Are you a business owner, self-employed professional or an entrepreneur owning and managing a company or an enterprise? If yes, then do not forget to check your business entity’s credit rating to know its creditworthiness and capability to repay the financial obligations. There are several credit rating agencies in India, which generate and issue credit ratings of the companies, enterprises and organizations. You can directly request your company’s credit rating report from these agencies and get it instantly.
However, if you just want to check CIBIL score for individuals then you can request your Credit Information Report from all the four leading credit bureaus in India, named as TransUnion CIBIL, Experian, Equifax and CRIF High Mark.
In this article, we shall broadly discuss the meaning, scale, types and importance of credit rating, along with the functional Credit Rating Agencies in India.
What is Credit Rating?
Credit rating is an assessment that highlights the creditworthiness and repayment or payback capabilities of an enterprise regarding any debt or financial obligation. The assessment performed is based on both qualitative and quantitative assessments by using unique mathematical calculations.
Credit Rating Agencies (CRAs)
CRAs are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. The Credit Rating Agencies are independent entities that rate the enterprises based on their credibility of paying back debts in time and the probability of default by any business entity.
Credit Rating Range
Credit Ratings issues by the CRAs range from ‘AAA’ to ‘D’, wherein ‘AAA’ stands for the highest in regards to creditworthiness and ‘D’ being the lowest and considered as a default. The additional credit ratings that follows after AAA in descending order includes AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, C+, C, C- and D.
Note: The credit ratings in the mentioned format are exclusively issued by CRISIL.
Types of Credit Rating
All the credit rating agencies use a unique set of terms to depict the risk associated with a business or corporate entity. To differentiate the level of risk involved, the CRAs have categorized the credit rating into two types, such as Investment Grade and Speculative Grade. Investment Grade category indicates that the corporate entity is at low to moderate credit risk, whereas Speculative Grade displays higher level of credit risk or even default.
Factors that affect Credit Ratings
The factors that affect the credit ratings of business and corporate entities are stated below:
Loan Types: The types of loans a business entity is servicing shall influence the credit ratings. If the entity is repaying more of secured loans as compared to unsecured loans, then the ratings shall be higher. Unsecured loans tend to lower down the credit ratings.
Future business projections: Company’s future business expansion plans and projected earnings can help lenders in getting an idea of growth and future income. Better future projections could lead to high credit ratings.
Past payment behaviour: If the repayment history of the company is good with no delayed or missed payments, it may result in a high credit rating considering the company’s good financial health.
Market Standing: Company’s market reputation can directly affect its earnings both positively and negatively. This eventually can impact the borrower’s repayment capability, which further influences the credit rating.
Leading Credit Rating Agencies in India
Followed are the seven leading Credit Rating Agencies (CRAs) that are registered and regulated under Securities and Exchange Board of India (SEBI) that issues credit ratings to companies, enterprises and Govt. entities:
- Credit Rating Information Services of India Ltd. (CRISIL)
- Investment Information and Credit Rating Agency of India (ICRA) Ltd.
- Credit Analysis and Research (CARE) Ltd.
- Acuité Ratings & Research Ltd.
- Brickwork Ratings India Private Ltd.
- India Ratings and Research Pvt. Ltd.
- INFOMERICS Valuation and Rating Private Ltd.
Entities that check Credit Ratings
The below mentioned regulated financial entities are authorized to check your company’s credit ratings are as follows:
- Lenders: Banks/NBFCs and other financial institutions
- Retail and Institutional Investors
- Investment Banks
- Debt Issuers and other businesses or corporations
Importance of Credit Rating
The credit rating agencies provide standardized credit ratings for companies, enterprises and Government entities. These agencies offer independent assessment of a company’s creditworthiness. The CRAs consider the borrower’s financial health and its repayment capability of paying-off debts. The ratings generated and issued by Credit Rating Agencies are used as a benchmark by financial institutions in offering funds to borrowers. Therefore, borrowers should maintain a high credit rating in order to get their loan approvals easily and in a hassle-free manner.
