November 6, 2024 · 11 mins read
Santosh Kumar
Imagine you're lending money to a friend; you'd want to know if they are likely to pay you back, right? Similarly, in an economy, investors would like to know the financial health and stability of companies and organisations they invest in. In such a case Credit Rating Agencies (CRAs) are like trusted advisors for investors, banks, and even governments. They assess these companies and organisations as borrowers. Based on various factors, the Credit Rating Agencies rate the repayment ability of all these entities. This is crucial because the amount borrowed by these entities is often running into crores. With such a huge amount, it is natural for investors to want to know the organisation's credit rating because there is an extremely high financial risk involved.
By now, you have an idea of what a Credit Rating Agency is. However, let us delve deeper into its function and purposes.
1. Assessing Financial Health: You can say that a Credit Rating Agency is the detective of the financial world. These agencies basically dig deep into an entity's financial health and, based on that, judge if they will pay back what they owe on time. This is also often known as creditworthiness.
2. Assessing Risk Levels: By assessing the creditworthiness of entities, the Credit Rating Agencies also assess the risk associated with the dealing for investors. A company's good financial health is crucial before investments are made.
3. Assigning Ratings: Once the CRAs are done assessing the creditworthiness of a specific entity, it is now time for them to assign it a rating based on the said assessment. This rating lies on a scale of "AAA" to "D", wherein "AAA" is the highest rating, whereas "d" is the lowest and the poorest.
A company or organisation with a high credit rating is considered very reliable in terms of repayments, and investors find it safe to invest their money. Banks also finance such companies readily. On the other hand, a lower rating, such as "C" or "D", is a bad sign. It reflects the company's poor financial health, and chances are high that they would not be able to repay what they owe.
Before we move on to discussing the Credit Rating Agencies of India specifically, let us inform you of the larger body that regulates these credit agencies. Regulatory Body
The Credit Rating Agencies in India are regulated by the SEBI or the Securities and Exchange Board of India. SEBI was set up in 1981, and after passing the Securities and Exchange Board of India Act in 1992, it became an autonomous statutory body.
The major function and responsibility of the Securities and Exchange Board of India is to oversee the functioning of all the credit rating agencies in India. It has to make sure that these agencies are working in a fair and just manner. SEBI is entrusted with the duty of safeguarding the interests of the investors in the market.
To do so and maintain the utmost level of transparency in the Indian investment landscape, SEBI forms and implements various rules, regulations and investment-related guidelines that all the credit rating agencies must follow in India. In case an agency is found guilty of offending any of the prescribed regulations, SEBI is also invested with the right and the power to impose strict punishments.
In India, seven major credit rating agencies are registered under the SEBI. These are - CRISIL, ICRA, CARE, SMERA, Fitch India, Acuité Ratings & Research and Brickwork Ratings. Here is more detailed information about each of these agencies:
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1. Founded in 1987 and headquartered in Mumbai, CRISIL is perhaps India's oldest and most well-known credit rating agency. It is also perhaps the most well-respected of them all.
2. Because it has gained a good reputation over the years, a high credit rating from CRISIL is highly desirable for all entities since investors tend to trust CRISIL ratings a lot and readily invest money in such companies or organisations. A positive CRISIL rating can open doors to easier, more affordable loans for companies.
3. CRISIL has a market share of more than 60%.
4. Standard and Poor's is the largest trading agency in the world, and it holds the majority stake in CRISIL. It covers banks, NBFCs, PSUs, manufacturing companies, financial institutions, state governments, urban local bodies, etc.
5. Rating services provided by CRISIL: Independent Credit Evaluation, Corporate and Financial Sector ratings, Fund Ratings, Recovery Risk Ratings, Expected Loss (EL) Ratings, and Structured Finance and Insurance Hybrids.
6. The services of CRISIL extend to investors, issuers, lenders, and market intermediaries and regulators.
7. Based on a company's strengths, market repute, and market share, CRISIL assesses its creditworthiness.
1. ICRA was founded in 1991. It was originally called Investment Information and Credit Rating Agency of India Limited (IICRA India).
2. Prominent commercial banks and financial institutes in India created it.
3. It is partly owned by Moody's. Moody's is a huge credit rating agency based in the US and holds the largest market shares. This international association is why ICRA is well-respected, particularly among international investors.
4. ICRA is focused on a wide range of sectors, including corporate ratings, banks, infrastructure, and the public sector.
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1. Credit Analysis and Research Limited Ratings (CARE) Ratings was founded in 1993.
2. Out of all the credit rating companies in India, CARE Ratings is considered the second largest. Therefore, their ratings are very well-respected and extremely trustworthy.
3. CARE Ratings covers a wide range of sectors, from real estate and banking to manufacturing and more. They provide ratings for corporate loans, bank facilities, and even specific instruments like debentures.
