Why Should Investors care about Credit Ratings?

The credit rating is instrumental in deciding the rates of interests, based on the risks the borrower poses. It is an important aspect to consider for all investors. 

The concept of credit ratings and credit rating agencies are relatively new in India, dating back to just a couple of decades only. That being said, this medium of evaluation is most influential in our current environment as investors trust the independent assessments of such agencies - relying on them for their insights and findings before making an investment decision. 

 Essentially, credit ratings are certifications issued to every company by credible assessment agencies, based on their financial health, determining the creditworthiness of the securities that are being issued into the public sphere. These could be securities issued by government bodies, banks, corporations or any other entity. 

While every credit rating agency has its own set of ratings, they are usually represented as AAA, AA, A, BBB, and so on - the highest rating being AAA and the lowest being D - indicating that the security borders on defaulting. Typically, credit ratings are dynamic, reviewed every month by agencies - keeping in mind the constant market movements impacting the securities and finances held by a company. These agencies carry out their assessments independently, going through all their paperwork to gauge how the securities are faring. Their findings are objective, unbiased and driven by rationale - evolving every month based on their continuous evaluations

Credit ratings rightfully influence investor sentiments, guiding them away from securities with downgrading ratings that are not posed to perform well in the near future. A hearty recommendation from credit rating agencies indicates that the firm is doing well, and has the ability to service its debt methodically while meeting all investor expectations.

CREDIT RATING AGENCIES IN INDIA 

India has seven active and authorized credit rating agencies, approved by SEBI that issue credit ratings and scores to companies and individuals alike. In global circles, establishments like Moody’s Investors Services and Standard and Poor’s assess global firms and companies, and the same is done on a domestic level by these 7 agencies. 

1. CRISIL Limited 

Credit Rating Information Services of India Limited (CRISIL) is one of the oldest credit rating agencies, set up in 1987. The company’s portfolio includes mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

1. ICRA Limited 

The Investment Information and Credit Rating Agency (ICRA), a joint venture of Moody’s and Indian Financial and Banking Service Organisation was established in 1991. ICRA’s product portfolio includes a rating for - corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market-linked debentures and so on.

1. India Ratings and Research Pvt Ltd 

India Ratings and Research, a wholly-owned subsidiary of Fitch Group, provides accurate and timely credit opinions on the country’s credit market. The firm covers corporate issuers, financial institutions, managed funds, urban local bodies, project finance companies, and structured finance companies.

1. Credit Analysis and Research Limited (CARE)

Credit Analysis and Research Limited (CARE) is a credit rating agency that has been operational since April 1993. CARE Ratings has also ventured into valuation services and offers a valuation of equity, debt instruments, and market-linked debentures. 

1. Brickwork Ratings India Pvt Ltd

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, a capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE.

1. 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. 

1. Infomerics 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).