Credit Rating is an assessment of the borrower (be it an individual, group or company) by a registered credit rating agency that determines whether the borrower will be able to pay the loan back on time, as per the loan agreement. Needless to say, a good credit rating depicts a good history of paying loans on time in the past. This credit rating influences the bank’s decision of approving your loan application at a considerate rate of interest.
It is usually expressed in alphabetical symbols. Although, it is a new concept in Indian financial market but slowly its popularity has increased. It helps investors to recognize the risk involved in lending the money and gives a fair assessment of the borrower’s creditability.
But as an individual, it is your credit score that matters. Check Score
Importance of Credit Rating
Here are the benefits of credit rating:
For The Money Lenders
- Better Investment Decision: No bank or money lender companies would like to give money to a risky customer. With credit rating, they get an idea about the credit worthiness of an individual or company (who is borrowing the money) and the risk factor attached with them. By evaluating this, they can make a better investment decision.
- Safety Assured: High credit rating means an assurance about the safety of the money and that it will be paid back with interest on time.
- Easy Loan Approval: With high credit rating, you will be seen as low/no risk customer. Therefore, banks will approve your loan application easily.
- Considerate Rate of Interest: You must be aware of the fact every bank offers loan at a particular range of interest rates. One of the major factors that determine the rate of interest on the loan you take is your credit history. Higher the credit rating, lower will the rate of interest.
Credit score is for you what credit rating is for a company. Make sure it’s good! Check Score
How do Credit Ratings Work in India?
As a matter of fact, every credit rating agency has their algorithm to evaluate the credit rating. However, the major factors are credit history, credit type and duration, credit utilization, credit exposure, etc. Every month, these credit rating agencies collect credit information from partner banks and other financial institutions. Once the request for credit rating has been made, these agencies dig out the information and prepare a report based on such factors. Based on that report, they grade every individual or company and give them a credit rating. This rating is used by banks, financial institutions and investors to make a decision of investing money, buying bonds or giving loan or credit card. The better is the rating, more are the chances of getting money at payable interest rates.
Credit Rating Agencies in India
The following are the details of the 7 credit rating agencies currently registered to operate in India:
Credit Rating Information Services of India (CRISIL) Limited
Credit Rating Information Services of India Limited is the first credit rating agency of the country which was established in 1987. It calculates the credit worthiness of companies based on their strengths, market share, market reputation and board. It also rates companies, banks and organizations, helping investors make a better decision before investing in companies’ bonds. Besides India, it is also operational in countries including USA, UK, Hong Kong, Poland, Argentina and China. It offers 8 types of credit rating which are as follows:
- AAA, AA, A – Good Credit Rating
- BBB, BB – Average Credit Rating
- B, C, D – Low Credit Rating
Investment Information and Credit Rating Agency of India (ICRA) Limited
Investment Information and Credit Rating Agency of India was established in 1991 and is headquartered in Mumbai. It offers comprehensive ratings to corporates via a transparent rating system. Its rating system includes symbols which vary with the financial instruments. Here are the types of credit ratings offered by ICRA:
- Bank Loan Credit Rating
- Corporate Debt Rating
- Corporate Governance Rating
- Financial Sector Rating
- Issuer Rating
- Infrastructure Sector Rating
- Insurance Sector Rating
- Mutual Fund Rating
- Public Finance Rating
- Project Finance Rating
- Structured Finance Rating
- SME Rating
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Credit Analysis and Research Limited (CARE)
Credit Analysis and Research Limited (CARE) is operational from April 1993 and offers a range of credit rating services in areas like debt, bank loan, corporate governance, recovery, financial sector and more. Its rating scale includes two categories – long term debt instruments and short term debt ratings. It has its head office in Mumbai and regional offices in New Delhi, Kolkata, Pune, Jaipur, Chandigarh, Bengaluru, Ahmedabad, Chennai, Hyderabad and Coimbatore.
India Ratings and Research Pvt. Ltd.
Formerly known as Fitch Ratings India Pvt. Ltd., evaluates the credibility of corporate issuers, managed funds, financial institutions, project finance companies, urban local bodies and structured finance companies. It has its headquarters in Mumbai and other branch offices in Delhi, Ahmedabad, Chennai, Hyderabad, Bengaluru, Kolkata and Pune.
Acuité Ratings & Research (earlier SMERA Ratings Ltd.)
Originally, known as Small Medium Enterprises Rating Agency Of India Limited, this credit rating agency is now known as Acuité Ratings & Research. This agency has two divisions – SME Ratings and Bond Ratings. It was established in 2011 and is a hub of financial professionals. It offers credit ratings in the following format:
- AAA, AA, A – Low Credit Risk
- BBB, BB – Moderate Credit Risk
- B, C – High Credit Risk
- D- Defaulted
Brickwork Ratings India Private Limited
Headquartered in Bangalore, this credit rating agency is responsible for rating bank loans, municipal corporation, capital market instruments and SMEs. Other than this, it is also responsible to grade real estate investments, hospitals, NGOs, MFI, etc. It offers various rating systems depending upon the different financial instruments. It has Canara Bank as its promoter and strategic partner.
Infometrics Valuation and Rating Pvt Ltd
This is a SEBI-registered, and RBI-accredited credit rating agency that was founded by former bankers, finance professionals and administrative services personnel. It assesses and calculates credit ratings for banks, NBFCs, large corporates and SMUs (small and medium scale units). It aims to play a key role in serving the financial markets by minimizing the information asymmetry among different lenders and investors and facilitating borrowers to several fundraising opportunities.
What’s the Difference Between Credit Rating and Credit Score?
Often, these two terms are interchanged but they are not exactly same. Here are the differences between the two:
Credit Rating is basically a credit worthiness of a business or a company. However, it is not really used to individuals like us. It gives an understanding the ability of the company. These ratings are based on corporate financial instruments and usually denoted in alphabetical symbols. Higher the rating, lower is the probability of default pays.
Whereas credit score is a number, calculated by credit bureau and given to individuals based on the credit information report. This number can be in between 300 and 900. Credit report plays an important role in loan and credit card approval process.
Your credit score is the first thing any lender checks for a loan application. Make sure it’s good! Check Now