Credit Rating Agencies, Credit Rating Process, Credit Rating Symbols

Credit Rating Agencies

Credit rating agencies assign ratings to an organization or an entity. The entities that are rated by credit rating agencies comprise companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies. Credit rating agencies take into consideration several factors like the financial statements, level and type of debt, lending and borrowing history, ability to repay the debt, and the past debts of the entity before rating their credit. Once a credit rating agency rates the entities, it provides additional inputs to the investor following which the investor analyses and takes a sound investment decision. Poor credit rating indicates that the entity is at a high risk of defaulting. The credit ratings that are given to the entities serve as a benchmark for financial market regulations. Credit ratings are published by agencies like Moody’s Investors Service and Standard and Poor’s (S&P) based on detailed analysis.

A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt, but not of individual consumers.

The debt instruments rated by CRAs include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such as mortgage-backed securities and collateralized debt obligations.

The issuers of the obligations or securities may be companies, special purpose entities, state or local governments, non-profit organizations, or sovereign nations. A credit rating facilitates the trading of securities on a secondary market. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates. Individual consumers are rated for creditworthiness not by credit rating agencies but by credit bureaus (also called consumer reporting agencies or credit reference agencies), which issue credit scores.

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired 8.9% stake in CARE credit rating agency in 2017. It launched India’s first index to benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-income market, in the rupee as well as dollar version in 2018. The company’s portfolio includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.

Credit Analysis and Research limited (CARE)

Launched in 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. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. 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. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

Credit Rating Process

Credit rating agencies analyse an organisation, individual, or entity and assign ratings to it. These agencies have the authority to rate companies, state governments, non-profit organisations, countries, securities, local government bodies, and special purpose entities.

Many factors are considered while settling with a rating such as financial statements, type of debt, lending and borrowing history, repayment capability, past credit repayment behaviour, and more. Each of these factors contributes to a specified share in computing the end result, credit score.

The credit rating agency does not provide any decision to financial institutions on whether an entity should get a credit facility or not; rather it provides the report and additional inputs making it easier for the lender to analyse and an informed decision.

The credit rating process involves a detailed analysis of the credit risk associated with you. This is determined by evaluating factors such as your previous debt payments, credit exposure, and your credit utilisation ratio. It is generally carried out by an independent credit bureau and can be accessed in the form of a report that contains your credit history, as well as your score. This credit score can range anywhere between 300 and 900; knowing what your score indicates is important. Here is the breakdown of the score brackets.

NA/NH

This score is assigned to your profile when you have never borrowed credit and remains until you do.

300-549

This score indicates that you have a poor credit history. This could mean that you have minimal experience with handling credit or have defaulted on payments.

550-649

This is an average credit score and suggests that you need to work upon certain aspects that bring down your score.

650-749

This score is assigned to your profile when you have a healthy credit history. With this score, you have a fairly good chance of getting approval for credit. However, as there’s room for improvement, you may not enjoy other perks, such as being able to negotiate a lower interest rate.

750-900

This is the highest or good cibil score and is assigned to your profile when your credit history is excellent. It indicates that you have ample experience with credit and have a sound repayment record. With a score in this range, you are likely to get approval for a loan and get a favourable loan amount and interest rate, as the risk associated with lending to you is negligible.

For instance, you can qualify for loans such as the Bajaj Finserv Personal Loan with a CIBIL score of 750 or higher. It gives you access to a sanction of up to Rs. 25 lakh without collateral, repayable over a flexible tenor spanning up to 60 months, with instant approval and value-added benefits like the Flexi Personal Loan.

Credit Rating Symbols