A credit rating is an evaluation of a borrower’s creditworthiness that determines whether the borrower will be in the condition to repay the loan on-time as per the loan agreement. It is typically expressed in alphabetical symbols and provided by reputed credit rating agencies. These credit rating agencies look into numerous information such as annual reports, financial statements, etc., which in the end helps them determine the rating to be given to the borrower.
Importance of Credit Ratings
When a credit rating agency upgrades the rating of a business entity, it means that the entity has a high chance of repaying the credit. Conversely, when the credit rating is downgraded, it is visible that the entity’s ability to repay has declined. Once the entity’s credit rating has been downgraded, borrowing money becomes a problematic task, thereby impacting the overall business. Lenders will regard the borrower as a high-risk debtor because they are more likely to turn into defaulters. Therefore, credit rating is very important for borrowers because it does a quantitative and qualitative assessment of a borrower’s creditworthiness and offers a large audience for borrowing. Borrowers that have received a higher credit ratings are considered more creditworthy and less likely to default on their credit and debt obligations. And thus, other businesses are more likely to do business with that entity.
Key Benefits of Credit Ratings for Borrowers
Below-mentioned points are some of the benefits of credit ratings for borrowers:
- Better Chance of Loan Approval: Borrowers having high credit ratings will be perceived as low/no risk debtors. This improves the chances of getting the loan approved easily.
- Saving in Rate of Interest: The rating affects the total amount of money that a borrower is entitled to borrow. Thus, having a high credit rating enables borrowers to borrow money at a lower interest rate.
- Helps Promote Non-Popular Business Entities: Credit rating is beneficial to the non-popular business entities. If a borrower has a good rating given by a reputed credit rating agency, lenders will easily lend money to it. This is because the rating given by the agency increases the lending credibility of that borrower.
- A Wide Range of Audience for Borrowing: A borrower with a high rating can get a wider audience for borrowing. This is because the credit ratings are easily understood by the lenders such as financial institutions and banks.
- Aids in Growth and Expansion: A good credit rating enables an entity to grow and expand its business because it can get funds easily.
- Using Credit Rating As A Marketing Tool: Business entities now utilize credit rating as a marketing tool to increase their reputation and establish a more robust image in dealing with their clientele. By doing so, clients feel confident in the products’ quality manufactured by it.
Credit Rating Agencies
As mentioned earlier, the recognized credit rating agencies use their own algorithm to evaluate the rating of a borrower. However, the significant factors included are credit history, credit type and duration, credit utilization, credit exposure, etc.
- CRISIL (Credit Rating Information Services of India Limited)
CRISIL agency is the first credit rating agency of the country, which was founded in 1987. The agency computes companies’ creditworthiness based on their market share, strengths, market reputation, and board. It also rates companies, banks, and organizations, thereby assisting investors in investing in companies’ bonds.
- ICRA (Investment Information and Credit Rating Agency of India Limited)
Founded in 1991, ICRA is headquartered in Mumbai and provides comprehensive ratings through a transparent rating system. Its rating system incorporates symbols that differ from financial instruments. It focuses on rating corporate governance, mutual funds, hospitals, infrastructure development and construction, real estate companies, etc.
- CARE (Credit Analysis and Research Limited)
Established in 1993, CARE is a credit rating agency promoted and backed by IDBI, UTI, Canara Bank, and other financial institutions and NBFCs. Its ratings include financial organizations, state governments, and municipal entities, public utilities, and special purpose vehicles.
- India Ratings and Research Pvt. Ltd
India Ratings and Research (Ind-Ra) is a 100% owned subsidiary of the Fitch Group and headquartered in Mumbai. It provides timely and accurate credit opinions on India’s credit market (financial market). The rating agency currently maintains coverage of finance and leasing companies, corporate issuers, managed funds, urban local bodies, financial institutions (including banks and insurance companies), and structured finance and project finance companies.
- BWR (Brickwork Ratings)
Brickwork Ratings agency is a registered agency under SEBI, accredited by RBI and also empanelled by NSIC, NCD, MSME ratings and grading services. It also has accreditation from NABARD for NGO and MFI grading. It is authorized to grade companies seeking credit facilities from System Integrators (SIs), Renewable Energy Service Providing Companies (RESCOs), and IREDA.
- Acuite Ratings & Research Limited (formerly known as SMERA Ratings Limited)
Incorporated in 2005, Acuite was as an initiative of the Ministry of Finance (GOI) and RBI to facilitate the credit rating of bank borrowers. Bond Ratings and SME Ratings are two key divisions of the rating agency. It assesses the credibility of existing MSMEs (Micro, Small, and Medium enterprises).
- Infomerics Valuation and Rating Private Limited
Infomerics Valuation and Ratings is established by former bankers, finance professionals, and administrative services personnel. The agency is SEBI registered and RBI accredited. It evaluates entities such as banks, large corporations, non-banking financial companies (NBFCs), and small and medium scale units (SMUs).
The credit rating agencies uses rating symbols to denote the creditworthiness and risk level. The below table contains the rating symbols used in India:
Table: Long Term Scale
|AAA||Highest Safety, Lowest Credit Risk|
|AA||High Safety, Very Low Credit Risk|
|A||Adequate Safety, Low Credit Risk|
|BBB||Moderate Safety, Moderate Credit Risk|
|C||Very High Risk|
Note: For the rating categories AAA through to D, the modifier + (plus) or – (minus) may be appended to the rating symbols to indicate their relative position within the rating categories concerned. Thus, the rating of AAA+ is one notch higher than AAA, while AAA- is one notch lower than AAA.
Table: Short Term Scale
|A1||Very strong degree of safety, lowest credit risk.|
|A2||Strong degree of safety, low credit risk.|
|A3||Moderate degree of safety, higher credit risk than the two higher categories.|
|A4||Minimal degree of safety, very high credit risk, and is susceptible to default.|
|D||Already in default or expected to be in default on maturity.|
Note: For the rating categories A1 through to A4, the modifier + (plus) may be appended to the rating symbols to indicate their relative position within the rating levels concerned. Thus, the rating of A1+ is one notch higher than A1 and so on.
A good credit rating is crucial for borrowers because it attracts a wide range of lenders and offers various benefits. Depending upon the rating, lenders decide whether to lend money or not. Therefore, it is of paramount importance for borrowers to get good credit ratings from reputable and recognized credit rating agencies. To learn more about credit rating services, please contact us.