What is Credit Rating?
A rating is an opinion of a credit rating agency (CRA), regarding the ability of an issuing company to make timely payments of principal and interest on the obligation. The rating measures the chances of the issuer defaulting on the repayment of its liabilities. The opnion is expressed by a symbol.
Kinds of credit ratings in India?
Credit ratings can be of debt instruments i.e. fixed deposits, bonds, debentures, loans, future receivables, and mutual funds etc. Very recently, CRISIL has started rating the IPO offers of companies trying to raise share capital but it is optional for the company and is in a very nascent stage.
How are they determined?
A credit rating is based on a quantitative study of the company financials and qualitative variables like management quality and integrity, brand strength, parent support etc. It measures the relative ability and willingness to service the obligations as per the contract. For instance, most companies in the non-banking financial services (NBFCs) and agro-plantation sectors are unable to get good ratings due to the high risk tag attached to these sectors. Stable businesses with stable or increasing earnings get favourably rated and vice versa.
How to interpret them?
A rating is neither a general evaluation of the issuer nor an overall indicator of the credit risk involved in all the debts raised by the company. Thus ratings for the same company may differ, based on the tenure of different instruments (the longer the duration, the higher the risk, and generally the lower the rating) and in-built protection for default (like a first charge on assets in case of debentures).
The rating is also not a recommendation to buy, hold or sell an instrument i.e before buying an instrument, you have to ensure the suitability of the investment. Besides, since ratings change, it is always good to look at the latest ratings on the instrument.
What about rating agencies in India?
As per SEBI guidelines, such ratings must be issued by a rating agency duly registered with it. Some prominent credit rating agencies in India are CRISIL (Credit Rating Information Services India Ltd.), ICRA (Indian Credit Rating Agency) and CARE (Credit Analysis and Research Establishment).
What does the suffix ‘+’ or ‘ - ’ attaffixed to the rating mean ?
The ability to raise funds decides the strength of the debt instrument within a rating category indicated by the suffixes ‘+’ and ‘-’. The ‘+’ suffix denotes a relatively higher standing while the ‘-’ rating indicates a relatively lower rating. Thus any instrument from the highest to the lowest grade can have a ‘+’ or a ‘-’ suffix.
For example, the rating AAA+ assigned to a company Fixed Deposit offer indicates the highest safety and a probability of timely repayment of obligations. As we go down the order, we have AAA, AA+, AA, A+ …. and so on respectively.