What is Credit Rating in India? Who evaluates credit rating in India? What is the difference between Credit Rating and Credit Score? Read further to know more about Credit Rating in India.
In today’s financial world, credit rating is an essential factor that plays a crucial role in determining the creditworthiness of an individual or a business entity.
With the advent of globalization, credit rating has become increasingly important in India, as it directly affects the access to finance and the cost of borrowing.
In this article, we will explore the credit rating system in India, its significance, and the factors that affect it.
What is Credit Rating?
A credit rating is an evaluation of a borrower’s creditworthiness, either generally or in relation to a specific debt or financial obligation.
Any organisation looking to borrow money, whether it be a person, business, state or local authority, or sovereign nation, can be given a credit rating.
Credit rating companies assign ratings to entities after evaluating their financial and business risk. After considering additional variables like the ability to repay the loan, the firms compile a thorough report.
Who Evaluates Credit Ratings in India?
An Indian credit agency assesses the borrower’s credit rating by looking at both their quantitative and qualitative characteristics. The credit rating agency examines a variety of data, including financial statements, annual reports, analyst reports, news articles, industry analyses, and projections for the upcoming quarter, which ultimately aids them in deciding what grade to assign the organisation.
Credit Rating Information Services of India Limited (CRISIL), ICRA Limited, Credit Analysis and Research Limited (CARE), India Rating and Research Private Limited, etc. are a few of the leading credit rating agencies in India.
How do Credit Rating Agencies Work in India?
Each rating agency uses a different formula to determine credit ratings. Companies, state governments, non-profit organisations, nations, securities, special purpose entities, and local governmental bodies are all rated by agencies.
Before evaluating a business, credit rating agencies analyze a number of variables, including the financial statements, level and kind of debt, lending and borrowing history, capacity to repay debt, and previous debts of the entity. After a credit rating agency rates the entities, it gives the investor additional information, which the investor then analyses and uses to make wise investment decisions.
The entities’ credit ratings are used as a standard for financial market regulations. It should be highlighted, though, that the ratings should not be viewed as investment advice but rather as a tool for making wise choices.
Types of Credit Rating
All credit agency businesses use a variety of terminologies to generate credit scores. Therefore, ratings are divided into two categories: “Investment-grade” and “Speculative grade.”
- Investment Grade: Investment-grade ratings indicate a safe investment with a high probability that the issuer will adhere to the terms of the repayment. These investments cost less than investments of a speculative grade.
- Speculative Grade: These assets are rated as speculative because of their high risk. Therefore, they have higher interest rates.
Users of Credit Ratings
- Institutional and Individual Investors: Both institutional and retail investors utilize credit ratings to determine the portfolio-level risk associated with investing in a particular issuance.
- Intermediaries: Investment bankers fall under the category of intermediaries since they utilize credit ratings to assess credit risk and determine how much debts should cost.
- Debt Issuers: Debt issuers, which include municipalities, corporations, and governments, utilize credit ratings to determine their creditworthiness. They also consider the credit risk connected to the issue of debt. The ratings might also provide potential investors with a sense of the instrument’s quality.
- Corporations and Businesses: They try to assess the risk connected with a counterparty transaction. Credit ratings assist organizations in assessing the viability of joint ventures and business partnerships with other firms.
Significance of Credit Rating
- A borrower’s creditworthiness is evaluated both qualitatively and quantitatively through credit rating.
- After considering the risk factor and prior repayment behaviour, it enables investors to make a wise investment choice. To put it another way, it creates a connection between risk and reward.
- In the case of companies, credit ratings assist them in enhancing their brand. Particularly for unpopular companies, it is helpful.
- Credit rating serves as both a marketing tool and a resource for businesses when they are trying to raise capital. It lowers the cost of borrowing and aids in business growth.
- If an organization has a better credit rating, lenders like banks and financial institutions would give loans at a reduced interest rate. On the other side, a decreased credit rating implies that the company’s ability to make payments has diminished.
- Improved financial information, thorough information sharing, and better accounting practices are all encouraged by credit ratings.
What’s the Difference Between Credit Rating and Credit Score?
After determining a company’s or organization’s capacity to pay back the borrowed sum, credit rating firms issue that entity a credit rating. In the meanwhile, credit bureaus calculate a credit score after taking into account a number of variables, including credit history and payback behaviour.
Factors Affecting Credit Rating in India
Several elements that could have an impact on a company’s credit rating in India include:
- History of the Company: The credit rating agency examines the company’s prior performance, including its history of borrowing and when it has repaid its debts. If a corporation makes late payments or defaults on loans, this can have a negative impact on its credit rating.
- Future Commercial Potential of the Company: A company’s credit rating is also based on its potential for the future. The credit rating will give the company a good rating if projections, present performance, and other factors indicate that it will become profitable soon; alternatively, a negative rating will be issued if the future projections do not appear promising.
Factors Affecting Credit Scores in India
Several things can have an impact on your credit score, including:
- Not Paying Your Bills on Time: If you don’t pay your credit card bills or loan payments on time, your credit score may suffer. Therefore, to maintain a good credit score, constantly be sure to pay your bills by the due date.
- Credit Utilization Ratio: To keep your credit score high, you should preferably keep your credit utilization ratio at 30% or less. Don’t use your credit card for more than 30,000 rupees, for instance, if your credit card’s limit is Rs. 1 lakh.
- Delayed Loan and Bill Payments: Your credit score increases if you pay all of your bills on time and repay your loan. You could have the option of making minimum payments, but this won’t assist your credit score over time. Therefore, in order to maintain a good credit score, make sure you pay off all of your loans and credit card bills on time before applying for a new one.
- Frequently Applying for Loans and Credit Cards: The lender runs a credit investigation whenever you apply for a loan or credit card. Avoid applying for loans and credit cards frequently because doing so will lower your credit score because of too many credit inquiries.
- Increasing Your Credit card Limit Frequently: Increasing your credit card limit repeatedly may indicate that you rely significantly on credit to pay for your expenses, which might lower your credit score and make future loan offers from lenders unlikely. Increase your credit limit only if you are confident in your ability to pay the past-due account in a timely manner.
- Not Regularly Reviewing Your Credit Score: At a minimum, check your credit score every quarter. Your credit score could occasionally contain a little inaccuracy, which could then have an impact. If you discover a mistake, contact the credit bureau right once to have it corrected.
- Having a Bad Credit Mix: Don’t apply for only one kind of good. Don’t, for instance, submit a personal loan application every time. Having a variety of loans demonstrates your ability to manage your finances, which raises your credit score. It should go without saying that you must make your loan payments on time to keep a good credit score.
The credit rating system in India plays a crucial role in the financial market by providing investors with information on the creditworthiness of debt securities. It helps in determining the risk associated with investing in a particular security and aids in making informed investment decisions. Overall, the credit rating industry in India has shown steady growth and improvement in recent years, with increased regulation and transparency. However, challenges such as conflicts of interest and limited coverage of certain segments of the market remain to be addressed.
Article written by: Aryadevi E S