In this article, we are going to explain the meaning and definition of Credit Rating and you’ll be able to understand the whole concept by the end of this article.
- What is a Credit Rating?
- Definition of Credit Rating.
- Credit Rating and Credit Score
- Importance of Credit Rating
- Who is allocated the Credit Rating?
- Sovereign Credit rating, Corporate credit rating.
Table of Contents
What is a Credit Rating? Definition of Credit Rating:
- Corporate Houses
- Government body
- State Governments
- Central Government of a country
- Non-Government Organisations
Sovereigns Credit Rating:
Corporate Credit Rating:
Few top-rated credit rating agencies in the world are Moody’s, Standard & Poor and Fitch Rating. These agencies generally express credit rating of Corporates in form of Grading system such as AAA+, AAA, AA+, BBB+, BBB, CCC+, CCC- etc. Each grading code is defined in descriptive terms not in quantitative terms.
It facilitates individual investors or institutional investors in judging the risks involved in debt securities of a particular company.
Credit Score or Cibil Score (Individual Credit):
When it comes to an individual it is called as a Credit Score (Cibil Score), while in the case of business entities it is known as Credit Rating.
Credit Score (Cibil Score) is expressed as a number between 300 to 850 for the individuals on the basis of their previous repayment history.
Although plenty of factors considered like present financial situation, future income aspects and past repayment history to get the loan approved yet higher civil score indicate the probability of getting loans from banks is higher consequently lower credit score indicates chances of approval of loans is less.
The civil score also determines the rate of interest at which borrowers will be disbursed the loan, a
higher credit score ensures low-interest-rate whereas lower credit score indicates a higher interest rate.
Credit Rating Agencies in India:
- CRISIL (Credit Rating Information Services of India Limited)
- CARE (Credit Analysis and Research)
- ICRA (Investment Information and Credit Rating Agency)
- SMERA ( SME Rating Agency of India Limited)
- ONRICA Credit Rating Agency of India
- Brickwork Rating India Private Limited
- Moody’s Corporations
- Standards & Poors (S&P)
- FITCH Rating Agency
- European Rating Agency
- Veribanc, Inc
- AM Best Company, Inc
Importance of Credit Rating:
It’s hard to monitor and requires numerous knowledge to analyse each and every shares or debenture of the companies for investments. The investors don’t have time and knowledge, therefore, credit rating facilities them for the assessment of shares, security bonds or debentures.
A healthy credit rating of the country ( Sovereign Credit Rating) enhances the probabilities of foreign direct investment in that country. The investors don’t need to measure, monitor, evaluate, assess the risks associated with their investment.
Thus Credit Rating provides a hassle-free assessment of individuals or business entities from both financial institutions and investor’s point of view and hence escalating the liquidity of financial obligations.
Thus we can say Credit Rating System saves lots of time of investors and enhances investment opportunity and liquidity of funds in the financial system.
You may also like 5 major functions of commercial banks