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A credit rating is a particular credit agency’s opinion regarding the ability and willingness of an entity or individual to fulfill their financial obligations in completeness and in a timely manner.
Now, the question arises, “What is a Credit Rating Agency?” A credit rating agency is an entity which specializes in credit rating. In India, credit rating agencies are registered with SEBI. To know more about what a credit rating agency is, check out this blog post!
According to SEBI, “A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.” A credit rating agency is commonly abbreviated as CRA.
CRAs denote credit rating as a simple alphanumeric symbol, for e.g. AA, A, A1, A2 etc.
CRAs base their credit ratings on a thorough analysis of the company's strengths and weaknesses in terms of its fundamentals, including business and financial analysis, industry research, and the macroeconomic, regulatory, and political environment.
Credit ratings done by CRAs help lenders and investors manage risk exposure and make informed investment decisions by assessing credit risk of the company. As of 8th July, 2024, there are 7 credit rating agencies in India namely Acute Ratings and Research Limited, Brickwork Ratings India Private Limited, Care Ratings Limited, Crisil Ratings Limited, ICRA Limited, India Ratings and Research Private Limited and Infomerics Valuation and Rating Private Limited.
Also Read: Top 7 Credit Rating Agencies in India
CRAs provide rating services in a number of fields some of which are:
● Bank Loan Credit Rating
● Project Finance Rating
● Structured Finance Rating
● SME Rating
● Corporate Debt Rating
● Financial Sector Rating
● Issuer Rating
● Infrastructure Sector Rating
● Insurance Sector Rating
● Mutual Fund Rating
● Public Finance Rating
● Corporate Governance Rating
The entity must meet the following criteria to be eligible for becoming a credit rating agency:
● Company registered under the Companies Act 2013, with the objective of carrying on any defined rating operation in its Memorandum of Association (MOA)
● Five crores must be the minimum net worth
● It should be in the interests of SEBI to grant the registration certificate
● In compliance with the criteria fixed in SEBI regulations, the applicant must be a fit and proper person
● The infrastructure of the entity must be adequate enough to enable it to provide rating services in accordance with the provisions of SEBI Regulations
● Other requirements as stated in the regulations
Credit ratings have a direct impact on the interest rates at which companies can borrow funds from financial institutions like banks and NBFCs. Companies with higher credit ratings indicate strong creditworthiness and lower risk in lending. Hence, such companies have lower borrowing costs.
Many investors who invest at national and international level take into account credit ratings for evaluating the risk linked with investing in various financial instruments. Investors usually prefer to invest in entities with higher credit ratings as their whole purpose of investing in a business is to increase their investments and have better access to the capital markets.
Many companies want to raise funds through the issuance of bonds or other debt instruments. For this, they need to have their creditworthiness assessed. This is done by credit rating. A higher credit rating can allow companies to raise funds with more favorable terms and conditions. This is important for business expansion and to meet capital requirements.
Credit rating agencies examine the financial health and governance practices of companies. If a CRA gives a company a poor credit rating, the company might struggle while raising funds. But on the other hand, it might be inspired to improve its business practices. If a good credit rating is provided by the CRA, the company might become encouraged to stick to the strong corporate governance standards and maintain business transparency, benefitting the shareholders and stakeholders.
Credit ratings assist organizations in determining their own credit risk profiles and in taking the appropriate precautions to reduce risks. This involves lowering debt levels, enhancing financial management, and preserving healthy liquidity positions.
Credit ratings are sometimes used by regulatory bodies to determine the capital adequacy standards that financial institutions must meet in order to guarantee that they have sufficient capital to cover any potential credit losses. For each deposit or bond program they launch, banks and non-banking financial institutions (NBFCs) must get ratings; additionally, in order to sustain these programs, they must meet a minimum credit rating requirement. The money collected through these schemes must be returned if the required minimum credit rating is not reached.
The credit rating agencies offers following benefits for the investors:
● It protects investors against bankruptcy: Credit rating agencies do credit rating which gives the investors an idea about the issuer company’s degree of financial strength. This allows investors to decide whether the investment is worth making. A company’s highly rated instrument gives investors an assurance regarding the instrument’s safety and minimum bankruptcy risk.
● It helps investors to recognise any risks: Credit rating done by CRAs provides investors with rating symbols which have information in a manner which is easy to understand, for the investors’ benefit as it helps them to perceive the investment risk involved or the expected investment advantages.
● It allows investors to know the issuer company’s credibility: The investors are given a clue regarding the issuer company’s credibility through credit rating. This is because rating agencies are unbiased and have no business connections or otherwise any relationship with the issuer company. As there are no business links between CRA and rated companies, the credit rating is considered genuine and attracts investors.
● Investment proposals can be easily understood: No analytical knowledge or expertise is needed to understand the credit rating symbols. These symbols can be understood easily by all the investors. Through the credit rating, quick decisions can be made by investors about the investment to be made in the company’s particular rated securities.
Must Read : What is the meaning of Red Herring Prospectus?
● It helps to save resources: Investors greatly rely on credit rating. As it is done by professional experts, investors are relieved from worrying about a company’s fundamentals, actual strength, management details, etc. Credit rating’s quality helps to build confidence of the investors and they rely on this rating for making investment decisions.
● Allows investors to make independent investment decisions: Investors often seek advice from financial advisors, stock brokers, merchant bankers, portfolio managers, etc. regarding good investment proposals. However, for rated instruments, investors do not need to be dependent upon these financial intermediaries’ advice as the rating symbols given to a particular instrument suggests the instrument’s creditworthiness and also indicates the degree of risk associated with it.
● Allows investors to make investments of their choice: For making investment in the capital market, many alternative credit rating instruments are available at a particular point of time. Investors can make their choice based on their risk profile and diversification plan.
A credit rating agency is a company which provides creditors with information about the creditworthiness of individuals and businesses based on their credit rating. A number of variables, including assets, liabilities, the ability to repay debt, collateral and credit repayment, and default history, affect this kind of rating. For any business to attract investors, having a high credit rating is a must. Get in touch with Registrationwala if you want to avail credit rating advisory services for your business!
Q1. How many credit rating agencies are in India?
A. There are a total of seven credit agencies in India, as of 8th July, 2024, namely Acute Ratings and Research Limited, Brickwork Ratings India Private Limited, Care Ratings Limited, Crisil Ratings Limited, ICRA Limited, India Ratings and Research Private Limited and Infomerics Valuation and Rating Private Limited.
Q2. What does credit rating mean?
A. Credit rating refers to the alpha numeric representation of a company’s creditworthiness. It is a rating agency’s opinion regarding the ability and willingness of an entity or individual to fulfill their financial obligations completely within the due date. It is an important aspect which can either make or break an application for a loan
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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