Credit rating is an evaluation of credit risk of a borrower or of a business or of an instrument of a business on relevant factor indicating ability to pay back the debt in general term. Credit Rating establishes a link between risk and return, it is a symbolic indication of the current opinion regarding the relative capability of a corporate entity to service its debt obligations in time with reference to rating. For easy understanding, credit rating is expressed in alphabetical or alphanumerical symbols. It is considered more relevant for gradation of debt securities; it can be applied for other purposes also.
Rating is not only beneficial for investor but also beneficial for company as a whole in terms of direct mobilization of savings from individuals. Ratings also encourage discipline amongst corporate borrowers to improve their financial structure and operating risks to obtain a better rating for their debt obligations and thereby lower the cost of borrowing. Companies those get a lower rating are forewarned, as it were and have the freedom, if they desire, to take steps on their financial or business risks and thereby improve their standing in the market.
Credit rating is useful to investors, issuers, intermediaries and regulators
- For Investors:
For investor credit rating plays an important role because through this rating they used to judge whether to invest in proposed fund or investment or not. The rating helps them to judge whether the investment will give expected return or not, it will show the credibility of the investee company o organization.
- For Issuers:
The market places immense faith in opinion of credit rating agencies, hence the issuers also depend on their critical analysis Credit rating provides a basis for determining the additional return (over and above a risk free return) which investors must get in order to be compensated for the additional risk that they bear. The difference in price leads to significant cost savings in the case of highly rated instruments.
- For Intermediaries:
Rating is helpful to intermediaries like merchant banker, underwriter, broker, for planning and pricing of issue. And they also use rating to calculating and monitoring the risk of investment.
- For Regulator:
The Reserve Bank of India (RBI) prescribes a number of regulatory uses of ratings. The RBI requires that a NBFC must have minimum investment grade credit rating if it intends to accept public deposits. As per money market regulations of the RBI, a corporate must get an issue of CP rated and can issue such paper subject to a minimum rating. SEBI has also stipulated that ratings are compulsory for all public issue of debentures. SEBI has also made mandatory for acceptance of public deposit by Collective Investment Schemes.
Credit rating is important for activities like
- For merger
- For takeover
- For issuance of security instrument
- For issuance of debt instrument etc.
- Better Lending Rate from Financial Institutions
- Better Brand Good will
- Rating Agencies in India:
- India Ratings
- AAA+,AAA, AA+, AA,A+, A – Good Credit Rating
- BBB+,BBB, BB+,BB,B+, B – Average Credit Rating
- B, C, D – Low Credit Rating
Firstly Company selects the credit rating agency.
After this they execute agreement with them.
Then rating agency assigns rating team in the concerned company.
The team analyses the information and interacts with client, undertakes site visits and analyses data, interacts with bankers and auditors; prepares ratings note.
Rating Committee awards rating to client, rating is conveyed to client along with the key rating consideration.
Now it is the choice of the company whether to accept rating or not
If company accepts the rating provided by agency then rating letter and rationale issued by rating agency and rationale published in website.
After this company used to do periodic surveillance
If company don’t accept the rating then it can appeal for review of rating