Credit Rating Agencies (CRA) assess creditworthiness of organisation and different entities. In simple words, these agencies analyse a debtor’s ability to repay the debt and also rate their credit risk.
All the credit rating agencies in India are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
There are a total of seven credit agencies in India viz,
India Rating and Research Pvt. Ltd
Infomerics Valuation and Rating Private Limited.
The entities that are rated by credit rating agencies comprise companies, state governments, non-profit organisations, countries, securities, special purpose entities, and local governmental bodies.
Poor credit rating indicates that the entity is at a high risk of defaulting.
Credit rating agencies take into consideration several factors like the financial statements, level and type of debt, lending and borrowing history, ability to repay the debt, and the past debts of the entity before rating their credit.
Once a credit rating agency rates the entities, it provides additional inputs to the investor following which the investor analyses and takes a sound investment decision.
The credit ratings that are given to the entities serve as a benchmark for financial market regulations.
What is the difference between credit ratings and credit score?
A credit rating is given to a company, organisation or a government body by calculating its ability to repay the debt and to predict the likelihood of default. On the other hand, a credit score is given to an individual after taking a look at his credit history and repayment behaviour.
How is credit rating expressed/denoted?
Credit ratings are generally expressed using a letter-based system or alphanumeric system with symbols, for example A-, AA+, AAA, A1+, A1- etc.
How can borrowers benefit from a good credit rating?
A good credit rating indicates a higher credit worthiness and lower risk of default for the lender/ investor and can thus help the borrowing entity access funds more easily and on better terms such as a reasonable rate of interest.