Credit Rating

What is credit rating:

Credit Rating is a measure of the ability of a business entity to repay a financial obligation. A good credit rating is very important when you apply for a loan. While it helps quantify the creditworthiness of your business, it also plays a role in helping the lender determine what rate of interest is to be levied.

Credit rating is provided by credit rating agencies which determine whether the entity will be in a position to pay back the loan amount on time.

While the calculation of credit rating might differ from agency to agency, some major factors remain consistent all through the process. Length of credit history, credit utilization rate and credit exposure are some of the main influencers.

Let’s understand credit ratings:

Credit rating quantifies the possibility of the borrower returning the loan amount without defaulting.

A high credit rating gives lenders the faith that the business will, in all possibility, pay back the loan amount in its entirety without defaulting, and therefore, the loan approval and processing may be easier. On the other hand, a poor credit rating is suggestive of the fact that the borrower has faced troubles in the past paying back the loan amount and might follow a similar trend, going forward.

A brief history of credit rating in India:

In India, credit rating agencies first came about in the late 1980s. Credit Rating Information Services of India Limited or CRISIL was the first credit rating agency to be set up in 1987.

As of today, there are seven credit rating agencies in India that are registered with SEBI. They are:

  • Credit Rating Information Services of India Limited (CRISIL),
  • Investment information and Credit Rating Agency (ICRA),
  • Credit Analysis and Research Limited (CARE),
  • Fitch Ratings (India) Private Limited,
  • Brickwork Rating (India) Private Limited,
  • Infomerics Valuations and Ratings Private Limited, and
  • SME Rating Agency of India Limited (SMERA).

Credit rating and credit score:

Credit ratings are applicable to businesses, states and sovereign governments. On the other hand, credit scores are applicable to consumers such as individuals and small businesses.

In India, credit scores range between 300 and 900. The higher the credit score, the higher the credit worthiness of an individual.

Credit rating is depicted using letters. CRISIL, for instance, has a credit rating scale ranging from CRISIL AAA, which depicts the highest level of safety, to CRISIL D, which means that the entity is expected to default on their payments soon.

When assigning a credit rating to an entity, factors such as the entity’s history of credit and repayment, and the entity’s future growth potential are taken into account.

While calculating credit score factors such as payment history, length of payment history, credit mix and others are considered.

FAQs:

Credit ratings give an unbiased view of the financial standing of the entity and an understanding of the capacity of the entity to repay the loan. The rating, hence, impacts the decision of a potential investor as to whether or not to purchase the bonds/loans/debts of a said entity. A good credit rating makes for prudent investment while a poor credit rating makes for a risky investment as it means that there exists a high possibility of the entity defaulting in its payment obligations.
Factors such as the entity's credit repayment history and future growth potential.

Credit ratings are useful for multiple parties such as:
- Debt issuers: Credit ratings are used as an indicator of creditworthiness of an entity. This helps debt issuers get a sense of risk associated with lending credit to an entity.
- Investors: Investors, both current and potential, use credit ratings as an evaluation for the risk associated with putting money in the future of an entity.
- Other businesses: Credit rating allows other businesses to evaluate the risk involved in entering into transactions with an entity.

Different credit rating agencies have different rating metrics, but following are the general guidelines around the same:

AAA Highest creditworthiness of the entity
AA Very high creditworthiness of the entity
A High creditworthiness
BBB Creditworthiness is sufficient, but some contributing factors can be improved
BB Creditworthiness is sufficient for the time being but some contributing factors require improvement
B Creditworthiness is questionable
CCC Creditworthiness is highly questionable and the entity is at a high risk of default
CC The entity is likely to default
D All of the financial obligations are in default.

A plus (+) or minus (-) sign is often attached with the rating in order to indicate the relative standing within each category.

Credit rating agencies are regulated by SEBI in India.

Your credit rating is in your hands but OneNDF can help you assess your credit ranking from authorized credit rating agencies such as CRISIL, CARE and ICRA among others, and work with you to better your financial standing. Credit advice is one of our strongholds. We can help you understand your loan eligibility too, and thereafter help you secure a loan with terms to your liking.
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