What is Credit Rating? | Comprehensive Explanation

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.
What is credit rating

What is a Credit Rating? Definition of Credit Rating:

“Credit Rating is an instrument to assess the probability of repayment of individuals or business organisations regarding loans/ debts granted or to be granted”
Credit Rating is one of the significant criteria of the financial institutions to approve loans. It can be allotted to

  • Corporate Houses
  • Government body
  • State Governments
  • Central Government of a country
  • Non-Government Organisations

Sovereigns Credit Rating:

Sovereign credit rating is the credit rating which is assigned to the national government of a country. It works as a measurement of political and economic risks of a country for investments.
The investors who are willing to invest in a certain country can predict the risk involved in a particular country with the help of sovereign credit rating.

Corporate Credit Rating:

Corporate credit rating is assigned to the financial instruments of business enterprises such as debt securities (bonds), shares, commercial paper or the corporates itself by the credit rating agencies.

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:

Few credit rating agencies in India are:
  1. CRISIL (Credit Rating Information Services of India Limited)
  2. CARE (Credit Analysis and Research)
  3. ICRA (Investment Information and Credit Rating Agency)
  4. SMERA ( SME Rating Agency of India Limited)
  5. ONRICA Credit Rating Agency of India
  6. Brickwork Rating India Private Limited
There are few other foreign-based credit rating agencies are which offer evaluation and assessment of Credit Rating for the business enterprises and Central Government of a country are as follows.
  1. Moody’s Corporations
  2. Standards & Poors (S&P)
  3. FITCH Rating Agency
  4. European Rating Agency
  5. Veribanc, Inc
  6. AM Best Company, Inc
There are some agencies that evaluate, analyse, maintain, store and sell the credit score (Civil Score/ Individual Credit) like US firm Dun & Bradstreet, Experian and Transunion.

Importance of Credit Rating:

When it comes to purchasing of shares or bonds/ debentures or requirements of debt/ loans there might be two scenarios.
First is the business entities or individuals seeking financial assistance, in this case, Credit Rating becomes one of the major criteria to get the loans approved.
In the second scenario, business entities offer its shares or bonds and investors willing to purchase, in this case, Credit Rating plays a crucial role as assessment point of view of shares or debentures of the company whether it is going to give returns or not.

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.

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