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Credit Rating in India: Meaning and Significance

The credit ratings of the companies are determined by credit rating agencies considering various factors. These credit ratings are very important for debt investors. Know the significance of credit rating and the meaning of various gradings from this article.

Those who invest in Corporate Bonds and Non-Convertible Debentures (NCDs) always check the credit rating of the company which is offering that particular bond or debenture. The credit rating indicates the condition of the company and prospective investors get an indication about the risk involved in investing in that particular corporate bond or debenture. The higher the credit rating is, the safer is the invested amount.

So, it is imperative for the investors, especially the debt investors to clearly understand credit rating, its meaning and significance. Let us try to find out.

What is credit rating?

Credit rating is simply an assessment of the borrowing company. It determines whether the borrowing company will be able to pay back the loan (taken from the investors) on time as per the loan agreement. The credit rating also helps a company to get a loan from banks and other financial institutions.

Importance for the lenders

Now let us understand clearly the importance of credit rating for the lenders. Needless to say that credit rating determines the decision of the investors to invest money/to give loan in/to that particular company. Conservative investors or some banks may not be willing to give money to a risky customer with low credit rating. The lenders always feel that high credit rating means an assurance about the safety of the invested amount and that the amount will be paid back with the stipulated rate of interest on time.

Importance for the borrowing companies

If the credit rating of a company is high, it creates a good will. So, such companies get loan easily or can raise money in the form of corporate bonds or NCDs from the market very quickly. Furthermore, the companies with high credit rating get a loan and comparatively lower rate of interest.

How credit rating is done?

In India, there are various credit rating agencies. Different credit rating agencies have their respective algorithm to calculate credit rating. However, it can be generally stated that the common factors are credit history of a company, credit types, duration, credit utilization, exposure, etc. The credit rating agencies collect information in respect of above factors from banks and other financial institutions and prepare report in respect of a company. Based on the reports, the gradings are given to the companies.

Some credit rating agencies in India

Some reliable credit rating agencies of India are: (a) Credit Rating Information Services of India Limited (CRISIL), (b) Investment Information and Credit Rating Agency of India (ICRA), (c) Credit Analysis and Research Limited (CARE), Onida Individual Credit Rating Agency of India (ONICRA), etc.

Meaning of different ratings

Now let us understand the meaning and significance of various ratings. For this purpose, we would take the ratings given by CRISIL.

  • AAA: The instrument with AAA rating is considered to have the highest degree of safety in respect of timely servicing of financial obligations.
  • AA: The instrument with AA rating is considered to have high degree of safety in respect of timely servicing of financial obligations.
  • A: The instrument with A rating has adequate safety in respect of timely servicing of financial obligations.
  • BBB: The instrument with AA rating is considered to have a moderate degree of safety in respect of timely servicing of financial obligations.
  • BB: An instrument with BB rating has a moderate risk of default in respect of timely servicing of financial obligations.
  • B: An instrument with BB rating has high risk of default in respect of timely servicing of financial obligations.
  • C: Such instruments have very high risk of default.
  • D: Such instruments with D rating are already in default or are expected to be in default soon.

The gradings given by other credit rating agencies are similar in nature.

Summing up

Concluding our discussion, it must be stated that the credit ratings of companies are very important to debt investors. They take investment decision based upon the credit rating of a company. However, it must also be remembered that if the credit rating of a company is high, the rate of interest offered by such company will be comparatively low, and vice versa.

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