Credit Rating

Credit Rating: Role of Credit Rating for success of Financial Services

What are Credit Ratings?

Credit rating can simply be defined as assessment of the individuals’ or organization’s ability to clear the financial obligations. This ability to pay back the financial obligations is known as creditworthiness. Credit ratings are applicable to debt securities like bonds, notes and other debt instruments. But are not applicable to equity securities like stocks, mutual funds etc. This can be a useful data to be considered when deciding about investments. But decisions cannot be solely based on credit ratings as they have their drawbacks.

Rating of any company is subjective to the credit rating agency. As it purely depends on the procedure followed by the credit rating agency in rating any entity. Various factors like historical financial performance, operating experience and collateral performance may be considered. Credit rating agency’s expectations, assumptions and analytical models also do effect the rating of a company. Changes to the credit rating can happen at any time. And it cannot be guaranteed that a AAA rated debt would clear its financial obligations all the time.

Why Credit ratings?

Before investing any investor would like to evaluate various options available to him/her before taking the decision. Company’s reports, Financial Statements, other industry related data and ratings of the company if available can help an investor dissect various parameters before taking the decision. As it was said that credit ratings of a company varies with the credit rating agency. Hence it is important to consider credit ratings of multiple credit rating agencies for better evaluation. Credit rating should always be a supplement to the other research and analysis about the investment opportunity but it cannot be a replacement.

Evolution of Credit Rating agencies in Indian Financial Markets

With the increasing defaulters in the financial markets, role of credit rating can be highly appreciated. This would act as an alarming signal to the investors to know the creditworthiness of a company before investing. Changing global perspectives are showing impact on how the financial markets in India are evolving. India, set up credit rating agency in 1988, was the first among developing countries. It was formally functionalized when RBI made it mandatory for the issue of Commercial Paper. Subsequently SEBI made credit rating mandatory for certain debentures and debt instruments.

In June 1994, credit rating was made mandatory by the RBI to the Non-Banking Financial Companies. CRISIL (Credit Rating and Information Services of India Ltd) was the first credit rating agency in India which was established in 1987. This was followed by establishment of two more credit rating agencies namely ICRA Ltd (investment Information and Credit rating Agency of India Ltd) in 1991 and CARE Ltd (Credit Analysis and Research Ltd) in 1994. All-India Financial Institutions have promoted all the three credit rating agencies.

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