IMPORTANCE OF CREDIT RATING AGENCIES | EXPLAINED IN ENGLISH AND HINDI.
INTRODUCTION:
Credit rating agencies (CRAs) play a key role in financial markets by helping to reduce the insightful asymmetry about the creditworthiness of businesses or countries between borrowers and creditors on the one hand and issuers on the other. The position of CRAs has increased with financial globalization and has received an additional boost, integrating CRAs ratings into the rules for credit risk weighting. Ratings tend to be sticky, the markets lagging behind, and overreact as they change.
The primary purpose of credit rating is to provide consumer knowledge on debt capital issues of public concern. A rating is a guide to full and on-time investment payments and repayment of the investment principal when the debt matures. Credit can be allocated to short-and long-term debt obligations as well as shares, bonds, preferred stock and insurance undertakings. Long-term credit ratings tend to be more indicative of the investment surrounding a country and/or the ability of a company to honor its debt obligations. A credit score is a numerical index which is an estimation of the financial creditworthiness of a person. To determine credit limit and interest rate, it is based on a sub-set of the information in an individual's credit score. Score is usually assigned to the business as a whole, rather than to particular instrument. The rating is performed in the Indian context at the instance of the issuers, who pay rating fees for this service. If the rating assigned to his proposed instrument is unsatisfied, it is at liberty not to reveal the rating given to it.
(TO UNDERSTAND THIS ARTICLE IN HINDI WATCH THE VIDEO.)
IMPORTANCE OF CREDIT RATING
Credit ratings are an important tool for lenders to get access to credit cards and loans. Good credit scores make it easy for people to borrow money from financial institutions or the debt markets. At the level of borrowers, banks usually view the terms of a loan as a feature of your credit rating; this means that the higher the credit rating, the better normally are the terms of the loan. If your credit rating is poor, you may even be refused for a loan by the Bank.
At the corporate level, opting for a credit rating agency to rate your debt is usually in a company's best interest. Investors often base part of their decision to buy bonds from a corporation, or even the stock, on the company's debt credit rating. Major credit agencies like Moody's or Standard and Poor's perform a fee for this rating service. Investors will usually look at the credit rating provided by these international agencies as well as ratings given by regional rating agencies before they decide to invest.
Credit ratings are also important throughout the country. Many countries rely on foreign investors to buy their debt, and they rely heavily on credit ratings from credit rating agencies. A good credit rating country's advantages include being able to access funding from outside their country, and having a good rating may bring certain sources of finance to a country, such as foreign direct investment. For example, a firm seeking to open a factory in a given country may first look at the country's credit rating to assess its stability before deciding to invest.
BENEFITS OF CREDIT RATING.
Helps in Investment Decision: Credit rating provides the creditors an indication of the issuer company's reputation, and the risk factor applied to a given instrument. Thus the investors will determine whether or not to invest in such firms. The higher the ranking, the more ability to spend, and vise-versa, in these instruments.
Benefits of Rating Reviews: The rating agency annually checks a ranking issued to a particular instrument. So, the current investors can decide whether to retain or sell the instrument. Of example, if the instrument is downgraded, the investor may decide to sell the instrument, and if the rating is retained or improved, the investor may decide to retain the instrument until the next rating or maturity.
Assurance of Safety: High credit rating gives investors assurance about the instrument's safety and minimal bankruptcy risk. The businesses who receive high scores for their methods should try to maintain healthy financial management. That will protect them from bankruptcy. So, the investors are going to be safe.
Easy Understandability of Investment Proposal: The rating agencies offer the instrument ranking marks, which investors can easily grasp. That allows them to consider an issuer company's investment plan. For proof AAA (Triple A), provided by CRISIL for debentures, guarantees the highest level of security, while D-rated debentures are in default, or assume maturity default.
Choice of Instruments: The credit rating helps an applicant to choose a single instrument from a number of available alternatives. This choice depends on the instrument's health, or risk.
Saves Investor's Time and Effort: Credit ratings allow an applicant to save time and effort in an appraisal of an issuer company's financial performance. This is because the investor can rely on professional rating agency to make an investment decision. He need not waste his time and energy in collecting and reviewing the financial information about the issuer company's credit status.
PROCESS OF CREDIT RATING.
ABOUT THE INDUSTRY:
CREDIT RATING AGENCIES IN INDIA.
1. Credit Rating Information Services of India Limited (CRISIL)
CRISIL is one of India's most senior credit rating agencies. It was launched in the country in 1987, after which in 1993 the company became public. Headquartered in Mumbai, in 2016 CRISIL moved into infrastructure ranking and in 2017 it completed 30 years. In 2017, CRISIL bought an interest in CARE credit rating agency of 8.9 per cent. It launched India's first index to benchmark foreign portfolio investor (FPI) investment performance in the fixed-income market, in both the rupee and dollar version in 2018. The portfolio of the company includes, ranking of mutual funds, ranking of Unit Linked Insurance Plans (ULIP), index of the CRISIL coalition, and so forth.
2. ICRA Limited
ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries - Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for - corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.
3. Credit Analysis and Research limited (CARE)
Launched in 1993, CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.
4. Brickwork Ratings (BWR)
Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognized as external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.
5. India Rating and Research Pvt. Ltd.
India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognized by the Reserve Bank of India and National Housing Bank.
TYPES OF CREDIT RATING
CRISIL AAA
(Highest Safety)
Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
CRISIL AA
(High Safety)
Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
CRISIL A
(Adequate Safety)
Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
CRISIL BBB
(Moderate Safety)
Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit riris
CRISIL BB
(Moderate Risk)
Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
CRISIL B
(High Risk)Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
CRISIL C
(Very High Risk)Instruments with this rating are considered to have very high risk of Default Instruments with this rating are in default or are expected to be in default soon.;
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