Credit Rating -Characteristics, Types, Benefits & Credit Rating Agencies

Credit Rating is an opinion of a particular agency known as credit rating Agency regarding the ability and willingness of an entity (Government, Business or Individual ) to fulfil its financial obligations in completeness and within the established due dates.

It is very difficult for an individual investor to gather details about credit worthiness of a company, neither he has the time nor the skills to undertake risk evaluation, every investor wants to ensure safety of his investment. Credit rate agencies investigate the financial position of the company issuing various kinds of instrument and assess risk involving investing money in them.

Credit Rating system can be defines as an act of assigning value to credit instrument by assessing the solvency i.e. the ability of the borrower to repay debt, and expressing them through predetermined symbols.

The rating would be expressed by symbols AAA, AA, A, BBB, BB, B, C and D. These rating will provide the degree of safety regarding timely servicing the obligations and will indicate on risk on investing on particular entity.

Characteristics of Credit Rating

• It assesses the issuer’s capacity to meet financial obligation.
• It assesses the financial strength of the borrower.
• Rating expressed in symbols e.g. AAA, BBB …which can be understood by layman easily.
• Credit Rating is done by expert of, reputed, accredited institutions.
• Credit Rating is only guidance to investors which provides recommendations to the investors whether to invest in any particular investment.

Credit Rate Agency

A Credit rate Agency is an organisation which assigns the credit ratings to debtors predicting their capabilities to pay back debt timely and simultaneously making the forecast on the chances of debtors being default.

Some of the top credit rating Agencies in the world are Moody’s, Standard and Poor’s (S & P) and Fitch rating.

Credit Rating Agencies in India

There are number of Credit Rating Agencies in India. Out of which three main credit rating Agencies are

1. CRISIlL

2. ICRA

3. CARE

CRISIL

CRISIL commenced its operations in the year 1987 and it is India’s first credit rating agency. The company conducts its operations from 8 countries including India, US, UK, Singapore, China, Poland, Argentina and Hong Kong. However, it has its head office in Mumbai.

The company provides ratings, analytics, and solutions, research with a very good track record of innovation and growth. Standard and Poor’s is the majority shareholder of CRISIL.

The long-term ratings given by CRISIL are shown below-

Source: www.crisil.com

2. ICRA

ICRA was the second rating agency established in the year 1991. It is a public limited company and it has its head office in New Delhi. Moody’s is the majority shareholder of ICRA. The long-term rating of ICRA is exactly similar to CRISIL as shown below

ICRA’s Long-Term Rating Scale

Long-Term rating Scale All Bonds, NCDs, and other debt instruments (excluding Public Deposits) with original maturity exceeding one year.

[ICRA]AAA Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

[ICRA]AA Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

[ICRA]Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.

[ICRA]BBB Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

[ICRA]BB Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.

[ICRA]B Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.

[ICRA]C Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.

[ICRA]D Instruments with this rating are in default or are expected to be in default soon.

3. CARE

Then in the year 1993, the next credit rating agency which came up was CARE. It has its head office in Mumbai and it is India’s second largest credit rating agency.

It is one of the five partners of international rating agency called ARC Ratings.

Credit Rating Process

• In India credit rating is done mostly at the request of the borrowers or Issuer companies.

The process followed by credit rating agencies are-

1. Agreement– an agreement is entered in to between rating agency and its issuer company. It covers details about terms and conditions for doing the rating.

2. Appointment of analytical team– the rating agency assigns the job to a team of experts. The team usually comprises of two analysts who have expert knowledge on the relevant business area and is responsible in the relevant business.

3. Obtaining Information – The analytical team obtains the required information for the client company and studies company’s financial position, cash flow, native and basic of competition, market share, operating efficiency arrangement, management track, cost structure, selling and distribution record, power ( electricity) and labour situations etc.

4. Meeting of officials – To obtain clarifications and understandings the client business, the analytical team visits and interacts with the executives of the client.

5. Discussion about findings– After completion of study of facts and their analysis by the analytical team the matter is places before the internal committee (which comprises of senior analyst) an opinion about rating is taken.

6. Meeting the rating committee– The findings of internal committee are referred to the “Rating Committee” which generally comprises of few directors and is the final authority for assigning ratings.

7. Communication of decision– The rating decided by the rating committee is communicated to the requesting company.

8. Information to the public– The rating company publishes rating through reports and the press.

9. Revision of rating – Once Issuer Company has accepted the rating, the rating agency under an obligation to monitor the assigned rating. The rating agency monitors all ratings during the life of the instrument.

Types of credit rating

Types of credit rating classified in to

Rating of

1. Bonds and Debentures

2. Equity Shares

3. Preference shares

4. Medium Term Loans ( Public Deposits, CDs , etc)

5. Short Term Instruments ( Commercial Papers ( CPs)

6. Borrowers

7. Real Estate, Builders and developers

8. Chit funds

9. Insurance companies

10. Collective Investment Schemes

11. Banks

12. States

13. Countries

Main functions of credit rating Agency

The important functions of credit rating agencies are

1. To Provide unbiased opinion to investors

2. To provide quality and dependable information

3. To provide information free of cost or at nominal rate, public has not required to pay, when credit ratings of instruments are published in financial newspapers and advertisement of the rated companies.

4. To help investors in taking investment decisions.

5. To enhance corporate image.

6. To help in formulation of public policy.

Benefits of Credit rating

Credit rating offers many advantages which can be classified in to

1. Benefits to Investors – Investors can assess the risks.

2. Benefit to rated companies – Helps to raise funds, facilitates growth.

3. Benefit to intermediaries– namely for merchant bankers.

4. Benefit to business world– increase in investors population, get guidance to foreign investors.