Credit Rating and credit scores are two of the most critical activities when it comes to sanctioning loans. Every lender will carry out either a credit rating or a credit score check to evaluate the borrower’s financial position. And this outcome determines the entire loan sanctioning process.
While credit ratings are the financial evaluation of businesses, credit scores are used to check individual borrowers’ financial position.
Among small businesses and MSMEs, there is a great deal of confusion regarding what is credit rating, and what is the credit rating process in India.
In this article, we will answer what is credit rating, and share the role of credit rating agencies. We will also inform you about the types of credit rating in India and the Advantages of credit rating.
Does credit rating impact your business? By the end of the article, you will be able to answer this question and understand the entire credit rating process in detail.
But first, let’s understand what is credit rating?
What Is Credit Rating?
In layman terms, credit rating is the evaluation of the borrower by the lender, and the result of this rating determines the approval or disapproval of the loan.
Be it any borrower: a small business or a large corporation, or even Government, the lender will always deploy a Credit rating process and then determine the creditworthiness of that borrower and their ability to repay the loan.
Credit rating is the foundation based on which business or corporate loans are sanctioned, anywhere in the world.
What Is The Credit Rating Process?
The authorized credit rating agencies do credit ratings, and the base of this entire credit rating process is the financial position and history of the borrower.
This credit ratings evaluated determines the borrower’s loan repayment capability and forms the basis of loan approval or disapproval. The higher the credit rating, the better are the chances of getting loan approved for any business.
There are other factors as well, which are considered while approving a business loan: For example, any past dues, any cases of fraud, current revenues, existing liabilities, credit awareness, loan repayment history, EMI defaults, etc.
But all these factors become part of the overall credit rating process and become the ultimate benchmark for getting a loan approved or disapproved.
Role of Credit Rating Agencies
The role of credit rating agencies is to evaluate and measure the creditworthiness of any individual or business and assign a credit rating for the borrower.
The lender accesses this rating, and this forms the basis of the loan sanctioning/approval process.
Hence, the Role of credit rating agencies is of utmost importance in the whole financial ecosystem of any country, including India.
In India, the leading credit rating agencies are:
CRISIL or Credit Rating Information Services of India Limited
Founded in 1987, CRISIL is the biggest credit rating agency in India. Almost every bank, NBFC, and MFI follows the credit score and ratings provided by CRISIL to determine their loan approval process. CRISIL captures approximately 65% of the lending market in India. Standard & Poor’s holds a majority stake in CRISIL.
CARE or Credit Analysis and Research Limited
CARE came into existence in 1993. Backed by some of the biggest lenders such as IDBI, UTI, Canara Bank, CARE evaluates the creditworthiness of larger entities such as State Governments, PSUs, public utilities, large financial organizations, and more.
ICRA was previously known as the Investment Information and Credit Rating Agency of India Limited and was founded in 1991. ICRA evaluates loan repayment capabilities of large entities such as hospitals, real estate developers, mutual funds, large corporate houses, and more. It’s backed by Moody’s.
Acuite Ratings & Research (previously SMERA or SME Rating Agency of India)
Acuite Ratings & Research is backed by SIDBI, Dun & Bradstreet Information Services India Private Limited, Credit Information Bureau (India) Limited (CIBIL), and other major financial institutions. It mainly focuses on evaluating credit ratings of SMEs in India, along with bond ratings.
Brickwork Ratings India Private Limited, India Ratings and Research Pvt. Ltd., Infometrics Valuation and Rating Pvt. Ltd., are other prominent credit rating agencies in India.
Types of Credit Rating
Here are the primary types of credit ratings:
Preference Share Rating
Commercial Paper Rating
Fixed Deposit Rating
Credit Ratings are expressed in the letter and alphanumeric codes, which are of three characters long, for example, AAA, AA, BB, AA+, etc.
AAA ratings are reserved for Governments or massive corporate behemoths, while firms with smaller market cap and repayment capabilities are assigned ratings like AA, A.
Average companies with moderate to high loan repayment capabilities are assigned ratings such as BBB, BB, and so on. And the smaller and weaker companies will have B, C, D ratings.
D rating is for defaulters and considered as lowest. Here is a very good resource to understand the rating scale for CRISIL.
Advantages Of Credit Rating
- Investors use credit ratings to understand the company/business’s creditworthiness, where they are about to put their money. Hence, for calculating potential ROI, credit rating is a must.
- Ratings can be used for decisions mergers and acquisitions.
- For issuing security instruments
- For issuing debt instruments
- RBI considers credit ratings for every non-banking financial institution and micro-finance institutions and evaluates their performance
If you are a small business or MSME and wish to know the answer of what is a credit rating, Types of credit rating, and the Functions of credit rating agencies, then we at MSMEx.in can help you right away!
Our business experts and financial wizards can share in-depth information about the entire credit rating process and describe the role of credit rating agencies in determining the loan sanctioning process for businesses. This can help you to make better business decisions and give shape to your business ideas.
Book an appointment at MSMEx, and start the process of understanding credit ratings right here.