Credit Rating: Importance, Range, Types & List of Credit Rating Agencies in India

What is a Credit Rating?

A credit rating essentially is an indicator of the loan repayment capability of an organisation that has borrowed money. These ratings are assigned by agencies after accounting for their annual income, their overall debt and the kind of profits they are expected to make in future. Credit ratings are one of the first things that lenders look at while considering their loan application. A good credit rating indicates that the borrower is capable of repaying the loan on time and vice-versa.

Types of Credit Rating

Each credit rating agency uses a different set of terms to highlight the risk associated with a corporate entity as it is a part of the credit rating scale that they have developed for such purposes. But, they can be broadly put under the following two categories:

• Investment Grade

• Speculative Grade

 1. Investment Grade

Investment grade credit ratings indicate that the corporate entity has made sound investment decisions and can repay their debts on time. Companies with ratings that fall under this category can easily avail a loan and that too at low interest rates.

 2. Speculative Grade

Ratings that fall under this category indicate that a corporate borrower has made very risky business investments and thus may not be able to repay the loan given to them. Entities which get ratings that fall in this category get loans at higher interest rates.

Who are the Users of Credit Ratings

The following types of entities/organisations look at credit ratings of companies:

• Lenders

• Investment Banks

• Debt Issuers

• Retai/Institutional Investors

• Other Businesses/Corporations

1. Lenders: Lenders look at credit ratings of companies to determine their loan repayment capability. A good credit rating of a company would be an indication of a healthy repayment behaviour and their ability to repay the loan on time. On the other hand, average or poor credit ratings will tell the lender that the borrowing company may not be able to make timely payments.

2. Investment Banks: Credit ratings come in handy for investment banks at the time of taking the debt instruments/equity shares of the company to the market. More specifically, it helps investment banks decide on the price of such securities before they are listed on financial markets.

3. Debt Issuers: This refers to the borrowing companies/entities themselves. These entities take a look at their own credit rating from time to time to assess their creditworthiness.

4. Retail/Institutional investors: These are individuals/organisations that invest in the securities of companies. Most retail and institutional investors look at credit ratings of companies to determine the returns they can make from investing in their shares/bonds. Good credit ratings indicate healthy returns over a long period of time and vice-versa.

5. Other businesses/corporations: Other businesses also look at the credit ratings of organisations before entering into a business transaction/partnership with them.

Importance of Credit Ratings

Credit ratings are important to lenders, the borrowing companies as well as other entities who will invest in the equity shares/bonds of the borrowing firm. Lenders assess the creditworthiness of a company by looking at their credit rating and approve/deny loans to them accordingly. It is important to the borrowing companies as it decides whether or not they will be able to get a loan for operational/expansion reasons. Individual or institutional investors also look at credit ratings before investing in the shares/bonds of a company to assess the risks of investing in them.

Credit Rating Agencies in India

Over the past 30 years, seven credit rating agencies have established themselves on the basis of their specialisation and the industry they service. These credit rating agencies are ICRA, CRISIL, CARE, BrickWorks, India Ratings and Research, Informetrics Valuation and Acuite.

How do the Various Credit Rating Agencies in India Work?

Before assigning a grade, all credit rating agencies in India take a similar set of factors into consideration. These agencies analyses the financial statements, repayment behaviour shown in the past and the kind of debt that they are servicing currently. Some agencies even take the reputation of the board and that of the firm in the market. After collating the relevant data, individual agencies add weightage as per their system to each factor. This ultimately helps them arrive on a grade for a corporate entity or a financial instrument.

Credit Rating Scales Used by Various Credit Rating Agencies in India

The below table highlights the credit rating scales that are individually used by the major credit rating agencies in India.

Factors That Affect Credit Ratings

The factors that affect credit ratings of corporate entities in India are:

• Loan portfolio: The kind of loans a corporate entity is servicing at the time plays a major factor. If the entity is repaying more of secured loans than the insecure ones, it will have a much more favourable rating. If the loan portfolio of the company is majorly made up of unsecured loans, that could affect its credit rating negatively.

• Future prospects of the business: Expansion plans and projected earnings, which could give the lender an insight into the degree of growth in its future income, plays a major factor. If the business is expected to see a significant rise in its income on the basis of sound fundamentals, it will get a good credit rating. However, the opposite of the same can be true as well.

• Past repayment behaviour: Whether the entity has paid its past loans on time or has made late payments will also play a factor. It will give the lender a sense of the financial management skills of the borrower.

• Market reputation: The reputation of the borrowing firm in the market can affect its income positively or negatively, which will directly impact its loan repayment capability. Hence this too is a factor that is taken into account by agencies while assigning credit ratings.

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

The key distinctions between credit scores and credit ratings are:

• Credit scores are assigned to individuals, whereas credit ratings are assigned to corporate/government entities.

• Credit scores are three-digit-long numeric codes that stay within the range of 300-900. Credit ratings, on the other hand, are alphabetical codes and range from AAA to D.

• Only a lender or a potential guarantor will look at a credit score. Credit ratings, on the other hand, are looked at by stock market investors, other business and investment banks.

List of Credit Rating Agencies

The agencies that assign credit ratings to corporate entities in India are:

• ICRA

• CRISIL

• India Rating and Research Private Limited

• Brickworks Ratings India Private Limited

• Credit Analysis and Research Limited (CARE)

• Acuite Ratings and Research

• Infometrics Valuation and Rating Private Limited

1. Investment Information and Credit Rating Agency of India (ICRA): ICRA was established in 1991. It has since risen to become one of the most eminent rating agencies  in India. The headquarters of ICRA is situated in New Delhi.

2. Credit Rating Information Services of India Limited (CRISIL): CRISIL was established in 1987, making it one of the first-ever credit rating agencies in India. It is known for assigning ratings to companies based on their strengths, reputation of the members of its board of directors and market share/reach. CRISIL also has offices in Hong Kong, China, USA, Argentina and UK. It assigns companies, eight types of ratings, ranging from AAA to D. The main headquarters of CRISIL is situated in Powai, Mumbai.

3. India Rating and Research Private Limited: Formerly known as Fitch ratings India private limited, this agency also assigns ratings to managed funds and urban local bodies (ULBs). Additionally, it also gives ratings to corporate issuers and financial institutions. This agency has its head office in Bandra East, Mumbai.

4. Brickworks Ratings India Private Limited: This agency is best known for assigning ratings to Non-Governmental Organisations (NGOs), municipal corporations, banks and Small and Medium Enterprises (SMEs). The headquarters of this company is located in Marol, Mumbai.

5. Credit Analysis and Research Limited (CARE): CARE has been assigning ratings to most of the companies that belong to the finance sector since 1993. It also assigns ratings to such firms on the basis of their short term creditworthiness and long term creditworthiness. Its main office is located in Sion, Mumbai.

6. Acuite Ratings and Research: This firm mainly assigns grades to Small and Medium Enterprises (SMEs) and corporate bonds. As it was established in 2011, it is one of the youngest rating agencies in India. It assigns eight different types of ratings to its targeted group entities, ranging from AAA to D. This agency has its base set up in Marol, Mumbai as well.

7. Infometrics Valuation and Rating Private Limited: This New Delhi-based agency was founded by former finance professionals and gives ratings to banks and Non Banking Finance Companies (NBFC). It was established in 1986, making it the oldest Indian rating agency.