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A Brief Understanding on Credit Rating Agencies

Credit rating has gained wide significance among investors and in Indian financial market in the last two decades. Credit rating is simply an opinion on the credit quality of a firm i.e. the ability of debt issuing firm to service the instrument.

Assessment of credit quality calls for expertise which credit rating agencies should possess. The rating issued by a rating agency serves as summary information about credit quality for economic decision makers. As long as the agency assigning the rating is perceived as being credible, economic decision-makers would not evaluate the inputs that go into the rating process.

 Credit rating originated in the U.S.A. in 1909 when Moody’s began rating corporate and railroad bonds. Since then the practice of credit rating has been adopted in several countries around the world.

In India, the practice of credit rating began in 1988 with the setting up of the Credit Rating and Investor Services of India Ltd (CRISIL).

Credit Rating Agencies

A credit rating agency is a company which rates the debtors on the basis of their ability to pay back the debt in a timely manner. They rate large-scale borrowers, whether companies or governments.

A credit rating agency is an organization which assigns credit ratings to the debtors predicting their capability to pay back debt timely and simultaneously making the forecast on the chances of the debtor being default. These rating agencies rate large borrowers (both governments and companies).

Some of the top credit agencies in the world are Moody’s, Standard and Poor’s (S&P) and Fitch Rating.

Key functions of Credit Rating Agencies

Some of the key functions of credit rating agencies are discussed below-

1. Low-cost information 

The credit rating agency collects, analyses, interprets and makes a proper conclusion of any complex data and transforms it into a very lucid and easily understandable manner.

2. Provides a basis for suitable risk and return

The instruments rated by rating agency gets greater confidence amongst investor community. It also gives an idea regarding the risk associated with the instrument.

3. Helps in formulation of Public policy

If debt instruments are professionally rated, it becomes very easy to judge the eligibility of various securities for inclusion in the institutional portfolio with greater confidence.

4. Provides superior information

Credit rating agency being an independent rating agency, due to highly trained and professional staffs and with the access to information which are not publicly available information, these agencies are able to deliver superior information.

5. Enhances corporate image

Better credit rating to any credit investment enhances visibility and corporate image in the industry.

CRISIL

CRISIL commenced its operations in the year 1987 and it is India’s first credit rating agency. The company conducts its operations from 8 countries including India, US, UK, Singapore, China, Poland, Argentina and Hong Kong. However, it has its head office in Mumbai.

The company provides ratings, analytics and solutions, research with a very good track record of innovation and growth. Standard and Poor’s is the majority shareholder of CRISIL.

The long term ratings given by CRISIL are shown below-