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Credit rating is an analysis of an organisation’s creditworthiness and credit quality. A credit rating agency performs a detailed analysis of financial instruments of an entity. The rating scales range from AAA to D based on how safe the instruments for investing. Credit ratings of financial instruments are very important for borrowers of money as it helps them raise money for their projects. At the same time, investors benefit from it as it helps them in making sound financial decisions. In this article, we have covered credit rating, its importance and different ratings scales and agencies in India.
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What is credit rating?
Credit rating is an analysis of financial instruments, more specifically debt instruments offered by corporations, governments, entities, organisations, individuals etc. In other words, it is assessing the creditworthiness of an organisation. The process of rating an instrument involves analysing business risk, financial risk, and credit risk of the entity being rated.
Credit rating agencies do the credit rating of various organisations and their financial instruments. Few of the financial instruments that they rate are Non Convertible Debentures (NCD), company deposits, fixed deposits etc. They consider the statements of assets, liabilities, and cash flows along with previous lending and borrowing transactions to assess their ability to repay financial obligations. SEBI has the sole right to regulate and authorise rating agencies. Also, the rating system in India under the SEBI Regulations, 1999 of the SEBI Act, 1992.
The process of credit rating involves qualitative and quantitative assessment of the organisation. It shows the risk associated with investing in debt instruments. Hence this gives investors a clear picture to make clear decisions. Moreover, it also helps companies to raise money to finance their projects.
The highest rating in India is AAA. Financial instruments with AAA rating are the ones that have the least risk. Moreover, the companies issuing these financial instruments are less likely to default their payments. Hence the interest rate or rate of return on these instruments is low.
The lowest rating on the rating scale is D. Also, a rating of ‘D’ is a very poor credit rating (bad credit rating), and the company with such rating is more likely to default or is already in default.
There are different types of credit ratings. Two of them are short term credit rating and long-term credit rating. Short term rating is a type of rating that determines the probability of a borrower to default within one year. On the other hand, long-term ratings indicate the probability of a borrower to default in the extended future. Mostly, the credit ratings are for medium to long term. However, with the current scenario, investors are more inclined towards short term rating than long-term ratings.
Importance of credit rating in India
Credit ratings help an investor assess the creditworthiness of the borrower. Following is the importance of credit rating for borrowers and lenders.
For Borrowers
Loan Approvals: With good ratings, the borrower is perceived to be as low or no risk customer. Hence, loan approvals are easy for such companies.
Rate of Interest: The credit history of the borrower plays a vital role in determining the interest rate. All banks offer loans at a particular range of interest rates. Therefore, high credit ratings will help the borrower in getting the loan at a low rate of interest.
For Lenders
Safety: High credit ratings can be interpreted as an assurance that the money will be paid back on time. In other words, it assures the safety of money and interest payments.
Investment Decision: No one would like to lend money to a risk customer. Ratings help in assessing the creditworthiness of the borrower. It also helps in interpreting the risk factor associated with the borrower. Therefore, based on the credit ratings, one can make better investment decisions.
How does credit rating work in India?
These are multiple rating agencies in India. Also, each has its own set of criteria to rate financial instruments and entities. A rating agency rates any entity that raises money from the public to finance their projects. Hence countries, governments, companies, non-profit organisations, and special purpose vehicles are just some of the many organisations that get rated.
A credit rating agency takes into consideration the following before assessing the credit quality of an entity:
- Financial statements
- Past borrowing and lending transactions
- Past and current debts
- The purpose of raising a new debt (credit) and the type of credit
- Their ability to repay the financial obligations
The above list is not limited to these. Each credit rating agency has the rating system that it follows before it gives a rating.
Once the bond rating agency analyses an entity, it gives a rating that can range from AAA to D.
AAA is a very good credit rating while D is considered as a poor credit rating. The rating agencies give detailed credit reports for every instrument they rate. This rating will only serve as a benchmark to compare multiple financial instruments. Also, investors shouldn’t consider the rating agencies as advisors. Moreover, an investor should consider credit ratings only as a tool that helps in making sound financial decisions.
