A credit rating is an evaluation of a credit worthiness of potential borrower’s and its ability to meet the debt service obligations as and when they arise. A credit rating tells a lender or investor the probability of the subject being able to pay back a loan. Credit rating is only an opinion but not a recommendation to purchase, sell, or hold a borrower’s security or lending of money to borrower.

A rating assigned does not remain static forever. It needs to go on for revision due to factors like change in economic environment, corporate restructuring, management of the organisation, etc. thus the need of revision of ratings arises.

A poor credit rating indicates a high risk of default of a loan, and leads to high interest rate or the refusal of a loan by the creditor.

Credit Rating Agencies in India

Following are the important Credit Rating Agencies in India:

  1. Credit Analysis and Research Limited (CARE)
  2. Investment Information and Credit Rating Agency of India Limited (ICRA)
  3. Credit Rating and Information Services (India) Limited (CRISIL)
  4. FITCH Credit Ratings India Private Limited
  5. Brickwork Ratings India Private Limited

A certain methodology is adopted by rating agencies to ascertain the credit worthiness of the debt issuers.

In brief, following aspects are taken into consideration while assigning a rating by independent professional organisation:

  • Industry Risk
  • Market position
  • Earnings & Performance
  • Projected Cash flows
  • Management structure and composition
  • Capital & Debt Structure
  • Paying off Debt Obligation/ Statutory Liabilities on time
  • Corporate Governance
  • Other factors like Peer Comparison/Ratio Analysis

Each rating agency uses different rating scales for different kinds of ratings. Most common rating scales are AAA, AA, A, BBB, BB, B, A+, AA+, B+ and so on.

Benefits of Credit Ratings

To Corporate:

  • A good credit rating enables corporate to have lower interest costs, concession in bank charges and win confidence of Lenders/investors.
  • There is also a compulsion from the regulators like SEBI, Financial Institutions like banks/NBFC to have credit rating.

To Investors:

Ratings helps investors in their investment decisions, they get an ease of selection of investment products.

Thus, Credit Rating is the need of the time since investors and Financial Institutions should be equipped with easy methods to make their investment and lending decisions. If ratings are assigned in a proper, systematic, transparent way, then it will be a boon for them and will go a long way in making the investment and lending world a safe place.

(Authored by Shushant Singhal a qualified Chartered Accountant who had worked with Big Business houses and presently working with GyanShree Industrial Consultants Pvt Ltd.)

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