IFMI Assignment

Topic – Credit Rating

To: Prof. CA. Harshawardhan S. Patil

By: Harshvardhan Patil

Roll Number: 44182

PRN: 21020141082

Date Of Submission: 2nd October, 2021

The term credit rating refers to a quantified assessment of a borrower's creditworthiness in general terms or with
respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to
borrow money—an individual, a corporation, a state or provincial authority, or a sovereign government.

CIBIL Score is a three-digit numeric summary of your credit history. The score is derived using the credit
history found in the CIBIL Report (also known as CIR i.e., Credit Information Report). A CIR is an individual’s
credit payment history across loan types and credit institutions over a period of time. A CIR does not contain
details of your savings, investments or fixed deposits. Credit assessment and evaluation for companies and
governments is generally performed by a credit rating agency. These rating agencies are paid by the entity
seeking a credit rating for itself or one of its debt issues.

A loan is a debt—essentially a promise, often contractual. A credit rating determines the likelihood that the
borrower will be willing and able to pay back a loan within the confines of the agreement without defaulting.

An individual's credit rating affects their chances of approval for a given loan and favourable terms for that loan.
A high credit rating indicates a strong possibility of paying back the loan in its entirety without any issues while
a poor credit rating suggests that the borrower has had trouble paying back loans in the past and might follow
the same pattern in the future.

Credit ratings and credit scores

Credit ratings apply to businesses and governments as well as individuals. For example, sovereign credit
ratings apply to national governments while corporate credit ratings apply solely to corporations. Credit scores,
on the other hand, apply only to individuals.

Credit scores are derived from the credit history maintained by credit-reporting agencies such as
Equifax, Experian, and TransUnion. An individual’s credit score is reported as a number, generally ranging
from 300 to 850 (see more under Factors Affecting Credit Ratings and Credit Scores).

A short-term credit rating reflects the likelihood that a borrower will default within the year. This type of credit
rating has become the norm in recent years, whereas in the past, long-term credit ratings were more heavily
considered. Long-term credit ratings predict the borrower’s likelihood of defaulting at any given time in the
extended future. Credit rating agencies typically assign letter grades to indicate ratings.
Importance of Credit Ratings

Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies. Though a
borrowing entity will strive to have the highest possible credit rating because it has a major impact on interest
rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial
situation and capacity to service and repay the debt.

A credit rating determines not only whether or not a borrower will be approved for a loan but also the  interest
rate at which the loan will need to be repaid. As companies depend on loans for many start-ups and other
expenses, being denied a loan could spell disaster, and a high-interest-rate loan is much more difficult to pay
back. A borrower's credit rating should play a role in determining which lenders to apply to for a loan. The right
lender for someone with great credit likely will be different than for someone with good or even poor credit.

Credit ratings also play a large role in a potential investor’s decision as to whether or not to purchase bonds. A
poor credit rating is a risky investment. That's because it indicates a larger probability that the company will be
unable to make its bond payments.

Credit ratings are never static, which means borrowers must remain diligent in maintaining a high credit rating.
They change all the time based on the newest data, and one negative debt will bring down even the best score.
Credit also takes time to build up. An entity with good credit but a short credit history  is not viewed as
positively as another entity with equally good credit but a longer credit history. Debtors want to know a
borrower can maintain good credit consistently over time. Considering how important it is to maintain a good
credit rating, it's worth looking into the best credit monitoring services and perhaps choosing one as a means of
ensuring your information remains safe.

Factors Affecting Credit Ratings and Credit Scores

Credit agencies like CRISIL, CARE and ICRA take into consideration several factors when assigning a credit
rating to an organization. First, an agency considers the entity’s past history of borrowing and paying off debts.
Any missed payments or defaults on loans negatively impact the rating. The agency also looks at the entity’s
future economic potential. If the economic future looks bright, the credit rating tends to be higher but if the
borrower does not have a positive economic outlook, the credit rating will fall.

For individuals, a high numerical credit score from the credit-reporting agencies indicates a stronger credit
profile and will generally result in lower interest rates charged by lenders. A number of factors are taken into
account for an individual’s credit score, some of which have greater weight than others. Details on each credit
factor can be found in a credit report, which typically accompanies a credit score.

CIBIL Score is a three-digit numeric summary of your credit history. The score is derived using the credit
history found in the CIBIL Report (also known as CIR i.e Credit Information Report). A CIR is an individual’s
credit payment history across loan types and credit institutions over a period of time. A CIR does not contain
details of your savings, investments or fixed deposits.

As noted above, CIBIL scores range from a low of 300 to a high of 900—a perfect credit score that is achieved
by only about 1% of the borrowing public. A very good credit score is generally one that is 750 or higher. This
score will qualify a person for the best interest rates on a mortgage and the most favourable terms on other lines
of credit.

With a credit score that falls between 600 and 750, financing for certain loans can often be secured but with
interest rates rising as the credit score falls. People with credit scores below 580 may have trouble finding any
type of legitimate credit.

Credit ratings apply to businesses and governments. Credit scores, on the other hand, apply only to individuals
and are reported as a number, generally ranging from 300 to 850.

Credit ratings or credit scores are based on substantial due diligence conducted by the rating agencies who must
take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.
This can impact whether or not a borrower will be approved for a loan but also the interest rate at which the loan
will need to be repaid.

Credit ratings also play a large role in a potential investor’s decision as to whether or not to purchase bonds. A
poor credit rating makes for a riskier investment because the probability of the company defaulting on bond
payments is viewed to be higher.

A short-term credit rating reflects the likelihood that a borrower will default within the year. This type of credit
rating has become the norm in recent years, whereas in the past, long-term credit ratings were more heavily
considered. Long-term credit ratings predict the borrower’s likelihood of defaulting at any given time in the
extended future.