Credit Rating: How Does It Work? | Credit Rating Agencies in India

Credit rating is one of the most crucial factors that determine whether your bank gives you a loan or not. A fair credit rating shows a good history of paying back bank loans on time.

The concept of it has gained a great amount of significance in the past two decades. Since the ideas of investments and loans have become common among the people, it is very important for people, groups, and organizations to maintain a good credit rating.

So, how does a credit rating work? In this article, we'll know more about credit rating and how it works. We'll also know why it is important.

What is a Credit Rating?
How does Credit Rating Work?
Factors Affecting Credit Rating
Why is a Credit Rating Important?
Credit Rating Agencies in India

1. Credit Rating Information Services of India Limited (CRISIL)
2. Credit Analysis and Research Limited (CARE)
3. Investment Information and Credit Rating Agency of India Limited (ICRA limited)
4. Brickwork Ratings India Pvt Ltd (BWR)
5. Acuite Ratings & Research Limited
6. Infomerics Valuation and Rating Private Limited

What is a Credit Rating?

Credit rating is the evaluation of a buyer by a credit rating agency. It determines whether they would be able to pay back a loan in time or not. The buyer can be an individual, a company, an NGO, a government, or even a country. Credit rating helps lenders assess the financial risk and lend money.

A loan is a debt that the lender gives. It is more of a contractual promise. The credit rating gives the lender insight into the loan history of the borrower. Moreover, it also determines if they would be able to pay back in time.

There are two types of credit rating:

Investment-grade
This assures the lender that the borrower will most likely meet the repayment terms. Hence, the rate of interest is low.

Speculative grade
This shows that the investments are risky and thus, the lender charges a higher interest rate.

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How does Credit Rating Work?

Every company has its algorithm to provide the rating. When the request for a credit rating is made, the agencies dig up information from various sources like banks and other financial institutions to prepare a report. Based on that, they grade the borrowers according to a scale.

The scale represents the risk the borrowers pose in long-term or mid-term investments. The lenders can then examine the rating and decide whether it is worth lending money to them or not.

The credit rating agencies generally make use of this scale to show ratings of people or organizations by allotting these grades to them. As shown 'AAA' symbol of rating is considered excellent which means the borrower possesses the least risk and is offered a lower rate of interest. The symbols below 'BBB' fall under speculative-grade which means the borrower possesses high risk so the lender charges a higher rate of interest. The symbol 'D' is the lowest grade of rating which means a person or company is either in default or is soon to be in default on its financial obligation.

Factors Affecting Credit Rating

Various factors can affect the credit rating of the lender. These are as follows:

Borrower's financial history

• Lending and borrowing history
• Repayment history
• Past debt
• Level and type of current debt
• Financial statement

Borrower's future economic potential

• Ability to repay the debt
• Current performance
• Future income

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Why is a Credit Rating Important?

Credit rating helps both the lenders and the borrowers with the loan. Here is how:

For lenders:

• A credit rating helps the lender make better investment decisions. No one would want to lend to a risky customer. With the credit rating, the lender can analyze their creditworthiness and the risk attached to that investment. Thus, they can make a better decision.
• A high credit rating assures the lender that their money is in safe hands and it would be paid back in time with adequate interest.

For borrowers:

• With a high credit rating, you look like a low or no-risk customer, and thus it is very easy to get your loan approved.
• Every bank offers loans with a range of rates of interest. If your credit rating is high, you will have to pay a lower rate of interest.

Credit Rating Agencies in India

Here is a list of credit rating agencies in India that can grade you:

Credit Rating Information Services of India Limited (CRISIL)

CRISIL was the first credit rating agency in India established in 1988. The Mumbai-based agency celebrated its 30 years of completion in 2017. Both UTI and ICICI launched CRISIL, the subsidiary of S&P Global, an American company. In 2017, CRISIL got around an 8.9% stake in CARE, a Mumbai-based credit rating agency. Presently, CRISIL is India’s largest credit rating agency.

Credit Analysis and Research Limited (CARE)

Credit Analysis and Research Limited has been active since 1993. The Mumbai-based agency, CARE, offers services in rating and grading. The rating areas include the financial sector, rating debts, issuer rating, bank loan rating, etc. The rating helps corporates to raise finance for their investors.

Recently, CARE collaborated with four countries, South Africa, Brazil, Portugal, and Malaysia. The new international agency formed is named ARC Rating. Also, CARE has its branches spread over states like Kolkata, Hyderabad, Chennai, Pune, Bengaluru, and many more.

Investment Information and Credit Rating Agency of India Limited (ICRA limited)

The Investment Information and Credit Rating Agency of India Limited has been in operation since 1991. Moody corporation with various other financial and commercial banks had founded the agency.

The organization, ICRA handles the offering of well-researched, independent credit ratings for the borrowers. At present, ICRA has four subsidiaries in different countries. The subsidiaries of ICRA are Consulting and Analytics, ICRA Lanka, Data Services and KPO, and ICRA Nepal.

Brickwork Ratings India Pvt Ltd (BWR)

Brickwork Rating India Pvt Ltd has been in operation since 2007 and Canara bank has elevated it. RBI sanctioned the Bengaluru-based agency to calculate credit ratings in India. Three other enterprises named NSIC, MSME, and NCD have enlisted it. NABARD has authorized BWR for rating NGO and MFI. Moreover, BWR is also responsible for rating real estate investments, tourism, IREDA, MNRE, and many more.

Acuite Ratings & Research Limited

The Mumbai-based credit rating agency named Acuite Rating & Research Limited is in motion science 2005. SEBI (Securities and Exchange Board of India) recognizes this agency. RBI has certified the company as External Credit Assessment Institution (ECAI). Hence, the company offers ratings for bank facilities, debt instruments, bank loans, and many more.

Infomerics Valuation and Rating Private Limited

Administrative personnel, renowned finance professionals, and former bankers together founded a company. They named it Infomerics Valuation and Rating Private Limited. The company offers a detailed evaluation of banks, corporate companies, NBFC, small and medium units, and many more.

Conclusion

A credit rating agency assesses a firm’s or an individual’s financial background. Moreover, it helps the investors recognize the company’s potential for repaying the debt. Hence, credit rating is an integral process before investing or lending capital. It is a boon for both lenders and borrowers as it keeps the intentions transparent between the participants. It is usually a lengthy process. It takes almost 2 weeks to 1 month to complete the rating process.

FAQ

What is a credit rating?

Credit rating refers to the evaluation of a borrower's creditworthiness.

Which are the credit rating agencies in India?

CRISIL (Credit Rating Information Services of India Limited)
CARE ( Credit Analysis and Research Limited)
ICRA Limited (Investment Information and Credit Rating Agency of India Limited)
BWR (Brickwork Ratings India Pvt Ltd)
Acuite Ratings & Research Limited
Infomerics Valuation and Rating Private Limited

What is a good credit rating?

In general, credit scores from 670 to 739 are considered as good.

Which is the most important credit score factor?

Payment History is the most important credit score factor as it accounts for 35% of the FICO score.