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Credit Rating Agencies

Updated on December 18, 2024 , 31656 views

A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of Default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments and in some cases, of the servicers of the Underlying debt but not of individual consumers.

The debt instruments rated by CRAs include government Bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities.

1. What are Credit Rating Agencies?

Credit rating agencies are agencies which provide ratings to represent objective analyses and independent assessments of companies, entities or countries that issue such debt securities.

These ratings are an indication to the buyers of this debt how likely they are to be paid back.

2. Core Functions

Compiling financial data essential for loan decisions and insurance.
Statistical assessment that is involved in ascribing a rating to a borrower.
Providing investors an objective analysis of the organization’s ability to pay back.

3. What are These Ratings?

A credit rating issued by a rating agency is an assessment of the creditworthiness of securities issued by corporations, governments and other entities.

The ratings given to such securities are mostly represented as AAA, AAB, Ba3, CCC etc. It is very similar to a marking system wherein the highest rating AAA is given to a borrower who has the highest probability of paying back. In that way, AAA is considered to be one of the safest debt securities to buy.

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4. Types of Ratings

What type of rating is provided by the Moody’s to the organization and the countries’ is given below.

Rating	What Rating Shows
AAA	Bonds and other financial products of this rating considered as the lowest credit risk and highest quality. In financial terms it means; that the bonds possess least investment risk.
AA1	Bonds and other financial products of this rating are believed as high quality and very low credit risk. In business term this rating shows high grade bonds.
AA2	same as above
AA3	same as above
A1	Bonds and other financial products of this rating are assumed as upper-medium grade and low credit risk. It shows high mid grade bonds with favourbale investment factors.
A2	same as above
A3	same as above
BAA1	Rated as medium grade, with some speculative elements and moderate credit risk. It shows mid grade bonds neither low grade nor high grade safety.
BAA	hose financial products have this rating; It shows they are covered with speculative factors.

5. Importance of Credit Ratings

Credit rating represents an objectively analyzed assessment of the creditworthiness of the borrower. So, the scorecard affects the amount that companies or governments are charged to borrow money. A downgrade, in other words, pushes down the value of the bonds and raises interest rates. These, in turn, influence the overall investor sentiment concerning the Borrower Company or Country.

If a company perceives to have undergone a downturn in fortunes and its rating is lowered, investors might ask for higher returns to lend to it, thereby judging it to be a riskier bet. Similarly, if the economic and political policies of a country look gloomy, its ratings are downgraded by global credit agencies thereby influencing the flow of investments in that country. On a macroscopic level, these changes affect economic policies of a nation.

An endorsement from a convincing rating agency makes life easier for countries and financial institutions issuing bonds. It basically tells investors a firm has a track record and indicates how likely it is to be able to pay back the money.

6. Who are These Credit Rating Agencies?

Globally, Standard & Poor’s (S&P), Moody’s and Fitch group are recognized as The Big Three credit rating agencies. In terms of acceptability and influence, these three collectively have a global Market share of 95% as per the CFR report, USA (published in 2015).

The Indian credit rating Industry has also evolved with the emergence of professionally competent agencies like CRISIL, ICRA, ONICRA, CARE, CIBIL, SMERA, and others. Below are details of important credit agencies.

Rating Agency	Details
CRISIL	CRISIL (“Credit Rating Information Services of India Limited”) is the largest rating agency in India with over 65% of Indian market share. Established in 1987, it has been Offering its services in Manufacturing, service, financial and SME sectors. Standard & Poor’s now holds the majority stake in CRISIL.
CARE	CARE (“Credit Analysis and Research Limited”), established in 1993 is a credit rating agency promoted and backed by IDBI, UTI, Canara Bank, and other financial institutions and NBFCs. Ratings provided by CARE include financial organizations, state governments and municipal entities, public utilities and special purpose vehicles.
ICRA	ICRA, backed by Moody’s is a leading agency that focuses on rating corporate governance, Mutual Funds, hospitals, infrastructure development and construction and Real Estate companies. SMERA, a joint venture by several learning banks of the country primarily focuses on rating the Indian MSME segment.
ONICRA	ONICRA is a private rating established my Mr. Sonu Mirchandani which analyzes data and provides rating solutions for Individuals and Small and Medium Enterprises (SMEs). It has credible experience in operating across sectors like Finance, Accounting, Back-end Management, Application Processing, Analytics, and Customer Relations.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.