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Credit Rating

What is a Credit Rating?

A credit rating is the quantitative analysis about the performance of creditworthiness of an individual, business or corporate or product. This rating is offered by credit rating agencies that perform in-depth analysis of the credit risks associated with financial instrument or entity. This rating is based on the financial credentials (borrowings and lending) of a particular entity. The credit rating is usually offered in form of a detailed report. This report helps various financial institutions and banks understand the solvency of particular individual, business or corporate.

Types of Credit Ratings Scales

Credit Ratings are assigned to companies and businesses. These credit ratings given to entities are in the form of various symbols and represent the creditworthiness of these entities. Credit ratings are also given to entities, debt instruments, NCDs, Company Fixed Deposits, and other investment instruments. The following table illustrates the credit rating symbols offered to rating agencies for long and mid-term debt instruments.

Name of the Credit Rating AgencyCredit Rating Scale
CRISILFor maximum safety— CRISILAAA, CRISIL AA, CRISIL A
For moderate safety — CRISILBBB, CRISIL BB
High-risk individuals — CRISIL B, CRISIL C, CRISIL D
CARECARE agency has 2 separate ratings for bank loans- ST and LT ranges-
— The short-term debt is rated as CARE AAA, CARE AA, CARE A, CARE BBB, CARE BB, CARE B, CARE C, CARE D.
— The long-term debt ratings are CARE A1, CARE A2, CARE A3, CARE A4, and CARE D.
BrickworkBrickwork Ratings rates using its signature rating scale starting with “BW” followed by unique rating symbols.
SMERA— AAA – Highest amount of Safety with the Lowest Credit Risk
— AA – Highest amount of Safety with the Super Low Credit Risk
— A – High amount of Safety with Low Credit Risk
— BBB – Moderate amount of Safety with Moderate Credit Risk
— BB – Moderate amount of Risk along with Moderate Risk of Default
— B – High amount of Risk along with High Risk of Default
— C – Very High amount of Risk with Very High Risk of Default
— D – Default or soon Expected to be in Default

Functions of Credit Rating

Credit rating is an important aspect of investment and study of credit-worthiness of any individual, business or corporate. Credit rating fulfils following functions:

  • Analysis of Business
  • Evaluation of Risk profile
  • Used as marketing tool used for placing company or business in the industry
  • To understand operating efficiency of the entity
  • To understand financial analysis of the entity

Importance of Credit Rating

Credit rating agencies in India offer credit rating to various debt or investments instruments in India. The rating provided can be utilized by investors to understand the risk profile of the investments. Simultaneously, these credit ratings are also given to individuals, businesses or corporates depending on their credit history and repayment capacity. Higher the credit rating, higher shall be the potential of individual, business or corporate to attract investors. Following are the key important factors of credit rating:

  • Credit rating is a tool that offers quantitative analysis of the creditworthiness of an individual
  • Credit rating offered to a debt or investment instrument helps investors to track the risk profile of the instrument and thereby, take a wise and informed decision
  • Credit rating for corporates helps them to attract investors and improves their presence across the corporate spectrum
  • Credit rating is a powerful tool that helps companies to raise money in times of need
  • Individuals having higher credit rating will help them acquire loans at lower rate and quickly

How do Credit Ratings Work?

As we know, credit rating companies offer various ratings which are benchmark parameters used by investors who seek valuable information regarding various investment or debt instruments available in India. Higher the credit rating, higher are the chances of attracting investors for investments. The calculation of credit rating or process of rating an instrument varies from one agency to another. Each credit rating agency has its own unique way of rating various entities, but the basic parameters that every credit rating agency considers are financial statements of the entity, type of lending, borrowing and lending history, repayment history and debt history of the entity. Thus, every credit rating agency analysis entity on these parameters and offers credit rating for them.

India's Top Credit Rating Agencies

Credit Rating Agencies in India have a huge contribution towards assessing the creditworthiness of all individuals, corporates, business and government in India. The ratings offered by these credit rating agencies are used as benchmark by investors who seek information related to wise and informed investing in various debt or investment instruments. Following is the list of some of the top credit rating agencies in India.

CRISIL

CRISIL is the abbreviation of Credit Rating Information Service of India Limited. The CRISIL credit agency is one of the oldest agencies in India. CRISIL was established in the year 1987, which latter went on to go for public investment in the year 1993. The headquarters of CRISIL is based in Mumbai, Maharashtra. CRISIL is one of the most popular credit rating agencies in India that offers efficient credit ratings for mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index etc.

ICRA

ICRA stands for Information and Credit Rating Agency of India is a public limited credit rating agency that was established in the year 1991. ICRA has its headquarters in Gurugram. The company ICRA was previously called Investment Information and Credit Rating Agency of India Limited. This credit rating company offers comprehensive credit rating system to corporates through transparent rating system and offers credit rating for -corporate debt, bank loan rating, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME Rating, issuer rating, market linked debentures and so on.

CARE

CARE (Credit Analysis and Research Limited) agency was launched in the year 1993. CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. The CARE credit rating agency’s headquartered in Mumbai, Maharashtra. CARE offers two types of bank loan ratings to its investors namely, long-term debt instrument and short-term debt instruments. Apart from this, the company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions.

