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A credit rating agency is a company that assigns credit ratings, which rate a
debtor's ability to pay back debt by making timely principal and interest. It is
an independent assessment of a company's or government
entity's creditworthiness in general terms or with respect to a particular debt or
financial obligation. The credit ratings are majorly graded from the highest
(AAA) to (D) lowest that shall vary as per the agency and company’s profile
a) Investment Grade
Investment grade credit ratings signify that the company has made perfect
investment decisions and are in a good position to repay their debts on time.
Corporate entities falling under this category can avail loan easily that too at
low interest rates.
b) Speculative Grade
Companies falling under this category have made risky business investments
and shall not be able to repay the loan on time. Therefore, these corporate
entities do get loans but at higher interest rates.
iii. Investment Information and Credit Rating Agency of India (ICRA) Ltd–991
A credit rating company will analyze the business condition of the borrowing
company not merely by the profits the borrowing concern has made, but by
the use of capital in a more productive purpose. The return on capital and
the cost of capital will be analyzed.
Every industry will have its risks which are due to natural or market
conditions such as competition or due to the substitutes that have arrived in
the market. The extent of risks and measures to overcome them will be taken
into account while judging the credit rating of the company.
3. Market position of the company within the industry
What is the share of the market of the company seeking credit rating? A higher
percentage of market shares will involve more risks as the company has to be
vigilant to maintain its share. So, a credit rating agency will give due
weightage for the market share of the borrowing concern.
4. Operating efficiency
This is judged from the point of view of utilization of the capacity. When full
capacity is utilized, the company has an advantage over others. This may be
possible due to location advantage or better labor relations. These will be
looked into by the credit rating agency.
The statements made in the prospectus, should be true and factual. If tall
claims are made, they will hamper the growth of the company and the credit
rating agency will not rely on the prospectus of the company. It may also be
construed as a willful fraud for attracting more funds. So, the contents of
prospectus will also be a factor for credit rating considerations.
7. Statement of profits
To what extent, the earnings of the companies are consistent? Does it show
any growth? What is the extent of profitability? All these will be judged under
these criteria.
Is the cash flow sufficient to meet its current commitments as well as any
other contingencies? This factor is taken into consideration by the rating
agencies.
How far the company is in a position to arrange for alternative financial plans
for raising its funds, if its existing idea does not work out successfully? Rating
agencies adjudge the financial flexibility of companies.
What is the track record of management? How far they are successful in
steering the company under difficult conditions? Evaluation of management is
one of the important functions of credit rating agencies.
Rating agency studies the available mechanism for recovery with the company
for meeting any sudden unforeseen calamities.
Here, what kind of organizational goals are adopted? What are the strategies
adopted for achieving the goals, etc.? Such aspects are considered when
evaluation of an organization by rating agency.
How far the nonalignment is looking after the welfare of its labor? What is the
extent of punctuality, discipline and morale of the labor force? To what extent
they continue with the employment in the company? A rating agency looks for
all these issues.
If there are more regulations, restricting competition, then there will be more
protection to the company, whereas under condition of deregulation,
providing more scope for competition, the efficiency of the company will be
tested. A rating agency studies the regulatory and competitive environment
from these angles.
Here, the value of assets and the price of the assets according to the market
conditions and the provisions made for these assets will be taken into account
credit rating authorities. Performance of assets will also be taken. The extent
of standard, sub standard, doubtful and bad assets will also be taken into
account while granting credit rating.
If there is increase in the interest rate due to the market condition, how far the
company will be able to bear it? What will be the impact on the company’s
earnings? Similarly, if the government increases tax on income, what will be
the tax burden? What impact it will have on the company’s earnings. These
factors are taken into consideration.
For Lenders
ii. Safety Assured: High credit rating means an assurance about the safety of
money and that it will be paid back with interest on time.
For Borrowers
i. Easy Loan Approval: With a high credit rating, you will be seen as a low/no
risk customer. Therefore, banks will approve your loan application easily.
ii. Competitive Rate of Interest: You must be aware of the fact that every
bank offers loans in a particular range of interest rates. One of the major
factors that determine the rate of interest on the loan you take is your credit
history. Higher the credit rating, lower the rate of interest.
ii. Every month, these credit rating agencies collect credit information from
partner banks and other financial institutions
iii, Once the request for credit rating has been made, these agencies dig out
the information and prepare a report based on such factors
iv. Based on that credit report, they grade every individual or company and
give them a credit rating
vi. The better the rating is, more are the chances of getting loan at lower
interest rates