It will be intriguing to know that there are agencies that solely involve themselves with the analysis and grading of investment instruments and credit risk. These deem useful for many banks and lending institutions in determining how much capital they can deploy on an individual or entity on a credit basis. These credit ratings and credit scores have an invisibly pervasive effect on our lives. We’re given a numeric value based on our debt risk. As they say, improve your credit scores and lead a good financial life.
Although they have been set up for improving the critical barriers of risk through credits and funding, there have been speculations where ratings are simply bought off. All the conjectures aside, there is plenty of scope for individuals and entities to improve their ratings and get easy investments through credit.
In this blog, we’ll dwell on what a credit rating agency is and what are some credit rating agencies in India.
A credit rating agency is an organization or entity mainly responsible for making judgments about various borrowers, including individuals, firms, etc. Moreover, these agencies also research and analyze market behavior from which they provide investment-related consultations. Some of the big names in India include CRISIL, ICRA, CARE ratings, ONICRA, Fitch India, Brickwork Rating, SMERA, and many more. In any developing country, taxes aren’t sufficient to fulfil financial obligations. They will need credits from banks. And by doing this, banks are putting themselves at financial risk by investing their capital. The main purpose of setting up a credit rating agency is to simply analyze their creditworthiness, prospectus, and ability to repay debts and provide a transparent grading structure. Banks will use these ratings to determine whether or not to lend their capital.
Any kind of government entity, company, or organization is assigned a rating based on several criteria, including market value, net worth, profit, credit history, etc., for establishing creditworthiness by credit rating agencies. Lending institutions use these ratings to assess the credit risk involved. A good credit rating, denoted by alphabetic symbols such as AAA, AA, A+, and so on, denotes a low-risk assessment. In contrast, a bad credit score depicts a higher risk for investors. These credit rating agencies also provide valuable inputs based on their analysis of the said entities for better assistance for investors and lending institutions. Credit rating agencies are regulated by the Securities and Exchange Board of India.
Some of the functions of a Credit Rating Agency is as listed below.
Communicating with lending institutions pertaining to a potential borrower’s loan repayment capacity.
Credit rating agencies are also involved in assessing the financial products offered by lenders, including bonds, securities, loans, etc.
Lending institutions consider all the assessment services to determine the appropriate fund deployment to lower risk factors.
They study and research market and economic patterns to predict favorable investment options for their consumers.
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