Credit Rating

A credit rating essentially is an indicator of the loan repayment capability of organisations, corporate entities, financial companies, etc., who borrow money. These ratings are assigned by agencies after accounting for their annual income, their overall debt and the kind of profits they are expected to make in future. Financial instruments like bonds and fixed deposits are also provided such ratings, depending on the risk associated with these. Credit ratings are one of the first things that lenders look at while considering their loan applications. A good credit rating indicates that the borrower is capable of repaying the loan on time and vice-versa.

 

Each credit rating agency uses a different set of terms to highlight the risk associated with a corporate entity. Investors rely on these ratings before investing in a company's fixed deposits or bonds to gauge the risk involved. This rating system is part of the credit scale developed by the agencies to reflect the company's creditworthiness and repayment capacity.

Each credit rating agency uses a different set of terms to highlight the risk associated with a corporate entity. This is part of the credit rating scale they have developed for such purposes. But, they can be broadly put under the following two categories:

• Investment Grade

Investment grade credit ratings indicate that the corporate entity has made sound investment decisions and can repay its debts on time. Companies with ratings that fall under this category can easily get a loan and that too at low interest rates.

• Speculative Grade

Speculative grade credit ratings indicate that the corporate borrower is engaged in high-risk business activities. This may jeopardise their ability to repay loans. As a result, these entities typically face higher interest rates on loans due to the increased risk perceived by lenders.

The following entities/organisations look at credit ratings of companies:

• Lenders
  

Lenders look at the credit ratings of companies to determine their loan repayment capability. A good credit rating of a company usually indicates healthy repayment behaviour and their ability to repay the loan on time. On the other hand, average or poor credit ratings will tell the lender that the borrowing company may not be able to make timely payments.

• Investment Banks

Credit ratings come in handy for investment banks at the time of taking the debt instruments/equity shares of the company to the market. More specifically, it helps investment banks decide on the price of such securities before they are listed on financial markets.

• Debt Issuers

This refers to the borrowing companies/entities themselves. These entities take a look at their own credit rating from time to time to assess their creditworthiness.

• Retail/Institutional investors

These are individuals/organisations that invest in the securities of companies. Most retail and institutional investors look at the credit ratings of companies to determine the returns they can make from investing in their shares/bonds. Good credit ratings indicate healthy returns over a long period of time and vice-versa.

• Other businesses/corporations

Other businesses also look at the credit ratings of organisations before entering into a business transaction/partnership with them.

Credit ratings are important to lenders, borrowing companies as well as other entities who invest in the equity shares/bonds of the borrowing firm.

• Lenders assess the creditworthiness of a company by looking at their credit rating and approve/deny loans to them accordingly
  

• Borrowing companies decide whether or not they will be eligible to get a loan for operational and expansion expenses
  

• Individual or institutional investors also look at credit ratings before investing in the shares/bonds of a company to assess the risks of investing in them

The agencies that assign credit ratings to corporate entities in India are:

• ICRA
  

• CRISIL
  

• India Rating and Research Private Limited
  

• Brickworks Ratings India Private Limited
  

• Credit Analysis and Research Limited (CARE)
  

• Acuite Ratings and Research
  

• Infometrics Valuation and Rating Private Limited
  
  

1. ICRA Limited

ICRA Limited, formerly known as the Investment Information and Credit Rating Agency of India Limited, was established in 1991. It has since risen to become one of the most eminent rating agencies in India. The headquarters of ICRA is in Barakhamba Road, New Delhi.

2. CRISIL Limited

CRISIL was established in 1987, making it one of the first-ever credit rating agencies in India. It is known for assigning ratings to companies based on their strengths, the reputation of the members of its board of directors and market share/reach. CRISIL also has offices in Hong Kong, China, USA, Poland, UAE, Singapore, Argentina and the UK. It assigns companies eight types of ratings, ranging from AAA to D. The main headquarters of CRISIL is situated in Powai, Mumbai.

3. India Ratings and Research Private Limited

India Ratings and Research, a subsidiary of the Fitch Group, assigns ratings to entities involved in managed funds and urban local bodies (ULBs). Additionally, it also gives ratings to corporate issuers and financial institutions. Even the investment schemes and managed funds are assigned ratings by the agency. This agency has its head office in Bandra East, Mumbai.

