What Is A Credit Rating

The loan repayment capability of an organization that has borrowed money is determined by the credit rating. These ratings are given by agencies after taking into consideration their annual income, overall debt, and the kind of profits they are expected to make in future. The credit rating is very important for a lender when he considers your loan application. A good credit rating shows that the borrower has the ability to repay the loan on time and vice-versa.

What Are The Different Types of Credit Ratings?

Each credit rating agency uses a different set of words to highlight the risk associated with a corporate entity. It is incorporated as a part of the credit rating scale that they have developed for the purpose. 

But, they can be mainly classified into the following two categories:

• Investment Grade
• Speculative Grade

 Investment Grade

Investment grade credit ratings indicate that the corporate entity has made correct decisions, is highly credible financially, and can repay their debts on time. Such companies easily qualify for a loan and that too at low interest rates. 

Speculative Grade

These ratings indicate that the borrower has made risky investment decisions and may not be able to repay the loan they have borrowed on time. Such entities do not get easy loan approval and even if they do so get them only at higher interest rates. 

What Is The Importance of Credit Rating? 

• Credit ratings are important to lenders, companies that borrow money, and other entities that invest in bonds/equity shares of the borrowing firm. 
• Lenders decide whether a company is creditworthy or not according to the credit rating of the company. They approve or reject loan applications as per the credit rating of the company. 
• Borrowing companies will know whether or not they will be able to get a loan for operational/expansion reasons by seeing their credit rating. 
• Individual or institutional investors also see credit ratings before investing in the   shares/bonds of a company. The credit rating helps in assessing the risk before investing. 

What are the Credit Rating Agencies in India?

Credit ratings are given by credit agencies which are regulated by the SEBI (Credit Rating Agencies) Regulations, 1999. This is part of the Securities and Exchange Board of India Act, 1992. 

Here is a list of important credit rating agencies in India. 

• Credit Rating Information Services of India Limited (CRISIL): This agency rates companies, banks, and organizations based on their strengths, market reputation board, market share, etc. It is also based out of the USA, Hong Kong, Poland, Argentina and China. It offers 8 types of credit ratings ranging from AAA – D.

• Investment Information and Credit Rating Agency of India (ICRA) Limited: This offers comprehensive ratings to corporates for various scenarios such as bank loans, mutual funds, corporate debt, etc. 

• Credit Analysis and Research Limited (CARE): CARE has been providing a range of credit rating services since April 1993. These services include debt, bank loans, corporate governance, recovery, financial sector, and more. Their rating scale also incorporates two categories - long-term debt instruments and short-term debt ratings. 

• India Rating and Research Private Limited: This agency was earlier known as Fitch Ratings India Private Limited. It offers credit ratings to evaluate the credibility of corporate issuers, financial institutions, project finance companies, urban local bodies, managed funds, etc. 

•    Acuité Ratings & Research: It has two divisions - SME ratings and Bond ratings. It offers 8 formats for credit rating ranging from AAA-D  

• Brickwork Ratings India Private Limited: This credit rating agency rates municipal corporations, bank loans, NGOs, real estate investments, capital market instruments, SMEs, etc. You can check your company’s credit rating by contacting one of the above credit rating agencies. 

What is the Difference Between a Credit Rating and a Credit Score?

The main differences between credit scores and credit ratings are:

• Credit scores are given to individuals but credit ratings are allocated to corporate or government entities. 
• Credit scores are three-digit long numeric codes within the range of 300 to 900. On the other hand, credit ratings are alphabetical codes and are designated from AAA to D.
• Credit scores are generally considered by lenders or potential guarantors. The nature of credit ratings are different. They are considered by stock market investors and other business and investment banks. 

What Are The Various Credit Rating Scales in India?

Here is a list of some credit rating symbols offered by rating agencies for long-term and mid-term debt instruments.

 

Conclusion 

The credit rating indicates the creditworthiness for any entity that wants to borrow money. It is very important to have a good credit rating since it is used by lenders and investors to determine whether or not to approve loans or join in business journeys. It is essential to have a good credit rating as it can help a company mitigate interest rates, raise money, and also promote better accounting standards. 

FAQS of What Is A Credit Rating

1:What are the factors that affect credit rating? 

The factors affecting credit rating are, past debt, payment history, financial statements, lending and borrowing history, market reputation, level and type of current debt,  and future prospects of the business. 

2:Who are the users of credit rating? 

The entities or organizations that look at credit ratings of companies are lenders, debt issuers, retail or institutional investors, investment banks, and other businesses or corporations.