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Credit Rating and Credit Rating Agency & their Credit Scale to Rate Instruments

Credit Rating and Credit Rating Agency in India

Credit Ratings


In the intricate world of finance, credit ratings hold a pivotal role in assessing the creditworthiness of individuals, corporations, and even governments. Understanding the objectives, sources, and the intricate process behind credit ratings is essential for navigating the financial landscape.


Objectives of Credit Ratings:

  • Transparency: Ratings provide a clear, standardised picture of financial health, fostering trust and confidence between lenders and borrowers.

  • Risk Assessment: They gauge the likelihood of repayment default, empowering lenders to make informed lending decisions and manage risk effectively.

  • Market Efficiency: Ratings guide investors towards sound investment choices, promoting stability and efficient allocation of capital in the financial markets.


Sources of Credit Rating Information:

  1. Financial Statements: These documents reveal a borrower's income, expenses, assets, and liabilities, offering a snapshot of their financial standing.

  2. Credit History: Past borrowing and repayment behaviour paints a picture of the borrower's creditworthiness and commitment to financial obligations.

  3. Industry Analysis: Understanding the economic and competitive landscape of a borrower's sector provides a crucial context for assessing their future prospects.


The Credit Rating Process:

  • Application and Data Collection: The borrower initiates the process by submitting financial statements, supporting documents, and relevant data to the credit rating agency.

  • Analysis and Evaluation: Analysts meticulously review the data, assessing the borrower's financial strength, debt burden, cash flow, and future outlook.

  • Rating Assignment: Based on the analysis, the agency assigns a rating using a standardised grading system (e.g., AAA-D in India). Each grade reflects the agency's assessment of the borrower's creditworthiness and likelihood of default.

  • Monitoring and Review: Ratings are not static; they're constantly monitored and may be revised based on changes in the borrower's financial standing or the broader economic environment.


Credit Agencies in India:


India boasts a robust credit rating ecosystem with several agencies, including:


  1. CRISIL: The leading agency, known for its comprehensive analysis and expertise across various sectors.

  2. ICRA: Renowned for its focus on infrastructure and project finance ratings.

  3. CARE: A prominent player in corporate, SME, and structured finance ratings.

  4. India Ratings and Research Pvt Ltd: Offers a diverse range of rating services, including sovereign and financial institutions.


Understanding CRISIL RATINGS


Crisil has divided the credit rating categories on basis of instruments 


Long-term: The term ‘long-term instruments’ indicates bonds, debentures, other debt securities, bank loans and other fund-based facilities with maturity of more than one year.


Short-term: The term ‘short-term instruments’ indicates commercial papers, short-term debentures, certificates of deposit, intercorporate deposits, working capital borrowings and other fund- and non-fund- based facilities with maturity of one year or less.


Dual Rating : CRISIL Ratings assigns dual ratings (ratings on both long-term and short-term scales) to debt instruments that have maturity of more than one year and a put option exercisable within one year from the date of issue.


Structured obligation ratings (SO): CRISIL Ratings assigns ratings to long- and short-term structured finance instruments by using the suffix SO. These ratings are assigned only to securitised or asset-backed transactions having credit enhancement/structure, which leads to the instrument being bankruptcy remote from the issuer/originaton


Credit enhancement (CE) ratings: CRISIL Ratings assigns the suffix CE to ratings on long- and short- term instruments that are backed by explicit credit enhancement that is external (from a third party, parent or group), but the rated instrument is not bankruptcy remote from the issuer/originator


Corporate credit ratings (CCR): CRISIL Ratings assigns corporate credit ratings to issuers on a scale ranging from ‘CRISIL AAA’ to ‘CRISIL D’. 


Debt mutual fund scheme ratings: CRISIL Ratings assigns ratings to debt mutual fund schemes on a scale ranging from ‘CRISIL AAAmfs’ to ‘CRISIL C-mfs’ on the long-term scale, and ‘CRISIL A1+mfs’ to ‘CRISIL A4mfs’ on the short-term scale.


Below are the Ratings Given by CRISIL:


Long-term rating scale

Short-term rating scale

Structured finance rating scale

Structured finance rating scale

Credit enhancement rating scale

Credit enhancement rating scale

Corporate credit rating scale (CCR)

Debt mutual fund scheme rating scale

Debt mutual fund scheme rating scale

Long-term rating scale

Short-term rating scale

Long-term SO instruments (Rating category)

Short-term SO instruments (Rating category)

Long-term CE instruments (Rating category)

Short-term CE instruments (Rating category)

Corporate credit rating scale (CCR)

Long term debt mutual fund schemes

Short term debt mutual fund schemes

CRISIL AAA

CRISIL A1

CRISIL AAA (SO)

CRISIL A1 (SO)

CRISIL AAA (CE)

CRISIL A1 (CE)

CRISIL AAA

CRISIL AAAmfs

CRISIL A1mfs

CRISIL AA

CRISIL A2

CRISIL AA (SO)

CRISIL A2 (SO)

CRISIL AA (CE)

CRISIL A2 (CE)

CRISIL AA

CRISIL AAmfs

CRISIL A2mfs

CRISIL A

CRISIL A3

CRISIL A (SO)

CRISIL A3 (SO)

CRISIL A (CE)

CRISIL A3 (CE)

CRISIL A

CRISIL Amfs

CRISIL A3mfs

CRISIL BBB

CRISIL A4

CRISIL BBB (SO)

CRISIL A4 (SO)

CRISIL BBB (CE)

CRISIL A4 (CE)

CRISIL BBB

CRISIL BBBmfs

CRISIL A4mfs

CRISIL BB

CRISIL D

CRISIL BB (SO)

CRISIL D (SO)

CRISIL BB (CE)

CRISIL D (CE)

CRISIL BB

CRISIL BBmfs


CRISIL B


CRISIL B (SO)


CRISIL B (CE)


CRISIL B

CRISIL Bmfs


CRISIL C


CRISIL C (SO)


CRISIL C (CE)


CRISIL C

CRISIL Cmfs


CRISIL D


CRISIL D (SO)


CRISIL D (CE)


CRISIL D




Beyond the Basics:


Remember, credit ratings are just one piece of the financial puzzle. While they offer valuable insights, it's crucial to consider other factors like the loan terms, interest rates, and your own financial goals before making borrowing decisions. Additionally, maintaining a healthy credit score through responsible financial practices plays a significant role in securing favourable credit ratings in the future.


Bonus Tip: Regularly access your credit report from authorised credit bureaus in India (TransUnion CIBIL, Equifax, Experian, CRIF High Mark) to monitor your credit health and address any discrepancies promptly.


Conclusion:

In the financial ecosystem, credit ratings serve as beacons guiding investors, lenders, and market participants through the complexities of credit risk. As we unravel the objectives, sources, and meticulous process behind credit ratings, it becomes clear that these assessments are more than just numerical scores—they are critical tools shaping financial decisions, fostering transparency, and contributing to the overall health of the financial markets. For investors and entities alike, a nuanced understanding of credit ratings is an


 

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