4. Brickwork Ratings India Private Limited

This agency is best known for assigning ratings to debt funds, market-linked debentures, fixed deposits, commercial papers, and so on. The headquarters of this company is located in Bannerghatta Road, Bengaluru.

5. CareEdge Ratings

CareEdge Ratings (CARE Ratings Ltd) has been assigning ratings to most of the companies that belong to the finance sector since 1993. It also gives ratings to such firms based on their short-term and long-term creditworthiness. Its main office is located in Sion (East), Mumbai.

6. Acuite Ratings and Research

This firm mainly assigns grades to Small and Medium Enterprises (SMEs) and corporate bonds. It was established in 2005 as an initiative by the Ministry of Finances and RBI. It assigns eight different types of ratings to its targeted group entities, ranging from AAA to D. This agency has its base set up in Kanjurmarg, Mumbai as well.

7. Infometrics Valuation and Rating Private Limited

This New Delhi-based agency was founded by former finance professionals and gives ratings to banks and Non-Banking Finance Companies (NBFC). It was established in 1986, making it the oldest Indian rating agency.

Credit rating agencies (CRAs) play a crucial role in India's financial ecosystem. They assess the creditworthiness of various entities, including corporations, government bodies, and financial institutions. Their evaluations help investors and lenders make informed decisions regarding investments and loans.

 

In India, credit rating agencies are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Credit Rating Agencies) Regulations, 1999. This regulatory framework ensures that CRAs operate transparently and maintain high standards of integrity in their ratings.

 

The credit rating process involves several systematic steps that ensure a thorough evaluation of the entity's financial health. While specific procedures may vary among agencies, the fundamental steps that credit rating agencies generally work on, consist of the following:

• Receipt of Formal Request

The process begins when an issuer company formally requests a credit rating

• Signing an Agreement

An agreement is signed between the issuer and the agency, outlining confidentiality and terms of service

• Assigning Analysts

Analysts with expertise relevant to the issuer's industry are assigned to conduct the evaluation

• Information Gathering

The analytical team collects comprehensive data from the issuer. These include financial statements, operational details, and market trends.

• Meetings with Management

Analysts meet with company executives to clarify information and gain insights into business strategies and risks

• Forming an Opinion

Based on their analysis, the team formulates a preliminary rating opinion. An internal committee of senior analysts then reviews this.

• Rating Committee Review

The findings are presented to a rating committee composed of directors who make the final decision on the rating

• Communication of Rating

The assigned rating is communicated to the issuer along with justifications for the decision

• Public Disclosure

The rating agency publishes the rating through reports and press releases to inform investors and stakeholders

• Ongoing Monitoring

After assigning a rating, agencies continuously monitor the issuer’s performance to ensure that ratings remain accurate over time

The below table highlights the credit rating scales that are individually used by the major credit rating agencies in India.

The factors that affect the credit ratings of corporate entities in India are:

• Loan portfolio: The kind of loans a corporate entity is servicing at the time plays a major factor. If the loan portfolio of the company is majorly made up of unsecured loans, that could affect its credit rating negatively. There needs to be a balance in the credit mix.

• Future prospects of the business: Expansion plans and projected earnings, which could give the lender an insight into the degree of growth in its future income, play a major factor. If the business is expected to see a significant rise in its income on the basis of sound fundamentals, it will get a good credit rating. However, the opposite of the same can be true as well.

• Past repayment behaviour: Whether the entity has paid its past loans on time or has made late payments will also play a factor. It will give the lender a sense of the financial management skills of the borrower.

• Market reputation: The reputation of the borrowing firm in the market can affect its income positively or negatively, which will directly impact its loan repayment capability. Hence, this too is a factor that is taken into account by agencies while assigning credit ratings.

The key distinctions between credit scores and credit ratings are:

• Credit scores are assigned to individuals. Meanwhile, credit ratings are assigned to corporate/government entities and financial products.
  

• Credit scores are three-digit numeric codes that stay within the range of 300-900. Credit ratings, on the other hand, are alphabetical codes and range from AAA to D.
  

• Only a lender or a potential guarantor will look at a credit score. Credit ratings are looked at by stock market investors and other business and investment banks.