A Brief Understanding on Credit Rating Agencies

Credit rating has gained wide significance among investors and in Indian financial market in the last two decades. Credit rating is simply an opinion on the credit quality of a firm i.e. the ability of debt issuing firm to service the instrument.

Assessment of credit quality calls for expertise which credit rating agencies should possess. The rating issued by a rating agency serves as summary information about credit quality for economic decision makers. As long as the agency assigning the rating is perceived as being credible, economic decision-makers would not evaluate the inputs that go into the rating process.

 Credit rating originated in the U.S.A. in 1909 when Moody’s began rating corporate and railroad bonds. Since then the practice of credit rating has been adopted in several countries around the world.

In India, the practice of credit rating began in 1988 with the setting up of the Credit Rating and Investor Services of India Ltd (CRISIL).

What is Credit Rating Agencies?

A credit rating agency is a company which rates the debtors on the basis of their ability to pay back the debt in a timely manner. They rate large-scale borrowers, whether companies or governments.

A credit rating agency is an organization which assigns credit ratings to the debtors predicting their capability to pay back debt timely and simultaneously making the forecast on the chances of the debtor being default. These rating agencies rate large borrowers (both governments and companies).

Some of the top credit agencies in the world are Moody’s, Standard and Poor’s (S&P) and Fitch Rating.

Key functions of Credit Rating Agencies

Some of the key functions of credit rating agencies are discussed below:

• Low-cost information:- The credit rating agency collects, analyses, interprets and makes a proper conclusion of any complex data and transforms it into a very lucid and easily understandable manner.

• Provides a basis for suitable risk and return:- The instruments rated by rating agency gets greater confidence amongst investor community. It also gives an idea regarding the risk associated with the instrument.

• Helps in the formulation of Public policy:- If debt instruments are professionally rated, it becomes very easy to judge the eligibility of various securities for inclusion in the institutional portfolio with greater confidence.

• Provides superior information:- Credit rating agency being an independent rating agency, due to highly trained and professional staffs and with the access to information which is not publicly available information, these agencies are able to deliver superior information.

• Enhances corporate image:- Better credit rating for any credit investment enhances visibility and corporate image in the industry.

Corporate credit ratings

S&P, Moody’s, Fitch and DBRS are the only four rating agencies that are recognized by the European Central Bank (ECB) for determining collateral requirements for banks to borrow from central bank. These rating agencies assign a rating to the company and to its financial instruments like bonds.

The credit ratings by some of the top rating agencies in the world like S&P and Moody’s are discussed below-

Standards and Poor (S&P)

The long-term rating given by S&P is  given below-

Moody’s

Credit Rating Agencies in India

There are a number of credit rating agencies in India, out of which the three main rating agencies are as follows-

1. CRISIL

CRISIL commenced its operations in the year 1987 and it is India’s first credit rating agency. The company conducts its operations from 8 countries including India, US, UK, Singapore, China, Poland, Argentina and Hong Kong. However, it has its head office in Mumbai.

The company provides ratings, analytics, and solutions, research with a very good track record of innovation and growth. Standard and Poor’s is the majority shareholder of  CRISIL.

The long-term ratings given by CRISIL are shown below-

2. ICRA

ICRA was the second rating agency established in the year 1991. It is a public limited company and it has its head office in New Delhi. Moody’s is the majority shareholder of ICRA. The long-term rating of ICRA is exactly similar to CRISIL  as shown in the chart above.

3. CARE

Then in the year 1993, the next credit rating agency which came up was CARE. It has its head office in Mumbai and it is India’s second largest credit rating agency.

It is one of the five partners of international rating agency called ARC Ratings.

Conclusion

The analysis made by these rating agencies provide the investor with valuable insights which facilitates their decision to further research and examine the opportunities and risks attached to these investment securities.

The analysis with regards to countries, sectors, and classes of securities provides valuable insights to investors in making their investment decision.

To understand the quality of ratings given by these agencies, it’s important to know about the history and evolution of these agencies to get an idea about the methodologies these agencies use.

However, some investors utilize the information from multiple rating agencies for more authenticity.

If you are a bankers/Finance Manager/CA/Entrepreneur, you can learn the critical aspects of Credit Analysis Process in Elearnmarkets.com.