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.
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 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.
Speculative grade credit ratings indicate that the corporate borrower has made very risky business investments and thus may not be able to repay the loan given to them. Such entities usually get loans at comparatively higher interest rates.
Credit ratings are important to lenders, the borrowing companies as well as other entities who invest in the equity shares/bonds of the borrowing firm.
The below table highlights the credit rating scales that are individually used by the major credit rating agencies in India.
Credit Rating Scale |
ICRA |
BrickWork |
CRISIL |
CARE |
India Ratings and Research |
High Safety: Lowest Risk of Default |
ICRA AAA |
BWR AAA |
CRISIL AAA |
CARE AAA |
IND AAA |
High safety: Low default risk |
ICRA AA |
BWR AA |
CRISIL AA |
CARE AA |
IND AA |
Low risk |
ICRA A |
BWR A |
CRISIL A |
CARE A |
IND A |
Moderate safety: moderate credit risk |
ICRA BBB |
BWR BBB |
CRISIL BBB |
CARE BBB |
IND BBB |
Moderate safety: Moderate default risk |
ICRA BB |
BWR BB |
CRISIL BB |
CARE BB |
IND BB |
High risk: High default risk |
ICRA B |
BWR B |
CRISIL B |
CARE B |
IND B |
High risk: Very high default risk |
ICRA C |
BWR C |
CRISIL C |
CARE C |
IND C |
Default: Defaulted or about-to-default instruments |
ICRA D |
BWR D |
CRISIL D |
CARE D |
IND D |
The factors that affect credit ratings of corporate entities in India are:
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 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.
The various credit rating agencies of India are regulated by the Securities Exchange Board of India (SEBI).
Credit ratings are expressed solely in alphabets. They range from AAA to D, with A being the highest possible rating and D being the lowest.
Credit ratings are important to investors, banking institutions and the current/future partners of the borrower firms. Investors look at the credit rating of a firm before investing money in their stocks/bonds. Current/future partners look at it to assess the risks of getting into a transaction with them. Lenders look at it to determine the applying business’ overall creditworthiness.
Yes. It is the second-highest credit rating that a corporate entity can receive. AA rating implies that the borrowing firm can pay off the loan easily and it has strong financials. However the highest possible credit rating an entity one can receive in India is AAA.
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.