Different rating scales
The rating agencies rate different financial instruments of organisations which include Non Convertible debentures, company deposits and fixed deposits. Below is the credit rating scales of multiple bond rating agencies in India.
| Rating Scale | India Ratings & Research | CRISIL | BrickWork Ratings | CARE | ICRA | Informerics |
| The highest degree of safety and lowest credit risk | IND AAA | CRISIL AAA | BWR AAA | CARE AAA | ICRA AAA | IVR AAA |
| The high degree of safety and low credit risk | IND AA | CRISIL AA | BWR AA | CARE AA | ICRA AA | IVR AA |
| An adequate degree of safety and low credit risk | IND A | CRISIL A | BWR A | CARE A | ICRA A | IVR A |
| A moderate degree of safety and moderate credit risk | IND BBB | CRISIL BBB | BWR BBB | CARE BBB | ICRA BBB | IVR BB |
| Moderate risk of default | IND BB | CRISIL BB | BWR BB | CARE BB | ICRA BB | IVR BB |
| High risk of default | IND B | CRISIL B | BWR B | CARE B | ICRA B | IVR B |
| Very high risk of default | IND C | CRISIL C | BWR C | CARE C | ICRA C | IVR C |
| Instruments are in default or expected to default | IND D | CRISIL D | BWR D | CARE D | ICRA D | IVR D |
Top rating agencies
SEBI authorizes only certain companies to compute and share the credit report with financial institutions and applicants. Following are the leading rating agencies in India that are registered with SEBI:
CRISIL Limited
Credit Rating Information Services of India Limited (CRISIL), was set up in 1987. Also, it is one of the oldest credit rating agencies. This rating agency provides corporate credit ratings, sovereign credit rating and even short term instruments like commercial paper rating. The agency also does infrastructure rating since 2016. Additionally, CRISIL also operates in countries such as USA, UK, China, Hong Kong, Poland, and Argentina.
India Ratings and Research Pvt. Ltd.
India Ratings and Research, a subsidiary of the Fitch Group and the headquarters are in Mumbai. It provides timely and accurate credit opinions on India’s credit market (financial market). Also, this rating agency provides corporate credit ratings.
The company covers financial institutions, project finance companies, structured finance companies, corporate issuers, managed funds, and urban local bodies. Also, India Ratings and Research Pvt Ltd has other branch offices in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, and Pune.
ICRA Limited
Investment Information and Credit Rating Agency (ICRA) is a joint venture between Indian Financial and Banking Service Organisation and Moody’s. The company was established in 1991. Also, it is known for assigning performance rating, mutual funds ranking, corporate governance rating, and more.
CARE
Credit Analysis and Research Limited (CARE) is a credit rating agency which has been operational since 1993. The company provides credit ratings that help corporates to raise funds. Also, the credit risk and risk-return expectations help the investors to make investment decisions. In addition to the head office in Mumbai, the company has an excellent pan India presence.
Brickwork Ratings India Pvt. Ltd.
Brickwork Ratings (BWR) is a registered agency under SEBI. In addition to this, BWR is accredited by RBI and also empanelled by NSIC. It offers MSME, NCD and short term instruments like commercial paper grading and rating services. Moreover, it has accreditation from NABARD for NGO and MFI grading. BWR is also authorised to grade companies seeking credit facilities from System Integrators (SIs), Renewable Energy Service Providing Companies (RESCOs), and IREDA. The leading promoter and strategically planned for BWR is Canara Bank.
SMERA Ratings Limited
SMERA establishes and analyses the credibility of micro, small, and medium enterprises (MSMEs). The MSMEs can grow, improve, and avail faster and cheaper loans.
Infomerics Valuation and Rating Pvt. Ltd.
Infomerics Valuation and Ratings is founded by former banker, finance professionals and administrative services personnel. The agency is SEBI registered, and RBO accredited. It evaluates entities such as large corporations, banks, non-banking financial companies (NBFCs), and small and medium scale units (SMUs).
What is the difference between a credit rating and credit score?
Often, credit rating and credit score are used interchangeably. However, these two terms do not have the same meaning.
Credit rating determines the creditworthiness of a company or business. However, it does not apply to individuals. The ratings give an understanding about the company’s ability to repay its debts. The ratings are denoted in alphabetically symbols like AAA, AA, A, B, etc. Moreover, these ratings are based on corporate financial instruments. Therefore, higher ratings imply a low probability of default. AAA is considered as a good rating while anything below BB is considered as a bad credit rating.
On the other hand, a credit score is a number that is calculated by the credit bureau. A credit score is given to an individual on the basis of their credit information report. The bureau evaluates credit history and repayment behaviour of an individual. The credit score number ranges from 300 to 900. This score is essential while applying for a loan or credit card. The company evaluates the individual’s credit score before approving a loan or credit card.
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