, the cost of issuing debt, and the availability of financing for corporations, governments, and other entities.
It’s important to note that credit ratings could be better, and there have been instances where ratings have failed to predict credit risk accurately. For example, credit rating agencies were criticized for their role in the 2008 financial crisis, as they gave high ratings to mortgage-backed securities that later proved to be much riskier than anticipated.
Overall, credit ratings provide valuable information to investors and lenders, and can help promote transparency and efficiency in financial markets. However, it’s essential to use credit ratings as just one factor in assessing credit risk and consider other information and analysis.