Credit rating has gained wide significance among investors and in Indian financial market in the last two decades. Credit rating is simply an opinion on the credit quality of a firm i.e. the ability of debt issuing firm to service the instrument.
Assessment of credit quality calls for expertise that credit rating agencies should possess. The rating issued by a rating agency serves as summary information about credit quality for economic decision-makers. As long as the agency assigning the rating is perceived as being credible, economic decision-makers would not evaluate the inputs that go into the rating process.
Credit rating originated in the U.S.A. in 1909 when Moody’s began rating corporate and railroad bonds. Since then the practice of credit rating has been adopted in several countries worldwide.
In India, the practice of credit rating began in 1988 with the setting up of the Credit Rating and Investor Services of India Ltd (CRISIL).
| Table of Contents |
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| What is Credit Rating Agencies? |
| Key functions of Credit Rating Agencies |
| Corporate credit ratings |
| Credit Rating Agencies in India |
| Conclusion |
What is Credit Rating Agencies?
A credit rating agency is a company that rates debtors on the basis of their ability to pay back the debt in a timely manner. They rate large-scale borrowers, whether companies or governments.
A credit rating agency is an organization that assigns credit ratings to the debtors predicting their capability to pay back debt timely and simultaneously making the forecast on the chances of the debtor being defaulted. These rating agencies rate large borrowers (both governments and companies).
Some of the top credit agencies in the world are Moody’s, Standard and Poor’s (S&P), and Fitch Rating.
Key Functions of Credit Rating Agencies
Some of the key functions of credit rating agencies are discussed below:
- Low-cost information:- The credit rating agency collects, analyses, interprets and makes a proper conclusion of any complex data and transforms it into a very lucid and easily understandable manner.
- Provides a basis for suitable risk and return:- The instruments rated by rating agency gets greater confidence amongst the investor community. It also gives an idea regarding the risk associated with the instrument.
- Helps in the formulation of Public policy:- If debt instruments are professionally rated, it becomes very easy to judge the eligibility of various securities for inclusion in the institutional portfolio with greater confidence.
- Provides superior information:- Credit rating agencies being an independent rating agency, due to highly trained and professional staffs and with the access to information which is not publicly available information, these agencies are able to deliver superior information.
- Enhances corporate image:- Better credit rating for any credit investment enhances visibility and corporate image in the industry.
Corporate Credit Ratings
S&P, Moody’s, Fitch and DBRS are the only four rating agencies that are recognized by the European Central Bank (ECB) for determining collateral requirements for banks to borrow from central bank. These rating agencies assign a rating to the company and to its financial instruments like bonds.
The credit ratings by some of the top rating agencies in the world like S&P and Moody’s are discussed below-
Standards and Poor (S&P)
The long-term rating given by S&P is given below-
Moody’s
Credit Rating Agencies in India
There are a number of credit rating agencies in India, out of which the three main rating agencies are as follows-
1. CRISIL
CRISIL commenced its operations in the year 1987 and it is India’s first credit rating agency. The company conducts its operations from 8 countries including India, US, UK, Singapore, China, Poland, Argentina and Hong Kong. However, it has its head office in Mumbai.
The company provides ratings, analytics, and solutions, research with a very good track record of innovation and growth. Standard and Poor’s is the majority shareholder of CRISIL.
The long-term ratings given by CRISIL are shown below-
2. ICRA
ICRA was the second rating agency established in the year 1991. It is a public limited company and it has its head office in New Delhi. Moody’s is the majority shareholder of ICRA. The long-term rating of ICRA is exactly similar to CRISIL as shown in the chart above.
3. CARE
Then in the year 1993, the next credit rating agency which came up was CARE. It has its head office in Mumbai and it is India’s second-largest credit rating agency.
It is one of the five partners of an international rating agency called ARC Ratings.
Conclusion
The analysis made by these rating agencies provide the investor with valuable insights which facilitate their decision to further research and examine the opportunities and risks attached to these investment securities.
The analysis with regards to countries, sectors, and classes of securities provides valuable insights to investors in making their investment decision.
To understand the quality of ratings given by these agencies, it’s important to know about the history and evolution of these agencies to get an idea about the methodologies these agencies use.
However, some investors utilize the information from multiple rating agencies for more authenticity.
Learn more about the functions of Credit Rating and Credit Cards from our detailed module. Click Here.
Frequently Asked Questions (FAQs)
1. How Credit Rating Agencies Work?
Credit rating agencies look at a company’s or government’s income, spending, debts, and how they have repaid loans in the past. Based on this, they give a rating that shows how likely they are to repay future loans. This helps investors know how safe it is to lend them money.
2. How Many Credit Rating Agencies Are There in India?
There are several credit rating agencies in India, with six currently recognized by the Reserve Bank of India for regulatory purposes. These include CRISIL, ICRA, CARE (now CareEdge), India Ratings & Research, Acuite Ratings & Research, and Infomerics Valuation & Rating.
3. Who Regulates Credit Rating Agencies in India?
In India, credit rating agencies are regulated by the Securities and Exchange Board of India (SEBI). SEBI sets guidelines, monitors their operations, and ensures transparency, accountability, and fairness in the credit rating process to protect investor interests.
