Credit Rating Agencies (CRA) analyse a debtor’s ability to repay the debt and also rate their credit risk. A credit rating not only determines whether or not a borrower will be approved for a loan, but also determines the interest rate at which the loan will need to be repaid. Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as Standard & Poor’s (S&P), Moody’s, or Fitch. These rating agencies are paid by the entity that is seeking a rating for itself or for one of its debt issues.
Why are Credit Ratings Important
Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies. While a borrowing entity will strive to have the highest possible rating since it has a major impact on interest rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service or repay the debt.
Since companies depend on loans for many start-up and other expenses, being denied a loan could spell disaster, whereas, a high interest rate is much more difficult to pay back. Credit ratings also play a large role in a potential investor’s determining whether or not to purchase bonds. A poor credit rating is a risky investment; it indicates a larger probability that the company will be unable to make its bond payments.
Credit Rating in the Indian Scenario
All the credit rating agencies in India are regulated by SEBI. At present there are seven major credit rating agencies in our country and they are CRISIL, CARE, ICRA, ONICRA, SMREA, BWR, Fitch India. A brief about them:-
CRISIL (formerly Credit Rating Information Services of India Limited) is a global company whose majority shareholder is Standard & Poor’s. They work with various governments and policy makers in India and many other countries.
ICRA (formerly Investment Information and Credit Rating Agency) is a joint venture of Moody’s and Indian financial and banking service organisations.
CARE is short form of Credit Analysis and Research. Mainly CARE does rating of debt instruments, Corporate governance rating, claim paying ablities of insurance companies etc.
ONICRA is established by Sonu Mirchandani under ONIDA Finance. They focus on MSMEs.
Fitch India is a part of Fitch Group who are one of the top three rating agencies in the world.
BWR is short form of BrickWork Ratings. They offer ratings for bank loans, corporate governance rating etc.
SMERA stands for Small and Medium Enterprise Ratings Agency. It’s a joint venture of SIDBI, Dun & Bradstreet and the leading banks in India. They focus primarily on the Indian MSME segment.
Credit Rating vs. Credit Score
A credit rating is given to a company, organisation or a government body by calculating its ability to repay the debt and to predict the likelihood of default. On the other hand, a credit score is given, by Credit Bureaus, to an individual after taking a look at his credit history and repayment behaviour.
Factors Affecting Credit Ratings and Credit Scores
There are a few factors credit agencies who take into consideration while assigning a rating to an organization. First, the agency considers the entity’s past history of borrowing and paying off debts. Any missed payments or defaults on loans negatively impact the rating. The agency also looks at the entity’s future economic potential. If the economic future looks bright, the rating tends to be higher; if the borrower does not have a positive economic outlook, the credit rating will fall.
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