ONICRA

ONICRA Credit Rating Agency is one of the leading private credit rating agencies established to offer performance and credit ratings. The headquarters of this company is situated in Gurugram, Haryana. This credit rating agency is responsible to provide credit ratings, performance rating based on risk assessment and also offers analytical solutions to individuals, corporates as well as MSMEs (micro, small and medium enterprises). The credit ratings offered by ONICRA helps various organisations to take informed decisions regarding lending funds to individuals, MSMEs and other organisations. The company, since its inception, has been dedicated in providing in-depth research of various parameters related to credit and creditworthiness.

SMERA

SMERA stands for small and medium enterprise rating agency of India was established in the year 2005. This credit rating agency was formed by SIDBI, Dun & Bradstreet India and leading banks in India. SMERA has its headquarters in Mumbai, Maharashtra and offers credit rating services for various investment instruments like IPO, Non-Convertible Debentures, Fixed deposits, Bonds, CP etc.

Brickwork Ratings India Private Limited

Brickwork Rating India Private Limited is a Bengaluru based credit rating agency established in the year 2007. This credit rating agency is promoted by the Canara Bank and it offers ratings for various investment and debt instruments like bank loans, SME companies, etc. as well as rating for corporate governance, rating for Municipal Corporation, capital market instruments ratings, financial institutions etc. Apart from these, the company also offers ratings for NGOs, Initial Public Offers, Investments in the Real Estate, Tourism, Hospitals, IREDA, Micro Finance Institutions, Educational institutions, etc.

Difference between Credit Rating and Credit Score?

Credit rating and credit score are two terminologies that are used interchangeably, but in reality, there is a distinct differentiation between both the terminologies. Credit rating is a rating deduced from information of credit and credit worthiness of business or government. While a credit score is usually used in cases of individuals and / or businesses. Both the terminologies, credit rating and credit score are utilized to showcase the potential of the borrower in terms of debt repayment. The credit rating or credit score is offered by independent 3rd party companies or agencies. The payment for the credit rating or credit score are born by the entity requesting for such service as well as by the creditor.

Credit Ratings History

Credit Rating Agencies have been one of the most important aspects of financial world since the 20th century. The CRA (Credit Rating Agencies) have been the key promotors of creditworthiness of individuals or businesses by means of providing ratings. These ratings are very important parameters for investors who want to understand the trade-offs involved with a particular debt or investment instrument. Therefore, when an investor wants to assess the level of risk associated with a particular investment, he / she will take help of credit ratings.

The concept of credit rating came into existence around the 20th century. The three pioneer credit rating agencies formed during this time are: Fitch, Moody’s and Standard and Poor’s. The credit ratings offered by these agencies had and still have a profound effect on the investment decision of the investors.

Conclusion

Thus, from the above article, we can understand that credit rating is an important tool for both individuals and corporates. For individuals a good credit rating gives them access to getting loans and credit cards easily. For corporates, a good credit rating attracts investors to easily invest in their companies, thereby it becomes easy for the corporates to borrow loan from the market. Any bank or financial institution shall base their terms and conditions as per the credit ratings, especially for individual customers.

Therefore, if your credit rating is good, you have better chances of getting your loans sanctioned quickly and with better terms. While on the other hand, if your credit ratings are poor, then the bank might reject your bank loans. On the other hand, companies having a high credit rating may attract investors heavily. Thus, credit rating is a tool to understand the key parameters of the performance, and these ratings are given by various credit rating agencies.

Frequently Asked Question's On Credit Rating

Is Credit Rating Important for Bank Loans?

Yes, Credit Rating represents the credit worthiness of an individual, which is an important aspect while availing Bank Loans. Therefore, higher the credit rating of an individual, higher is his / her chance of getting a loan approval quickly. Similarly, higher credit rating implies good credit repayment history. Thus, having a higher credit history implies that you are a no risk customer with good credit history in the eyes of the banks.

Is there any Relation Between Tax & Credit Rating?

Yes, there is co-relation between tax and credit rating. Filing of your tax reports does not affect the credit rating. However, failing to pay tax can hurt the credit ratings.

What are the types of credit rating?

Credit Rating is defined by every agency in their own terminology. However, the meaning of these ratings is similar to all the leading credit agencies. Following are the types of credit ratings offered by most of the credit agencies:

  • Bond or Debentures Rating
  • Equity Ratings
  • Preference Share Ratings
  • Commercial Paper Ratings
  • Fixed Deposit Ratings
  • Borrowers Rating
  • Individuals Rating
  • Structured obligation
  • Sovereign Rating

Thus, above are different ways and means on which credit rating are done in India.

What impact of bad credit Rating?

The impact of bad credit rating is tremendous. A bad credit rating results in rejection of bank loans, rejection of credit card application, and Bank Loans if available, are at higher interest rate. Bank loans are offered under unfavourable conditions, affects employment prospects, starting business might get tedious.

What impact of good credit Rating?

The good credit rating impacts your credit history positively. Therefore, you can avail bank loans and credit cards easily. Similarly, banks shall process your request for credit card and bank loan quickly.

What is the impact of excellent credit Rating?

Excellent credit rating implies a very good credit repayment history. Having an excellent credit rating will result in quick and hassle-free bank loan processing, quick approval of credit card application and if the bank finds you suitable, they might offer you bank loan at a considerate rate of interest.