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:
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:
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
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.)