4. CARE Ratings are headquartered in Mumbai.
5. Many financial and lending institutions support CARE Ratings. These include names such as Canara Bank, Unit Trust of India (UTI) and Industrial Development Bank of India (IDBI)
1. Unlike India's other credit rating agencies, SMERA is created especially and exclusively for rating Small and Medium Enterprises; hence the name.
2. It is a joint enterprise, created by the coming together of SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and some other prominent banks of India.
3. Just like some of the other Indian credit rating agencies, SMERA also has its headquarters located in Mumbai.
1. India Ratings and Research is a leading credit rating agency in India.
2. The headquarters of India Ratings and Research are situated in Mumbai.
3. It is a subsidiary of the Fitch Group and is owned completely by it.
4. India Ratings and Research services are provided to banks, insurance companies, corporate issuers, finance and leasing companies, urban local bodies and managed funds, structured finance and project finance companies.
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1. Out of all the credit rating agencies in India, Brickwork Ratings India Private Ltd. It is a comparatively newer one. It came into being in 2007.
2. However, it is already a trusted credit rating agency, especially in the small and medium enterprise (SME) sector, even though it works with a variety of other sectors as well.
3. In collaboration with the Ministry of Micro, Small & Medium Enterprises (MSME), Brickwork works to give specialised ratings for such businesses.
4. Investors can sometimes overlook MSMEs. This is why Brickwork's ratings are extremely beneficial for them to attract investments and bigger opportunities.
1. Acuité Ratings & Research is another newer credit rating agency established in India in 2005. 2. Acuité Ratings & Research is still in its growing stages and is gradually carving out a space for itself in the Indian financial landscape. 3. It serves lots of different sectors - manufacturing, retail, services, etc. and is especially known to serve companies that might not fit into the traditional rating models used by other agencies. 4. A unique feature of Acuité is that it is a credit rating agency that provides ESG ratings. These ratings evaluate how an entity performs regarding environmental, social, and governance factors. This is in keeping with the emerging concerns with sustainability.
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In India, Credit Rating Agencies (CRAs) play a critical role in helping investors, banks, and even companies understand the financial stability of various entities. There are seven major credit rating agencies in India - Credit Rating Information Services of India Ltd. (CRISIL), Investment Information and Credit Rating Agency of India (ICRA) Limited, Credit Analysis and Research Limited Ratings (CARE) Ratings, Small and Medium Enterprises Rating Agency (SMERA), India Ratings and Research (Fitch), Brickwork Ratings India Private Ltd. and Acuité Ratings & Research. These agencies assess the creditworthiness of various entities and, based on this assessment, provide them with a rating that could range from "AAA" to "D". These ratings are helpful for investors as they can learn about the level of risk involved with their investment in a specific company or organisation and can make a well-informed decision.
The Securities and Exchange Board of India regulates all these credit rating agencies. SEBI is responsible for making sure that their ratings remain transparent and fair.
1. Is CIBIL a credit rating agency?
No. CIBIL is not a credit rating agency. It is one of the four credit bureaus in India. The difference is that a credit bureau like CIBIL judges the creditworthiness of individuals who are applying for loans and credit cards. In contrast, the credit rating agencies judge the creditworthiness or repayment ability of companies and organisations. Credit rating agencies are more investment-centric than credit bureaus.
2. Can Credit Ratings be changed?
Yes. Credit ratings can change with time. They can get better or even go lower. It is all dependent on a company's financial habits.
3. Is AAA a good credit rating?
Credit ratings are given on a scale of AAA to D. AAA is the highest rating that can be given. This means that it is not only a good rating but also the best one.
4. Is SEBI a credit rating agency?
No. SEBI is not a credit rating agency. It is actually the regulatory body that oversees the functioning of all the credit rating agencies in India. Its full form is the Securities and Exchange Board of India, and it is entrusted with the responsibility of ensuring transparency, consistency, and accountability in the rating process.
5. What do different rating symbols like 'AAA' or 'D' mean?
In India, most CRAs use a standardised system with "AAA" being the highest rating and "D" the lowest. "AAA" suggests the company is very creditworthy and likely to repay debts without issues. Ratings like "AA" or "A" indicate good stability but with slightly higher risk than "AAA." On the other end, ratings like "C" or "D" mean the company is struggling financially, and repayment might be at risk. Each rating comes with a level of risk that helps investors decide where to place their funds.
6. Do investors need to pay any money to access credit ratings?
Most often credit ratings are accessible without any charges for investors. This is done to ensure transparency. However, in some cases, some charges must be paid to access detailed reports and additional analyses.
7. How can someone check credit ratings for companies in India?
It is very easy to check credit ratings for companies in India. You can do it very easily and that too online. You can either visit the official websites of Indian credit rating agencies such as CRISIL, ICRA, and CARE or look for the ratings on the website of SEBI. You can also check them on financial news portals and stock exchange websites.
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